Does retirement need to retire?

The next generation of older workers will behave differently. We need to discuss how to change the parameters of retirement to adapt to these changes.

By Michel St-Germain, FCIA, and Krystel Lessard, FCIA

The world has changed a great deal these past few years, and so too has the concept of retirement. The next generation of older workers will behave differently. It is time we discuss how to change the parameters of retirement to adapt to these changes. As actuaries, we are well positioned to participate in this discussion on adapting Canada’s retirement system.  

What is retirement? Many people assume they’ll work full time until they reach a certain age and then abruptly stop working – that they’ll be healthy and have accumulated a pension or enough income to not only see to their needs but also get the most out of their remaining years.

But for others, their health or the nature of their work will prevent them from continuing to work long enough to accumulate their desired income. Additionally, a number of people want to reduce their work hours and their stress level, rather than quitting cold turkey. We are already witnessing a change among workers aged 55 and over. According to a recent survey by Statistics Canada, more than half of this population would put off retiring if they could reduce their work hours or the physical or mental stress associated with their work.

Is the traditional retirement age still relevant today?

The normal retirement age of 65 was established in the 1960s, when at this time, the life expectancy after retiring at this age was 10 years. It is now 20 years and could continue to rise. Several countries, including the Netherlands, England, the United States and Japan, have begun adapting to this change and have extended the normal retirement age past 65, but not Canada.

The labour market is changing!

To change the retirement climate, we must address the labour market.

Since the pandemic, we have adapted to remote work. This work arrangement (or the hybrid version thereof) is here to stay. This can reduce stress when it comes to hours of work and can offer more flexibility. We have observed that many workers can work from home with flexible hours, and that others seek to work on a contract basis with clients rather than to occupy a full-time salaried position. This is the type of flexibility that older workers are looking for.

“Since 2000, older workers have remained on the job market longer. The rate of participation among men between ages 65 and 69 has more than doubled, from 15.5% to 33.8%. Among women in this age group, it has more than tripled, from 7.1% to 23.6%.”

With the labour shortage – a major concern of employers right now – these participation rates will keep rising and move closer to what we’re seeing in many other countries.

The type of employment has also changed. Since 1976, the number of jobs in Canada’s manufacturing sector has dropped by 100,000, while the number of service jobs is up by nearly 10,000,000. These changes will persist. Many are predicting that the next generation of workers will fill positions that do not yet exist. New technologies will continue to change the nature of work, although we do not yet know the effects of artificial intelligence (AI). The typical worker will spend their time in front of a computer that they can use wherever they are. Physical effort is less and less a reason to retire. Those employed in the service sector can just as easily use new technologies to work from home longer.

How do we define a new concept of retirement?

How can workers be motivated to work longer? Can AI help? Should it be made easier for people to reduce their hours as they approach retirement? Should they be encouraged to change jobs near the end of their career? Propose new tasks to facilitate knowledge transfer? And how about their health? All of these questions impact the way retirement mechanisms are to evolve, and they take into account a number of factors.

We recognize that needs vary from one individual to another. Some, in particular those living with a disability, roofers, police officers, firefighters and nursing personnel to name but a few, may be unable to continue working as they grow older. It should be made easier for such people to transfer to a different job, or targeted retirement programs should be developed for them. Knowledge workers, for their part, can continue working past 65 by taking advantage of new technologies. This will have the added benefit of lessening the labour shortage.

Here are some points that can animate our discussion:

Adapt defined benefit (DB) pension plans and the legislative framework

Large DB pension plans are not adapted to the negative consequences of the labour shortage and they continue to incentivize employees to retire earlier by offering early retirement benefits such as unreduced pension before age 65, and in some cases, even a bridge benefit payable until 65. Of course, more demanding jobs will continue to exist, with the need to retire sooner, keeping early retirement benefits relevant.

Workers who are nevertheless interested in putting off their retirement see a disadvantage in doing so, because they’d be losing the value of early retirement benefits. Should we revisit these incentives, and if so, how? These incentives are already being funded by annual pension plan contributions. If the aim is to keep employees working longer, the amounts paid by employers for these incentives could be used differently, maybe outside the pension plan, to facilitate worker retention.

“Should DB plans further incentivize older workers to remain on the job market, even those working part time? Society should have this conversation with a view of introducing legislative changes to help meet this objective.”

Several avenues could be explored for amending the legislative framework to allow more options at retirement and encourage workers to stay on the job longer:

• For plans offering an unreduced pension prior to age 65 (say, at age 60), the idea might be to increase the pension for each year the worker puts off retiring after age 60. Currently, such a move is allowed only after age 65. Thus, workers will have incentives to remain on the job after the age that they are entitled to an unreduced pension.
• Another idea might be to allow the bridge benefit to continue until age 75, rather than it ending at age 65 under the current legislative framework. Workers with access to a DB pension would be less likely to think they are losing out on benefits by delaying their retirement and would be more inclined to remain on the job.

And what about tax measures affecting retirement?

Should there be better coordination of the multiple tax measures for older workers, including the Guaranteed Income Supplement claw-back rate, to ensure that they are indeed incentivizing workers to remain on the job and helping reduce the labour shortage?

Should the Registered Retirement Income Fund withdrawal rules finally be changed to put off the start date past age 71 and allow lower drawdowns to counter the risk of living longer?

Continue changing our public plans and provide better information

The last decade saw extensive deliberations surrounding the Canada Pension Plan (CPP) and the Québec Pension Plan (QPP). These discussions culminated in some major changes, such as the adoption of the Supplemental Pension Plan and other measures, including the possibility for members of these plans to stop contributing to them as of age 65 and raising the maximum age at which someone can apply for their QPP pension to 72.

For example, should there be a more dynamic effort to encourage putting off Old Age Security pensions and CPP/QPP pensions until age 75 and using retirement capital before applying for these pensions?

We are seeing too many Canadians opting into their CPP/QPP pension at age 60. Should we propose ways to better inform and advise the population, or should this option be removed but with measures to protect the most vulnerable?

This debate will not be easy. If we look at what happened in France, the proposed increase in the normal retirement age paralyzed the government, despite its efforts to convince the population that the cost projections were credible. In Quebec, a proposal to raise the QPP eligibility age from 60 to 62 with no reduction in benefits had to be withdrawn in the face of pressure from a number of groups that wanted to see measures to protect the most vulnerable.

We know that amending the CPP and QPP is a very rare occurrence. That said, our new social context compels us to launch discussions founded on a credible analysis. As experts in the retirement field, actuaries have the credibility to take part in this debate.

Are employers ready to change their perspective?

A number of major employers remain hesitant to promote the retention of older workers. They prefer continuing to attract and retain younger workers, fearing that older ones won’t want to leave. They do not wish to adapt the work environment to suit these workers’ desire for flexibility. Though legitimate, these fears can be addressed, especially in a context of labour shortages.

“In conclusion, it is clear that the retirement landscape is rapidly changing and that as actuaries, we have a central role to play in shaping its future. The next generation of older workers will have different needs and aspirations, and we must adapt our retirement systems accordingly.”

The time has come to start a broader conversation with stakeholders from all sectors: political leaders, employers, unions, academics, workers and the public at large. We must join together in rethinking the concept of retirement while taking into account factors like health, flexibility and individual needs.

Please share this article with anyone who might benefit from this information, and let us know your thoughts in the comments section below.

About the authors

Michel St-Germain, FCIA, is a past president of the CIA. He was a partner and a retirement consultant at Mercer for more than 40 years.

Krystel Lessard, FCIA, is a pension plan consultant at Aon.

This article reflects the opinion of the authors and does not represent an official statement of the CIA.

The following comments were shared by readers:

Peter Gorham: Some further commentary on the people with Earned Income:

In the first call-out box, a statistic on the increase in working past age 65 shows from 2000 to today, men with earned income has increased from 15.5% to 33.8%. And women with earned income increased from 7.1% to 23.6%. 

It should be noted that the median earned income* during that period is very low.  In 2000, the median earned income for all workers over age 65 was $3,000, dropping to $1,900 in 2005 and then gradually increasing to $5,500 in 2020.  Based on my estimate of an approximate average minimum wage in each year, that is about 8 hours per week of minimum wage work in 2000, 5 hours in 2005, 10 hours in 2015 and 8 hours in 2020. 

Average earned income varies from about 4 to 5 times higher, suggesting a very skewed distribution.

I have not found data that gives quartile or decile income amounts.  That would be fascinating to see and get a better idea of how earned income is distributed  after age 65.

What I find most interesting about median earned income is going back to 1990 when the median was $13,400 and an average of $23,400 with 9% of people over 65 having earned income.  Between 1990 and 2000, there was an increase of about 4% to 5% in workers over age 65 together with a decrease in the median earned income from $13,400 to $3,000!  That’s quite a shift in behaviour.

My take on this is that many retirees are choosing to continue to work, but for very few hours.  The few hours might be by choice or might be all that they can obtain.  Maybe that is for some pocket money to enjoy a special treat or maybe it’s trying to supplement a gap in retirement income and retirement expenses.  I do hope for most of those people that they are choosing to work for non-financial reasons and that they are enjoying the work.  But recent news suggests the real reason might be to put some food on the table. 

* I used the data for people with wages, salaries and commissions plus self-employed income for my earned income numbers.  Stats Canada:  https://www150.statcan.gc.ca/t1/tbl1/en/cv.action?pid=1110023901