Retirees lose approximately $100 thousand of lifetime income by taking benefits 5-10 years earlier, said NIA director of financial security research
Retirement is looking less likely for many pensioners as they’re faced with fewer traditional workplace pensions, longer life expectancies, and rising health costs.
However, at a recent Sun Life webinar, Dr. Bonnie-Jeanne MacDonald pointed to a prospective solution that could be the ‘silver bullet’ for retirement security: delaying Canada Pension Plan (CPP) and Quebec Pension Plan (QPP) benefits.
MacDonald’s research indicates that delaying benefits from age 60 to 70 can more than double a retiree’s lifetime, inflation-indexed pension income. Yet, she highlighted fewer than 5 per cent of Canadians take advantage of this option as they typically wait until they turn 70 to claim, while 90 per cent claim by 65.
“They're losing about $100,000 in lifetime income by taking their benefits at age 60 instead of age 70," said MacDonald, director of financial security research at the National Institute on Ageing (NIA), while she pointed to market price research for comparison.
“If somebody were to take those income amounts earlier and bought an annuity, rather than use it to delay their CPP and QPP, they would only get half the amount of money from the retail annuity market,” she said.
“We have the biggest population of Canadians now going into retirement in our whole history, and they are unknowingly facing a perfect storm when it comes to their long-term financial security,” she added.
This disconnect isn’t due to a lack of financial viability, she argued, but rather a failure in education and communication.
“The reasons are largely centred in psychology and behavioural economics,” she added. “To actually change this and help people meaningfully, the solutions have to go beyond the mathematics.”
Meanwhile, Barbara Sanders, associate fellow at the NIA and associate professor at Simon Fraser University highlighted a major flaw in CPP governance.
“The CPP Act describes which ministers are responsible for running which part of the system, but we couldn’t actually find any documentation on what the goals or objectives are that they should be aiming for, and how they would be held accountable for those goals,” she said, adding that their policy proposal was to fix and improve CPP governance in two steps.
“First, to establish a clear mandate to prioritize participant outcomes, and second, to apply that mandate to the provision of education and advice so that participants can make more informed decisions and monitor whether that mandate is actually being fulfilled,” she said.
While Sanders is quick to attest the important work already made among pension organizations, “their good efforts and successes are going to be undermined if the participants are not supported also by robust governance,” she said, urging policymakers to redefine the federal government's focus and formal responsibilities “to put CPP participants at the centre.”
“Rather than face that much scarier and more considerable long-term risk of running out of money in a very vulnerable time of life, people are actually much more focused on the much less likely, inconsequential risk of dying early and having given up that short-term income,” noted MacDonald.
MacDonald and Sanders believe policy changes could make a significant impact, particularly by addressing behavioural biases that discourage Canadians from delaying CPP.
“It could genuinely really help older Canadians to make better choices and help them to lead happier, healthier and more financially secure lives,” said MacDonald.
Their research also proposes a pension-backed death benefit, which would ensure that if a retiree delays their pension but dies before recouping what they would have received by claiming early, their estate would receive the difference.
By addressing this cognitive bias, they argued more Canadians could be encouraged to make financially beneficial claiming decisions.
"What that would do is that if someone takes it after age 60 and they die before… the death benefit would actually just pay them back the difference," MacDonald said. “This really is a low cost and effective solution that could shift the paradigm.”
Sanders ultimately sees this as a critical reform because “it just significantly reduces the potential downside and allows people to focus on the upside,” she said.
And the idea is gaining traction. Since publishing their research, MacDonald highlighted she’s been in discussions with policymakers who are “testing and analysing the solution because it just has so much potential.”
“It's as close to a silver bullet as we're going to get in tackling Canada's upcoming pension crisis,” said MacDonald. “This solution does not require any changes to our system. It's more about raising awareness publicly and changing bad practices in the financial service industry.”
