Quebec needs to stop encouraging early retirement – Pension rules should be changed to persuade seniors to continue working

When Quebec’s public retirement plans were established back in 1966, people 65 and over accounted for only six per cent of the total population, and a 65-year-old male could expect on average to live 13.6 years longer.

Today, the 65-and-over age group forms 14 per cent of the overall population, and average life expectancy for a 65-year-old male is 17.3 more years. Someone who retires at age 55 after 30 years on the job will spend almost as many years in retirement as in the workforce, not counting time spent studying. Changes in Quebec’s retirement policies have failed to take account of these realities.

Things got more complicated in the 1980s, when measures favouring early retirement were instituted against a backdrop of high unemployment. A key aim was to make room for the many young people then entering the workforce. This also has changed: now we face shortages of skilled labour in some sectors.

These phenomena will soon cause a slowing of growth in the economy and in tax revenues, along with lower wealth creation, just as spending demands become heavier, especially in health care.

The situation is even more worrying in Quebec, where people tend to retire earlier than elsewhere (at age 60.1, compared with the Canadian average of 61.5), where the labour force participation rate among older people (52 per cent) is lower than in the rest of Canada (61 per cent) and where the population is aging more quickly than elsewhere.

It is estimated that in the next 25 years, the population age 65 and over will double in Quebec, while the number of young people will continue to decline even as it rises in other parts of the country. The Quebec pension board estimates the number of beneficiaries will be 19 per cent higher by 2011 and 90 per cent higher by 2030.

This rapid rise in new retirees will put pressure on pension plans. For all these reasons, we must put an end to incentives for early retirement and instead encourage people to work longer.

Laws governing retirement plans and taxes often make it less lucrative to keep working than to retire early. The Quebec Pension Plan provides an increase of only 0.5 per cent per month for later retirement and a reduction of 0.5 per cent per month for retirement before age 65. The chief actuary of Canada finds the current system unfair toward people who retire later and too generous toward those who retire early.

As for private plans, the law stipulates the rate of reduction applied to early retirement should not impose a long-term financial penalty on beneficiaries. Moreover, unlike people in phased retirement, those who retire early and are covered by a private pension plan can receive bridge benefits. These provisions, along with tax measures, mean that early retirement often pays better than working, especially on a part-time basis. Part-time work could be a particularly worthwhile option for older persons.

The latest federal budget proposed modifying the Income Tax Regulations to allow employees to receive benefits from their pension plans while continuing to accumulate other benefits. The aim is to increase incentives for older persons to stay at work.

This goes along with proposals from the Quebec government contained in its February 2007 budget and is highly welcome. However, it does not go far enough to handle anticipated problems.

We need an immediate end to incentives for early retirement to lessen the negative economic impact from the impending retirements of large cohorts of baby boomers and to strengthen the viability of our retirement plans.

To encourage older persons to stay at work, the Quebec government suggested raising the monthly bonus for retirement after age 65 from 0.5 per cent to 0.7 per cent. The reduction in benefits for persons retiring before age 65 could be adjusted by a similar amount. In addition to deterring early retirement, this measure would lower pension plan costs and contributions rather than increasing them.

Private plans should be allowed to bring in penalties for early retirement, which at present must be permitted, with a simple actuarial reduction, starting at age 55 at the latest.

Given the overall rise in life expectancy and the improved health of older people, raising normal retirement age from 65 to 67 must also be considered. Several countries, notably the United States and, more recently, Germany, have adopted this solution, with the United Kingdom also moving in this direction.

Whatever measures are chosen, it is essential to deal with the situation as soon as possible, before the anticipated problems become more deeply entrenched.

Norma Kozhaya est économiste à l’Institut économique de Montréal.