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Real Old Age Pensions

As I mentioned recently, I’m against a broad increase in the CPP because any such move is likely to be based on unsustainable assumptions and only benefit those retiring now. However there is one specific exception that I would support. People sometimes mention that the original “pension at 65” model was established when few people lived that long. With today’s lifespan that might work out to a pension starting somewhere between 100 and 110 years of age.

While that kind of increase in the retirement age would cause devastating riots, most financial planning has to account for a large uncertainty in longevity. You could die the year after you retire, or you could be spending your investment income for 35 years. As if that’s not bad enough, most financial planner consider “conservative” estimates to be safe if you run out of assets between 95 and 100. The lucky few who live past that run into the unlucky portion of the plan.

The CPP does take  baby steps in the right direction by increasing payouts if you don’t take it until you’re 70, but there is still a massive gap here. Those who live past 100 using today’s financial planning could be thrown back to the age before retirement was an option, even if they prepared well and paid their own way before that. Most will be able to get support from family in addition to the minimal amounts they get from the government, but there is still a risk that could be fixed by the government at a much lower cost than giving everyone at 35-year retirement.

While this makes a lot more sense than many pension proposals out there now, there are two problems with it. The first comes back to my reason for avoiding CPP increases. Since this benefit would be over 70 years away for me, there is too much political risk. I wouldn’t be able to plan for this until getting much closer. The second is that this is really insurance against a low-risk event. It would make sense for insurance companies to sell this at a reasonable cost and they do, in the form of annuities.

Annuities have some variation, with lower payouts when interest rates are low. Despite this they are a tool to plan for the risk of living too long, although they probably aren’t used as much as they should be. But maybe economies of scale could apply here (unlike the CPP’s investment returns) if the government provided some form of consistent insurance against living too long. Who knows – one small step in the right direction might actually encourage people to take another.

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