Pension envy all the rage

NationalPost.com – FP/Personal-Finance
Thursday, Nov. 18, 2010.   Jonathan Chevreau, Financial Post

Canada’s politicians and civil servants enjoy gold-plated Defined Benefit pension plans that let them retire as early as 55. They are ultimately backed by beleaguered Canadian taxpayers in the private sector, who typically retire a full decade later.

But if Ottawa implements recommendations from a University of Toronto think-tank, the normal retirement age for the rest of us receiving Canada Pension Plan (CPP) benefits would be pushed back two years from the current 65 to 67. Worse, early reduced CPP benefits could no longer commence as early as 60 but be deferred to 62.

This would happen gradually, over 10 or 15 years. Those in spitting distance of 60 or 65 may work as few as two extra months, or a multiple of that, assuming Ottawa bites.

Bill Tuft, author of Fair Pensions For All, says the public sector already gets CPP benefits on retirement regardless of age. “The rules that apply to early CPP do not apply to the public sector. On the contrary, they get the CPP benefit even when they retire before age 60.

If so, the prescription in the Mowat paper, entitled Is 70 the new 65?, would further aggravate a condition I call “pension envy.” Co-authors Martin Hering and Thomas Klassen seem motivated by similar moves elsewhere. In 2003, the United States started to raise the eligibility age for Social Security from 65 to 67, but it won’t fully phase in until 2025. In 2007, the United Kingdom began raising its age from 65 to 68. Germany raised theirs from 65 to 67, deferring early eligibility from 62 to 63. Last year, Australia moved theirs from 65 to 67.

Highlighting the plight of these countries seems superficially plausible, but if this plan became law, Canadians would have more cause to riot than the angry French. Actuary Malcolm Hamilton, a partner with Mercer in Toronto, says he accepts neither the Mowat authors’ diagnosis nor remedy. He points to the fact our politicians already put CPP on a sounder footing in the 1990s, when they substantially raised premiums. “Other countries are increasing their retirement ages to solve long-neglected social security problems … I see no merit in adopting other countries’ draconian solutions to problems we no longer have.”

With longevity and life expectancies moving ever upward, Fred Vettese, chief actuary with Morneau Sobeco, thinks it’s inevitable that Canada joins the rest, viewing later retirement as a question of when rather than if. Normal retirement age in most industrialized countries is already 67 or 68, he says, or will be once legislation is fully phased in.

Because it takes years for that, Mr. Vettese believes now is a good time to debate the issue. Especially since various groups in Canada — labour unions and CARP, representing those over 45 — are clamouring for bigger CPP benefits or an expanded universal pension to be grafted on to CPP.

CPP “replaces” 25% of the average wage and a move is afoot to increase this to as much as 50%. Mr. Vettese says this can be done by raising the base earnings on which CPP benefits are calculated: the current maximum threshold of $47,000 could be doubled to $94,000, improving benefits for the millions of middle-income workers who lack employer sponsored pensions.

Many Baby Boomers have contributed to the CPP since its launch in 1966, or soon after. (In my case, 1970.) Just last year, Ottawa tweaked the rules to make it less favorable to take early CPP at 60. To change the goalposts again just when Boomers thought they’d scored an early-retirement touchdown calls to mind the hapless Charlie Brown kicking the football Lucy invariably yanks away.

Mathematically, working two extra years makes sense: that’s two more years of savings and investment growth and two fewer years of drawing down savings. Employer pensions will also be that much sweeter.

But it’s one thing to voluntarily choose to work a bit longer and quite another to be told you can no longer do so at 60. Yes, longevity is rising and it may make sense for Boomers to keep working as long as body or mind permits (assuming they enjoy their work). But they should be permitted to retire between 60 and 65 if that’s what they and their financial advisors have been planning till now.

It should be up to individuals to decide to work until 67, not up to government. And those running that government shouldn’t be treated more generously than the working Joes who make their early retirements possible.

What’s sauce for the goose is sauce for the gander.

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