Lowering the age for public pensions reduces seniors’ poverty rates

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Most financial planners recommend that you delay claiming public pension benefits to maximize your monthly payments, but a new report says lowering the early eligibility age can help one group in particular: workers with lower incomes.

Currently, Canadians can start claiming their public pensions as early as age 60, and a report published by the Global Risk Institute said that claiming pensions earlier than 65 can put lower-income seniors in a better place financially and reduce the poverty rate among seniors as well.

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The report, which examined two Canadian pension reforms that took place in the 1980s, which dropped the early eligibility age (EEA) to 60 from 65, concluded that lower-income retirees have financially benefited by claiming their pensions earlier.

If you claim your Canada Pension Plan (CPP) before 65, you can expect your payments to decrease by 0.6 per cent each month (or by 7.2 per cent each year), up to a maximum reduction of 36 per cent if you start claiming after you turn 60.

On the other hand, waiting to claim means your payments will increase by 0.7 per cent each month, or 8.4 per cent each year.

But lower-income retirees have a shorter life expectancy than retirees with higher incomes, which means they might not live long enough to reap those benefits. They might also require a boost in funds sooner just to accommodate the rising cost of living, which means claiming early isn’t just the smarter financial decision; it’s often the only financial decision they can afford to make.

“It’s a no-brainer,” Bonnie-Jeanne MacDonald, director of financial security research at the National Institute on Aging (NIA), said, adding that lower-income Canadians who defer claiming their pensions could also face higher taxes as they age if they move into a different tax bracket. “(Claiming) at age 60? That’s absolutely life-changing for them.”

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Bill VanGorder, chief operations officer at the Canadian Association of Retired Persons (CARP), agreed.

“Any income at that point is helpful in terms of the day-to-day living costs that people have,” he said.

The Global Risk Institute report said that penalties for early claiming in Canada are much lower than in other countries, such as the U.S., making the choice much more attractive for lower-income Canadians who need the money sooner.

An earlier study by McGill economics lecturer Mayssun El-Attar, published in the Journal of Pension Economics & Finance, also said public pensions have helped reduce the persistence of poverty among seniors by increasing their odds of exiting it entirely, especially at age 65.

Early claiming of pension benefits has led to a greater total income for seniors at the onset of retirement, according to the Global Risk Institute report, but these were outweighed by losses in pension wealth later on — losses that were experienced most keenly by higher-income Canadians.

“Ultimately, whether lowering the EEA improves overall welfare depends on how society values redistribution from rich to poor,” the researchers said in the report.

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MacDonald said the decision about when to claim CPP or Quebec Pension Plan (QPP) benefits can be “a really nuanced topic,” but added that the majority of older Canadians are in a position where they can afford to defer claiming.

MacDonald, who has long advocated for Canadians to delay claiming their pensions, authored a report earlier this year that noted Canadians can receive 2.2 times the monthly pension at age 70 than if they claimed them at age 60.

She believes that waiting to claim your pension and supersizing your monthly payments can help alleviate higher-income seniors’ fears over not being able to afford long-term care and health costs or having to rely upon unpaid care from family or friends.

That said, MacDonald doesn’t think changing the EEA is the solution. She said some Canadians are forced into early retirement for reasons outside of their control, such as losing their job or suffering a life-changing illness.

Several Organization for Economic Co-operation and Development countries have reformed their pension systems by increasing the age of retirement by two to five years, which slightly increased labour force participation.

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However, some studies have shown these reforms caused a “spillover” effect on other social programs, such as employment or disability insurance, and made some groups more vulnerable to poverty. The research also showed there were no substantial changes as to when people chose to retire, as those who could work longer stayed in their jobs, while those who could not remained unemployed or retired with a penalty.

“I think (the EEA is) great the way it is,” MacDonald said. “I think what we need to do is just help support more informed decision-making.”

slouis@postmedia.com

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