This article was written by Andrew
Rickard and reproduced with permission from the September, 2006 Forum Magazine
During the First
World War, the song Keep the Home Fires Burning was hugely popular. As
the first wave of baby boomers approaches retirement, I've decided it's time to
launch my one man campaign to revive this classic with a new set of lyrics. I
hope you'll make a point of singing it to all the sixty year old clients you
have. It goes like this:
Keep the seniors
working,
While the costs
are lurking.
Though they long
to quit and play,
They can't stay
home!
I've composed my
little ditty not only because the national savings rate is hovering around zero
and much of demographic seems financially unprepared to face retirement, but
also because it appears everyone would be better off if people stopped dropping
out of the work force five years before the normal retirement age of
sixty-five.
In a paper1
written for the Department of Finance, Allan Pollock and Timothy C. Sargent
point out that there is “a growing concern that the ratio of workers to
non-workers in Canada will likely fall dramatically” as the population ages.
With more people taking early retirement, those who have left the work force
may place an inordinate amount of pressure on government finances as they “use
public services more intensively and generate less in tax revenue than
workers”.
The authors
suggest that eliminating the requirement that individuals retire in order to
claim the CPP benefits could actually increase the retirement age. This may
seem counter intuitive at first glance, but consider for a moment the
"stop work" rule that applies to anyone who wants to start collecting
his or her pension.
According to the
Social Development Canada web site, a CPP applicant must not be “working by the
end of the month before the CPP retirement pension begins and during the month
in which it begins.” A 60 year old worker who wants to begin receiving a
pension by Christmas would have to leave her job at the end of November and
could not do any work in December.
These
regulations have helped to turn early retirement into an all or nothing
proposition for many people. If you have to leave your job for a month, you are
unlikely to go back to it again - the Department of Finance paper suggests that
only 30 to 50 per cent of early-retirees end up returning to the work force.
If the work test
requirement were removed, Pollack and Sargent claim that lower income workers
would stay in the labour force for another two years, and that high-income
individuals would stick around for another four years. They say this would hold
true even if the actuarial adjustment were changed and early CPP take up made
less attractive. Note that Quebec has already forged ahead and eliminated this
stop work clause from the QPP, making phased retirement easier for people in
that province.
An economic
survey of Canada produced by the Organisation for Economic Co-operation and
Development (OECD) published earlier this year points out yet another
adjustment that needs to be made in order to stop individuals from withdrawing
from the labour force:
"The
calculation of benefits for the CPP is based on career earnings. If a worker
delays retirement and continues to work at a wage lower than his career-average
wage, the additional contributions may lead to a reduction in his pension
compared to what he would have received if he had retired earlier. This
penalises workers who would want to work part-time and could be avoided by
simplifying the calculation of retirement benefits."2 So the bureaucrats in Ottawa have a
Department of Finance paper that recommended changes two years ago, are already
being shown up by Quebec, and are now getting called to account by the OECD.
One wonders what else it will take to convince them to take action.
While legislators may be slow to act, it doesn't
take much time to show potential retirees the benefits of working until age 65.
All you have to do is log on to the Congress of Union Retirees of Canada (CURC)
web site at http://curc.clc-ctc.ca/earlycpp.html. Their CPP "break even
point" calculator shows that those who hold off until age 65 will have
received a total of $212,834 by age 85, while those who started collecting
their government pension at age 60 will have only receive $184,456 by age 85.
Younger retirees only come out ahead of their age 65 counterparts if they die
before age 77.
Of course, the
decision of when to retire is ultimately a question of personal preferences.
Those who want to leave early shouldn't be prevented from doing so, but surely
we can make life easier for those who want to keep working and paying taxes.
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