Financing Canadian Retirement
From an article published in the Ottawa Business Journal in April 2009
For this group, retirement will no longer signal the end of working, but rather a career and lifestyle transition.
To do this effectively, you’re going to have to develop a "deceleration" phase in your career, says Tammy Erickson, author of Workforce Crisis: How to Beat the Coming Shortage of Skills and Talent. People tell her they enjoy their colleagues and their work, and would definitely consider staying on longer if options to slow down a bit were more available. This way, they could ease up and step down, without the angst that comes from leaving altogether, she maintains.
Trouble is, though, that most of them are still going to want to get paid.
Recognizing this, more employers are creating programs that allow older workers to ease out of their jobs by reducing their work time, rather than just showing them the door when they hit a magic number of combined age and years of service.
But this causes problems when it comes to calculating future pensions, particularly for participants in defined benefit pension plans such as those enjoyed by teachers and public sector workers.
In these cases, employees have been prevented from working and earning additional pension credits while receiving a pension from the same employer. Either the pension had to be postponed, or the additional pension accruals had to stop.
Some companies have found ways to get around this by hiring former employees as consultants or contractors. However, the resulting loss of seniority and job security — to say nothing of forgone medical, dental, and future pension benefits — often makes these arrangements both unwieldy and unpopular.
Happily though, changes in the rules regarding how pensions are treated are starting to solve this problem for many people.
Last year, the federal government changed the pension rules so that workers 55 and older, who are eligible for a full pension from a DB plan, will be able to draw as much as 60 per cent of their pension while still continuing to work and earn benefits.
Under the new plan, as income decreases with lower hours of work, pension payments can actually increase.
In the past, employees who opted to stay on the job despite being eligible to receive a decent early retirement pension often ended up working for substantially less than the wages received, taking into account the value of missed pension payments. But that’s changing now.
The big winners here are plan members whose spouses are in a lower tax bracket.
Now, they’ll be able to negotiate a reduced work schedule, earn a matching salary, take a partial pension and split at least some of that income with their spouse for tax purposes – as they do now with Canada Pension Plan benefits.
If you file for a CPP pension at 60, for instance, you’ll get a reduced benefit that will stay reduced for the rest of your life. However, because benefit payments are based on how much, and for how long, you contributed to the plan, you could rack up bigger monthly cheques by staying on the job longer and not collecting CPP payments.
Waiting until full retirement later in your 60s raises the payment 20 per cent to 30 per cent, depending on your age.
Or, at age 60, you can draw a CPP pension even if you continue to work full-time. You can work as much as you want without affecting your pension amount, but you aren’t allowed to contribute to the plan on any future employment earnings.
To get CPP between the age of 60 and 64, you either have to stop working or earn less than the current monthly maximum CPP benefit ($909) for the current and prior month in which your pension begins.
It remains to be seen whether the 60-per-cent pension with ongoing accrual will be enough to entice employees to remain at work instead of collecting 100 per cent of their pension, and working elsewhere or for the same employer as a contract employee.
And, while the option of returning to work and starting to build up a pension again may be attractive to some retirees, others will have to see whether stopping their current pension payments and stepping back into a phased retirement makes good financial sense.
Tags: CPP between 60 and 64, deferring CPP benefits, earning income while on pension, financing retirement, working into retirement