To use an actuarial allegory heard here and there, work should now be considered the “fourth pillar” of the retirement system in Canada. This is all the more true since the myth that the price to pay is a transfer to tax of the majority of additional income has been debunked, helped by ever more accommodating taxation. Faced with the risk of longevity, working can pay off. First of two texts.
The project of the Conseil du patronat du Québec (CPQ) aimed at encouraging the continued employment of workers aged 60 and over, or their hiring, received last February the support of the Quebec government in the form of a subsidy of nearly of one million dollars from the Ministry of Employment. When it was launched, in August 2022, the CPQ said that the project “aimed to identify and develop tools for retaining or hiring people aged 60-69”. The current theme has moved from early retirement – dominant in the context of high unemployment – to working late – in a context of labor shortage, as we have already illustrated, with workers so-called experienced people finding themselves at the heart of great seduction, helped by accommodating taxation.
It pays to work in retirement
This offensive among this cohort is based on a favorable tax environment. We can recall that the Chair in Taxation and Public Finance at the University of Sherbrooke (CFFP) published a study in spring 2021 in which it compared 28 different profiles of taxpayers receiving a salary in addition to retirement income. In 23 of the 28 cases analyzed, these experienced workers kept more than 60% of the new work income in their pockets, we could read.
The Chair returned to the theme in July 2022 with the analysis of eight profiles. Same conclusion. “In all cases, the retention rates of work income are above 50%. For the lowest incomes and when the additional work income is $15,000 and less (the equivalent of 20 hours per week at minimum wage), the retention rates vary between 66% and 73%. » For a single person aged 65, this rate goes from 73% to 64% and to 58% if work income is $10,000, $20,000 and $30,000 respectively. See you without contributions to the Quebec Pension Plan (QPP).
In other words, the famous effective marginal tax rate, or TEMI, which measures the tax burden on additional income while also taking into account the impact on socio-fiscal measures, is far below 50% in almost all cases.
When compared to the situation of a non-retired household whose spouse decides to seek additional income, for a comparable work income at the start, “with the exception of high-income households, the income retention rates of work are always higher for retirees […] In the case of high-income households, it is the recovery of the Old Age Security Pension (PSV) which explains these lower rates than those of workers,” wrote authors Luc Godbout and Suzie St-Cerny.
Evolutionary taxation
This tax incentive environment has evolved. For the PSV as for the RRQ, we saw the introduction of the mechanism for deferring the start of benefits with an increase from age 65 to 70. For the Guaranteed Income Supplement, a smaller reduction in the benefit in the case of work income.
More broadly, we can also think of the Canada Workers Benefit at the federal level. On the Quebec side, the refundable tax credit aims to make work effort more attractive by partially compensating for the loss of the work premium and the credit for childcare expenses. More specifically, Quebec offers the career extension tax credit, a non-refundable tax credit aimed at eliminating the tax payable on part of the work income of experienced workers in order to encourage them to stay or return to the work market.
More recently, we were able to add to the list the reduction in Quebec’s tax rates of one percentage point for the first two tax brackets. And the changes made to the QPP in 2024 retaining an increase in the maximum age for receiving benefits, from 70 to 72, with an end to the obligation to contribute after 72. Also, contributions become optional for contributors aged 65 and over who are beneficiaries of the pension. And the work earnings of a person who defers their pension after age 65 will not reduce the average earnings used in the calculation of the pension.
Postponement of benefits
In addition to the incentive to work, there is the possibility of postponing the start of payment of the PSV and the QPP pension. For the latter, if the start of benefits is brought forward to age 60 compared to age 65, the pension paid is reduced by 36%. Conversely, if there is a postponement to age 70, it will be increased by 42%. “Thus, for someone entitled to the maximum pension, deferring to age 70 rather than advancing to age 60 more than doubles the annual pension, the gap between the highest amount at age 70 and the lowest at age 60 is $11,738 in 2022 dollars ($21,361 instead of $9,628), the CFFP has already measured. As with the PSV, we see that the choice to postpone the start of the QPP pension significantly increases the benefit for future years.
The Chair concludes from its simulations that “anticipation of the QPP pension at age 60 proves to be a costly choice, except for the specific case of those with poor health whose age of death is less than 73 years or in the case of a low targeted income.
To be continued.