With so much uncertainty these days, postponing retirement has become a new reality for many older workers. According to the CD Howe Institute, this underlines the need to reform the rules around retirement saving in tax-deferred programs.Ottawa should raise the age at which workers must stop contributing to tax-deferred saving vehicles and start receiving income from them to age 75 from the current 71, says Joseph Nunes of CD Howe, an independent not-for-profit research institute.
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Working longer is one of the levers that savers in defined-contribution plans have to build up their nest eggs to the desired level. Nunes quantifies the relationship between saving more during a shorter work career versus saving less and working longer. He finds that starting with a salary of $50,000 and a baseline savings rate of 10 per cent of salary, saving an additional 1.5 per cent at age 30 is equivalent to postponing retirement by one year. Comparatively, at a starting salary of $100,000, a one-year postponement of retirement equates to only a one per cent increase in the career-long rate of savings."This means that, given the COVID-19-related slump in the market, older workers may need to spend extra years on the workforce, or settle for a lower level of retirement income," says Nunes.Workers whose pensions are provided through the traditional defined-benefit retirement system are fully, or at least partially, protected from the unpredictable costs of pensions, since those costs are borne largely by the employers that fund their pension promises. In contrast, workers who rely on the defined-contribution pension system must, for the most part, bear responsibility for these unpredictable pension costs, the report notes.The report offers a number of recommendations to help workers rebuild their nest eggs:
In order to allow workers saving in a defined-contribution arrangement (most of the private sector) to accumulate sufficient savings to allow for retirement before age 65, Ottawa should raise the allowable contribution limits in the defined-contribution system to reflect the fact that retirement at age 60 requires a significant rate of savings during a much shorter working lifetime.
Recognizing that working past age 70 will become more common in the future, Ottawa should also raise the age at which workers must stop contributing to tax-deferred saving vehicles and start receiving income from them to age 75 from the current 71.
In support of longer work lives, the federal government, with cooperation from the provinces and territories, should amend OAS and the CPP to allow for the deferral of income from these programs to age 75, with appropriate rates of increase in the benefit rates.
