The public consultation begins this spring around a healthy, very healthy Quebec Pension Plan (QPP). Should we lower the contribution rate or improve the financial security of retirees and beneficiaries? And, by the way, raise the minimum age of eligibility? It depends.
There is an old reflex in public policy which consists in taking advantage of taxpayers’ contribution habits. In the tax field, we know the adage: there is nothing more permanent than a temporary tax. Especially since the economic and geopolitical uncertainty does not encourage playing yo-yo with the QPP contribution rate.
The reflection that is beginning is firmly rooted in its context of economic instability, climate change, demographic evolution and longevity, lower expectations of future returns and increased indexation of projected pensions. Even closer to home, it calls into question the considerations related to immigration, the transformation of the labor market and the retention of experienced workers. With the simple math that a reduction in the demand for an early pension, under the age of 65, induces an increase in the sums paid to future claimants.
First, the findings drawn from the reference documents. In 1966, a 65-year-old could expect to live another 15 years on average. Today, it is estimated that a person who retires at this age will have a retirement of about 21 years. In about forty years, the retirement of such a person will last more than 24 years.
In addition, Quebecers’ savings may be insufficient to cover the replacement income needed to maintain quality of life in retirement. Personal savings are necessary for anyone earning more than $30,000 per year. “However, in 2019, 41% of people who earned $30,000 to $50,000 a year had no retirement savings, apart from their QPP contributions. »
We can also read that a large part of the population asks to receive an early pension, which however provides a reduced benefit for the entire duration of retirement.
Then, the balance sheet according to the actuarial valuation as of December 31, 2021. “The QPP is in good financial health. Its reserve as of December 31, 2021 amounted to 103 billion dollars “while the cash inflows will be sufficient to pay the annuities to the beneficiaries for the next fifty years. Thus, the contribution rates provided for by law are adequate, and no increase is required. »
This level of 103 billion was projected for 2025 only, it is pointed out. It is expected that it will reach 303 billion in 25 years, 847 billion in 50 years. We are talking about a contribution rate provided for in the law of 10.8% and a steady-state rate of 10.54%.
This applies to the basic diet. The Quebec system provides for a supplementary plan in effect since 2019. Its reserve stood at $3 billion as of December 31, 2021. It should explode under the effect of compound returns to reach $250 billion in 25 years, $954 billion in 50 years, thus exceeding that of the basic plan. Here, we are talking about a contribution rate provided for in the law of 2% and a reference rate of 1.85% for the first component of the additional plan.
To explain simply, the financing of the basic plan is mainly based on the evolution of the payroll and that of the additional plan, on its financial assets and their return.
This two-tier system, which took shape on 1er January 2019, is based on the objective of increasing the income replacement rate obtained from the public plan from 25% to 33.33%. In its second phase, starting in January 2024, the enhancement will focus on the maximum pensionable earnings (MPE), i.e. the maximum salary on which the worker contributes to the plan.
As part of the current consultation, the Ministry of Finance is proposing a few lines of thought from the outset, namely:
improve financial security for retirees;
foster job retention of experienced workers;
protect the retirement pension of people who suffer a reduction in income in specific situations;
preserve the good financial situation of the QPP.
Raise pension eligibility ages?
In the process, Retraite Québec invites us to question the relevance of raising the minimum age and the maximum age of eligibility for a pension, which are respectively 60 years and 70 years. By keeping this 10-year period, it offers two options:
Raise the minimum age of eligibility at 62 years and the maximum age at 72 years, over a period of 7 years. “If the minimum age were raised to 62, a person entitled to the maximum amount would receive a 22% higher pension for life. Similarly, by raising the maximum age to 72, a person could obtain a 12% higher pension for life,” the organization calculates.
Raise the minimum age of eligibility at 65 and the maximum age at 75, over a period of 22 years. If the minimum age were raised to 65, a person entitled to the maximum amount would receive a 56% higher pension for life. Similarly, by raising the maximum age to 75, a person could obtain a 30% higher pension for life.
Under these two options, QPP beneficiaries would receive their full retirement pension as of age 65. In addition, currently, a person who works must contribute to the QPP even when he is already receiving his retirement pension. “Although it generally remains advantageous to continue to contribute, the beneficiaries of the QPP pension who are still working could stop contributing as of age 65,” we say. This measure would also harmonize the rules of the QPP and the Canada Pension Plan.