Senior Pension

 Interesting stats about seniors in Canada according to the government, proving that ageism exists and is practiced by the government.

Yesterday I said that I thought that the increase to the pension for seniors in Canada over 75 was unfair to those seniors under 75. 

In 2018, among OAS pensioners aged 75 and over, 59% had incomes below $30,000, compared to 52% of those aged 65 to 74.

In 2020, 39% of OAS pensioners aged 75 and over received the GIS, compared to 29% of those aged 65 to 74.

In 2020, among OAS pensioners aged 75 and over, 57% were women, compared to 52% among those aged 65 to 74.

These numbers show that seniors under 65 need the increase in pension just as much as those over 75. There is not a legitimate argument to not give these people an increase in their pensions. The only reason that I can see that there is no increase in pension is that the government is playing to institutional ageism to prevent an outcry against the policy. 

The government is seen to be helping one group of seniors so the general public will be happy and will ignore the fact that the government is ignoring the needs of another group of seniors. 

Seniors get a raise

An increase to the Old Age Security pension for seniors aged 75 years and older begins next week, which I think is unfair to all those younger seniors between the ages of 65 and 75. We received our first increase last month and I must admit every increase helps. This raise will be the first permanent increase to the OAS pension since 1973, other than adjustments due to inflation. In 1970 Old Age Security benefits were $79 per month according to the Canadian Museum of History. So have these payments kept up with inflation? 

Yes, they have. According to the Inflation Calculator, $79 in 1970 is equivalent in purchasing power to about $589.80 today, an increase of $510.80 over 52 years.  Today’s OAS is about $668 for those under 75 and $773 for those over 75. So today as seniors we have slightly more buying power than the $79 that seniors had in 1973. The amounts may look more but it is always important to calculate buying power and adjust for inflation.

The dollar had an average inflation rate of 3.94% per year between 1970 and today, producing a cumulative price increase of 646.58%. This means that today's prices are 7.47 times higher than average prices since 1970, according to Statistics Canada's consumer price index. A dollar today only buys 13.394% of what it could buy back then.

The inflation rate in 1970 was 3.35%. The current inflation rate compared to last year is now 7.20%. If this number holds, $79 today will be equivalent in buying power to $84.69 next year. For example, if you started with $79, you would need to end with $589.80 in order to "adjust" for inflation (sometimes referred to as "beating inflation").

These numbers are important to remember when you are saving for retirement. If you don’t account for inflation your retirement may not be what you think it will be.

It is important for Canadians to remember that the objective of the OAS program is not to ensure an adequate pension but to ensure a minimum income for seniors and help reduce the incidence of low income among Canada’s seniors. The OAS benefits include the OAS pension, which is paid to all individuals aged 65 and older who meet the residence requirements; the GIS for low-income seniors; and the Allowances for low-income Canadians aged 60 to 64 who are the spouses or common-law partners of GIS recipients, or who are widowed or widowers.

The good news is that all OAS benefits are indexed, on a quarterly basis (in January, April, July and October), so that they maintain their value over time, even as prices increase. Increases to OAS benefits are calculated using the Consumer Price Index, which measures changes in prices paid by Canadian consumers for goods and services. In July 2022, as a result of quarterly indexation, maximum OAS benefits increased by 2.8%. 

What is a pension in the USA

Retirement is an anxiety-inducing topic for many. In the US, according to a 2017 census department report, 50% of women and 47% of men between ages 55 to 65 have no retirement savings.

Retirement planning is represented using the three-legged stool metaphor, with each "leg" representing social security, personal savings, and pensions. So, the idea is that if you have all three of those, you're setting yourself up for a good future.

But over time, the retirement stool is leaning heavily toward the personal savings "leg" as increasingly important since social security isn't enough to entirely support retirees — and pension plans are becoming increasingly scarce in the USA as 401(k)s have become the dominant form of employer-sponsored retirement plans.

Pensions are a type of retirement plan where the employer deposits money into it during the employee's time at a company. The amount is calculated based on the employee's salary history and length at the company. Later when the employee retires, the pension offers a monthly source of income until they pass away.

Some especially generous — and especially rare — pensions even offer survivor benefits, which provide the surviving spouse with a percent of the pension money owed to the employee.

The type of retirement plan available to you depends on your employer. Many state and local government jobs, still offer traditional pensions. However, 401(k)s are quickly taking over as the dominant retirement plan for private companies, though traditional pensions are one of several terms that labour unions may fight for in negotiations.

The value of a traditional pension is accrued throughout the employee's time working for an employer, "so the longer you work, the bigger your payoff is going to be," Parks says. The value of a pension also takes the employee's pay into consideration as well as the expected growth rate of the company.

Once an employee works at a company long enough, they become vested in their pension, which means they are guaranteed the money in their pension regardless of their position at the company — even if they get fired or move companies. Vesting is a gradual process, so if you work a few years at a company, you can become partially vested in a pension.

Some employees may not be aware that they became partially vested in their pension at a company. If you worked at a company with a pension for a few years, it may be worth your time when you retire to call back and ask if you have any money from a pension, you were vested in.

Pensions are usually either unfunded or funded: which indicates how a company is planning to pay for the pension. Money from a funded pension comes out of a pool of invested money that the employer sets aside specifically for pensions. Meanwhile, unfunded pensions are paid out directly from the company.

Here's the main difference between pensions and 401(k)s: a 401(k) is a defined-contribution plan where both employer and employee can contribute to the account and invest funds to save for retirement. A pension is a defined-benefit plan that's sponsored by the employer that offers benefits based on salary and employment history at the company. So essentially pensions are plans where the employers are set up with higher costs and investment risks. 

 

Does collecting a pension hurt the economy?

 Pensions contribute to economic well-being but some argue that giving pensions hurt our economy.  The OECD 2019 published Pensions at a Glance 2019 In this study the researchers looked at the disposable income of those countries whose seniors have pensions They found that on average among OECD countries, people older than 65 have a disposable income equal to 87% of the total population. It is less than 70% of the economy-wide average in Estonia and Korea, but slightly more than 100% in France, Israel and Luxembourg. Moreover, income drops further with age in old age, and those older than 75 have a significantly lower income than the 66-75 in all OECD countries, with an average difference of 14 percentage points. In most non-OECD G20 countries it is the other way around, old-age income rises slightly with older ages, except in China and the Russian Federation.

Women’s pensions are lower than men’s. Older women often had short careers and lower wages than men, resulting in low benefit entitlements. In the EU-28, women’s average pensions were 25% lower than the average pension for men in 2015 (Figure 1.6). The gender gap stood at over 40% in Germany, Luxembourg and the Netherlands and below 10% in Denmark, Estonia and the Slovak Republic. This also translates into a disproportionate share of poor elderly people being women. On the one hand, with recent moves towards tighter links between labour

Of the four main sources of income on which older people draw, public transfers (earnings-related pensions, resource-tested benefits, etc.) and private occupational transfers (pensions, severance payments, death grants, etc.) account for two-thirds of the total income. Public transfers account for 55% and private occupational transfers represent 10% of older people’s incomes on average. The countries where over-65s are most reliant on public transfers are Austria, Belgium, Finland and Luxembourg: more than 80% of their incomes come from that source.

Public transfers represent only 6%, 15% and 18% of all income in Mexico, Turkey and Chile, respectively. Private occupational transfers are of particular importance in 12 OECD countries, with the Netherlands being highest at 39%.

Work accounts for 25% and capital for about 10% of older people’s incomes on average. Work is especially important in Korea and Mexico, where it accounts for more than half of old-age income; it also represents a large share of income in Chile, Estonia, Israel, Japan, Korea, Latvia, Lithuania, New Zealand, Poland, the Slovak Republic, Turkey and the United States.

Also, as incomes are measured at the household level, work is likely to be a more important income source for older people where many of them live in multi-generational households.

Capital, mostly private pensions, represents 40% of all income sources of older people in Canada. In Denmark and New Zealand, capital represents over 20% of all income.

In most countries, pensioners are not a drain on the economy, they contribute to it by paying taxes and working.

Inflation and planning your retirement

While the equity markets surge and investors breathe a sigh of relief after a stressful 12 months, we may be hurtling towards a retirement crisis.

As we know our Canada Pension Plan is sustainable and I believe that while pensions will continue to do their job and payout, the real question you must consider is what that money can buy you when the time comes to slide away from working life.

If you have a pension plan, you will be paid by their pensions, whether they are the defined contribution plans or the registered savings plans that are going to be converted to RRIFs. That is not the problem. The problem will be: what will we be able to purchase with that cash flow stream?

For example, according to the inflation calculator of the Bank of Canada, a "basket" of goods and services ...that cost: $100.00 in 2006 ...would cost $128.61 in 2021.

This means that in the 15 years since I retired, I would need $128.61 to buy what I could for $100 when I retired.

That means that over the past 15 years, there has been a 28.61 percent negative change in my purchasing power.

What does this mean, for me, that for me to keep the same standard of purchasing power I had when I first retired, I need to have my pension and investments growing at the same rate. This means over the last 15 years I would have to have at least the same amount of growth in my investments and pensions, higher than the rate of inflation to have the same purchasing power I did in 2006. I have been able to do this because I have a good investment counsellor who I listen to and who I trust to guide me.

When we are planning our pension, we must think seriously about inflation and what we need to do to protect ourselves over time. My advice is to talk to your investment broker and ask some questions about the performance of your portfolio over the long term.

COVID and Pension Planning Worldwide 3

 In an interesting article in the Asia Pacific Forum, Odusote Fatimah Abolanle and Alfred Muluan Wu write.

Many governments have also introduced subsidized pensions for a specific group of workers who registered under the pension scheme. In India, the central government was willing to contribute 24 percent of the salary of employees working in firms with up to 100 workers for three months.

 COVID-19 has laid bare the persistent gap in pension coverage, especially in low and middle-income countries where the working population is mainly in the informal sector. There is a clear need to create a non-contributory system in such a climate, or at least to extend its coverage to cater for those in the self-employed or informal sectors, to improve social protection and prepare workers for retirement.

 The hard truth is social security pension systems are still mainly the business of government, requiring strict monitoring, regulation, and support by the state, especially in developing countries. While COVID-19 has spurred several countries to make temporary adjustments to pension schemes, in the post-COVID-19 era all governments will have to conduct a thorough review of their pension systems to fix the endemic problems that exist.

 In doing so, policymakers will have to answer a number of critical questions. In addition to benefiting from public-private partnerships, the role of the state in providing pensions should be rethought. Policymakers should resist popular discomfort with increasing spending on retirement income protection, and acknowledge its many benefits for society and the economy.

 While much is up in the air for pension policy, one thing is certain. In the wake of COVID-19’s economic shockwaves, the adequacy and sustainability of pension schemes must be protected and extended, and policymakers must do everything they can to make that happen.

COVID and Pension Planning Worldwide 2

 In an interesting article in the Asia Pacific Forum, Odusote Fatimah Abolanle and Alfred Muluan Wu write.

The COVID-19 pandemic has complicated pension reforms in many countries. Worse yet, recent reforms in some countries put them at risk of further harm in the event of a another catastrophe like COVID-19.

For instance, a recent wave in pension schemes in many regions of the world shifted the risk and financial burden to employees and erased the state support system. In a normal environment this would already put employees at risk, but in a pandemic, it has been a disaster for inequality. Further, the vulnerability of low-income earners in the informal sector, especially in developing countries, has risen, compounding this global problem.

To deal with the impacts of COVID-19, many countries have had to create buffering mechanisms within the existing pension systems to alleviate the pains of its workforce. Some of these responses include allowing an early withdrawal of pension contributions, a reduction or deferral of contributions by employees and/or employees, provision of a subsidised pension, and the provision of a non-contributory pillar for unemployed.

For instance, the early full or partial withdrawal of pension contributions was initiated by Ghana for the self-employed and people who have permanently lost their jobs, and in India for those that are ill or have lost their job. Similar provisions have also been implemented in Australia, Malaysia, and Iceland.

In some countries, governments enacted policies to reduce or defer the contributions by workers to their pension account. In Thailand, social security contributions by employees – and also for employers – were reduced from five to four percent.

In India, those earning a basic salary of 15,000 rupees (approximately $280) per month will contribute 10 percent, rather than 12 percent of their monthly salary to the Employee’s Provident Fund from May until August. But those working with the central government were exempted.

In Malaysia, the mandatory monthly contribution to the Employee Provident Fund (EPF) by workers were reduced from 11 percent to seven percent.

Some governments have temporarily postponed or reduced pension obligations by employers in an attempt to mitigate the negative impact of COVID-19. For instance, the People’s Republic of China allowed for deferral or reduction in the employer contribution rate, depending on the location of the company within China, the size of the company, and the sector.

Vietnam also announced the suspension of mandatory contributions by some enterprises experiencing difficulties with COVID-19, based on the degree to which they are affected.

 The French government announced the deferral of social security and retirement contributions from May

DC pension plans vs DB pension plans

2020 is the year many of us will retire or move away from the workforce. So, it is important that we understand the two main types of employee pensions in Canada, defined contribution (DC) and defined benefit (DB). Both are important and help you when you retire, though they both work in different ways.

DC pension plan

The DC pension is more like a registered retirement savings plan (RRSP) in the way it works than what most people would traditionally think of as a pension. In this pension plan both employee and employer contribute to the plan. The amount invested is usually based on a percentage of income, up to a contribution limit. These contributions are then invested. The employee usually decides and directs what the pension plan

investments in, however, the employer also has a say.

Our government has a limit on how much each person can invest in a pension plan each year. This amount is called the pension adjustment. So, for every dollar contributed to the DC plan, the employee accumulates a dollar of pension adjustment. This means that the amount they can invest in their RRSP is reduced by a dollar. This is regardless of who makes the contribution. If the employee makes the contributions the contributions are eligible for a tax deduction. If the employer makes the contributions, they are not eligible for a tax deduction.

The government wants everyone to have a level playing field so the purpose of the pension adjustment is to equalize the retirement savings an employee with a pension can make versus someone who does not have a pension.

When a person retires and they have a DC plan, they have some options. The first is to transfer the value of the plan to a locked-in retirement account (LIRA). The second option is to use the money accumulated in the plan to purchase an annuity. The third option is to do a combination of the first two options.

To make it even more confusing changes in a recent federal budget, when a person retires with a DC plan, they can now choose aa variable payment life annuity (VPLA) or an advanced life deferred annuity (ALDA).

It is important when you are thinking about retirement and you have a DC plan that you talk to an advisor who can make sense of what you have and what you can do that is best for you. One of the first things you may want to look at is the current value of your pension. This is not complicated as all your advisor needs to do is to look at the value of the underlying investments in your plan.

What you don’t know (and this is why it is important to get impartial advice), is what future income this pension will produce. You have a defined contribution pension, which means the contributions to the plan are known, but your retirement income is dependent on the rate of return your investment earned and how much you have contributed over the years.

Employers like the DC pension plan, because it forces the employee to make retirement savings. By having it as part of the employment culture, with the savings coming right off of one’s pay, this type of plan encourages employees to save for their future.

Employees like this type of plan because the employer contributes to the plan. Each plan is different. Some employers may choose to match employee contributions, some may choose to make contributions regardless and some may combine the two in some fashion. No matter how they do it, the benefit is clear to the employee, it is free money toward their retirement savings.

10 tips to help you understand pensions

1. Get on board from the outset with your company pension
Your employer should provide you and all new workers with a ‘pension pack’ – in a printed or online format – that sets everything out in plain, jargon-free language and clearly directs how to get more information and support.

2. Read about it, then read about it again
To keep you from switching from the benefits your workplace scheme offers, you need to be reminded of the facts on a regular basis. Review your pension benefits every six months or at least once a year. Go to seminars offered by your employer on your benefits. Read and watch video's about your benefits if they are offered by your employer. 

3. Make sure the timings are right
Time your own review so it is the best time for you.  For example, avoid August, when you're more likely to be concentrating on having fun than choosing funds. And for many, December is obviously the time when long-term thinking tends to take a festive break.

4. Host financial education seminars
Go to seminars on finance, by looking at your finances holistically, you may come to realize that you may need to take a more ‘hands-on’ approach to their retirement planning. It’s all too easy to think that auto-enrolment will take care of everything, rather than considering how much is actually needed to fund a good lifestyle after work. Pension providers and other professionals should be able to help you find informative seminars and events.

5. Adopt online pensions calculation tools
Users of pension calculators say that when you can see the impact of cutting back on your total pension pot, the penny really does drop. There are lots of easy-to-use online calculators that can help you get an idea how much you might have in their pension pot when you retire – and how saving a relatively small additional amount could make a big difference down the line.

6. Make your scheme stand out
Paying in above the minimum levels is one way to set your pension apart from others. Other factors, such as online account access (perhaps alongside other savings products under a corporate platform), can also set your pension above and apart from your peers.

7. Know about the downside of opting out
You might tell yourself that you are only opting out for a short time, while you address more pressing financial needs. But because of the effects of compounding, this tactic could be more costly than you think – especially if you are a younger employee who would be missing out on many years of potential growth for the contributions you may have decided to ‘save’ to spend on other shorter-term priorities.

8. Different age groups respond to different tactics
Not everyone reading this is at the same life stage, and nor do they all have the same priorities or attitude to risk:

Younger people are more likely to be receptive to financial education. However, retirement is a long way away, so it’s important to communicate the value of getting into the habit of saving in general. Remember that your pension is part of your reward package and that you make contributions as well as your employer– why turn down ‘free money’.
If you are between 30 to 50 you are likely to be juggling some very immediate demands on their finances – from mortgages to family commitments. Remember your pension is positioned as a part of general support to help you make the most of their money.

If you are over 50 you will be more aware of the need to plan for retirement and you are likely to be concerned about the effect of volatility on your pension at this later stage. Think about your choices at age 55+, and at the same time highlight the opportunity you still have to make changes to your investments or level of contributions. 

9. Appeal to your self-interest
Sometimes, telling yourself a few straight facts is the best way to get yourself engaged more fully with your pension. Remind yourself that:

Employers put money in on your behalf. If you aren’t in the pension you won’t get the extra money. It’s your money, not the employers. What goes in is yours, what comes out is yours.

Finally, remind yourself of what you will get if you only rely on the Canada Pension or state or Federal pension if you don't have your own pension.  Would you want to live on that?

Do you have long term health care, maybe you should

Some 323,000 Canadians have inadequate retirement income once the costs of long-term health care are factored in, a figure that could grow to about 815,500 by 2038, according to a new study. The study, which looked at the impact of out-of-pocket health-care expenses on Canadian retirement security, was conducted in three major phases by the Healthcare of Ontario Pension Plan and the University of Toronto’s Institute for Health Policy, Management and Evaluation. 

The first was a review of the most relevant academic literature on retirement security and health spending in Canada; the second was an analysis of household consumer spending data to assess health spending trends; and the third was a recreation of LifePaths, a statistical model created by Statistics Canada to assess Canadians’ retirement readiness, with health spending factored in.

The study also found:

• Out-of-pocket health-care costs tend to rise with age, especially among high consumers of health-care services.
• To date, studies and analyses of Canadians’ retirement readiness have neglected the increasingly important area of out-of-pocket health-care costs, including home-based and long-term care.
• Including the costs of home-based and long-term care in the analysis worsens the picture of Canadians’ retirement readiness and future retirement security among certain groups, particularly women and people aged 85 and older. The percentage of women projected to have inadequate income nearly doubles once health-related costs are factored in (increasing to 17 per cent from 11 per cent for 70-year-olds and to 44 per cent from 25 per cent for 85-year-olds).

These findings play out against the backdrop of another issue — the fact that caregiving is a serious financial burden for an increasing number of adult Ontarians. Living longer means more Ontarians will live to 85, at which point the probability of becoming severely disabled increases significantly. Twenty-five percent of women and 15 percent of men aged 85 are severely disabled, which means significantly higher health-care spending and an increased need for caregiving from family members and home-care professionals.

Lets examine some public pension systems to see how they measure up globally

For ten years OECD (The Organization for Economic Cooperation and Development (OECD) is a unique forum where the governments of 34 democracies with market economies work with each other, as well as with more than 70 non-member economies to promote economic growth, prosperity, and sustainable development.) has reviewed and studied and scrutinized member and G20 countries’ pension systems and policies on pensions; ten years of assessing and predicting workers’ pension entitlements, and ten years of recommending reforms that lead to more financially sustainable pay-as-you-go pensions and also respond to citizens’ need for stable and adequate incomes in old age.

The most visible progress has been made in raising official pension ages. Many countries have been moving this key parameter beyond the mark of 65 years. As highlighted in previous editions of Pensions at a Glance, 67 has indeed become the new 65, and several countries are going even further towards ages closer to 70. Across OECD countries, the average retirement age will increase to 65.5 by 2060 from 64 in 2014 on the basis of legislation as of 2015.

The share of individuals aged 65 and above will increase from 8% of the total world population in 2015 to almost 18% by 2050 (Figure 1.1), and from 16% to 27% in the OECD. In the OECD, the share of the population older than 75 years will be similar in 2050 to the share older than 65 years’ today

Employees stay the longest in the labour market in Iceland, Japan, Korea and Mexico. In Belgium and France, men retire the earliest, while it’s women who do so in Poland and Slovenia.

Future net-replacement rates from mandatory pensions for a full-career, average-wage worker are an average of 63 per cent in OECD countries. They range from 27 per cent in Mexico to 111 per cent in Turkey.

Most OECD countries have been active in changing their pension system since the last publication of Pensions at a Glance (OECD, 2013). Efforts were mostly driven by the widespread need for fiscal consolidation, and a majority of countries indeed implemented reforms to improve the financial sustainability of their pension systems.

Some countries have done so while maintaining or improving retirement income adequacy, at least for some population groups.

Improving financial sustainability

•    The most popular measure was to strengthen the incentives to work by increasing the minimum retirement age and/or the main retirement age, thereby enlarging the contribution base while preserving adequacy for those who are able to work longer.
•    Almost no country resorted to direct nominal benefit cuts. When benefits were directly reduced, this only happened by switching to a narrower targeting, or by introducing adjustments in the initial pension benefit for new retirees.
•    A much larger number of countries changed the indexation of pension benefits to less generous uprating mechanisms.
•    Many countries raised revenues by increasing taxes or contribution rates in defined-benefit systems.
•    Measures to curb pension administration costs were quite common.

Increasing retirement-income adequacy

·       Several countries have taken measures to increase the coverage of voluntary private pension schemes. Some countries awarded retroactive pension credits or reduced the impact of missing years of contributions on pension levels.

·       In some defined-contribution schemes, contribution rates have been increased, while some countries chose to reduce the effective taxation of pensioners’ income.

·       In a number of countries management costs have been lowered and several improvements were made to the security of pension investments

One trend that is certain, however, is the shift from defined-benefit schemes, where the employer shoulders the risk, to defined contribution schemes, where the risk lies with the individual worker. This trend, well entrenched in occupational pension schemes, is also observed in public pension schemes with much closer links between workers’ contributions and their pension benefits, and benefit formulae which more and more often take into account increases in life expectancy.

So, how does Canada measure up against other industrialized countries?

CANADA

How does it work? Canada’s public pension system offers a flat-rate benefit that can be topped up with an income-tested benefit (the guaranteed income supplement) and earnings-related public schemes (the Canada Pension Plan and the Quebec Pension Plan).

Age of eligibility: Under the former Conservative government, the age of eligibility for the basic OAS pension was to gradually increase to age 67, starting in April 2023, but Prime Minister Justin Trudeau’s first federal budget confirmed it would restore it to 65. For the Canada Pension Plan, the normal eligibility age is 65, but people can take an early pension from age 60 or a late one up to age 70.

Benefit calculation: Based on April to June 2016 monthly rates, the maximum annual OAS pension benefit for an individual is $6,846.24. The maximum annual GIS benefit is currently $9,283.20 (the amount will increase on July 1 to $10,230.20). So a single senior with no income outside of OAS and GIS benefits (such as CPP) would receive a combined $16,129.44 under the current amounts.

The maximum CPP payment amount for 2016 is $13,110. According to Finance Canada, it’s possible for an individual with the maximum CPP benefit to qualify for GIS payments as well. A senior could receive OAS, GIS and CPP benefits, but it’s not possible to receive the maximum of each of them since higher CPP payments directly reduce GIS amounts.

AUSTRALIA

How does it work? Australia’s public retirement system involves a means-tested age pension funded through general taxation.

Age of eligibility: The pension is payable from age 65. From July 1, 2017, the pension age will increase by six months every two years until it reaches 67 by by July 1, 2023.

Benefit calculation: In March 2014, the maximum single rate of pension was equal to an annual entitlement of 21,570 Australian dollars (currently equal to $20,316.63).

BRITAIN

How does it work? Before April 6, 2016, Britain’s public pension system had two tiers: a flat-rate basic pension and an earnings-related one. The new state pension introduces a flat-rate pension based only on national insurance contributions.

Age of eligibility: The state pension age is currently 65 for men and 63 for women. The pension age for women is gradually rising to 65 by November 2018. The government has also legislated increases in the state pension age to 66 by October 2020 and to 67 between 2026 and 2028.

Benefit calculation: The full rate for the new state pension is 155.65 pounds per week, which works out to about 8,000 pounds a year ($14,585.51). The additional earnings-related pension, which can reach almost 200 pounds a week and depends on national insurance contributions, is still available for people who reached the state pension age before April 6, 2016.

CHINA

How does it work? China has a basic public pension.

Age of eligibility: The normal pension age is 60 for all men, 50 for blue-collar women and 55 for white-collar women. The government has said it will begin to gradually increase the normal pension age in 2017.

Benefit calculation: The basic pension pays one per cent of the average of the indexed individual wage and the provincewide average earnings for each year of coverage, subject to a minimum of 15 years of contributions. The program includes indexing according to a mix of wages and prices, which has been about 10 per cent in recent years.

FRANCE

How does it work? France has a basic pension that can be topped up by a means-tested supplement.

Age of eligibility: Under the country’s 2010 pension reforms, the minimum legal retirement age will increase to 62 from 60 by 2017 for people born in 1955 and onward. The age of entitlement to the full-rate pension will rise to 67 from 65 between 2016 and 2023.

Benefit calculation: The minimum full-rate pension is currently 629.63 euros a month or 7,555.56 euros ($10,851.08) per year.

GERMANY

How does it work? The statutory public pension system has a single tier and is an earnings-related system. The pension calculation is based on pension points. People can claim additional means-tested benefits from social assistance.

Age of eligibility: The current old-age pension is payable from age 65 and three months with at least five years of contributions. The statutory retirement age will gradually increase to 67 until 2031 for those born in 1964 or later.

Benefit calculation: A year’s contribution at the average earnings of contributors earns one pension point. The relevant average earning is approximately identical to the national accounts average earnings, which was 34,857 euros in 2014. At retirement, the pension points are summed up and then multiplied by a pension-point value, which was 337.68 euros in 2014. So, an individual who worked for 40 years and retired in 2014 could expect to receive 13,507.20 euros annually ($19,399.34).

JAPAN

How does it work? The public pension system has two tiers: a basic, flat-rate scheme and an earnings-related plan.

Age of eligibility: The pension age for the basic scheme is 65, with a minimum of 25 years of contributions. From April 1, 2017, it will require a minimum of 10 years of contributions. The earnings-related pension age is increasing to 65 from 60 between 2013 and 2025 for men and between 2018 and 2030 for women.

Benefit calculation: The full annual basic pension benefit in 2016 is equal to 780,100 yen ($9,283.64). The earnings-related pension benefit depends on both remuneration and the length of contributions.

THE UNITED STATES

How does it work? The publicly provided pension benefit in the United States, known as social security, has a progressive benefit formula. There’s also a means-tested top-up payment available for low-income pensioners.

Age of eligibility: The pension age (called the normal retirement age) was 66 in 2014 and will increase to 67 by 2022. A person can take a reduced retirement benefit as early as age 62.

Benefit calculation: The earnings-related pension benefit formula is progressive, with portions of relevant monthly earnings attracting a different replacement rate. For instance, in 2016, the band of monthly earnings between US$856 and US$5,1517 attracts a replacement rate of 32 per cent. According to the Social Security Administration, in 2015, the average monthly benefit was US$1,336 a month or US$16,032 ($20,404.82) annually.

There’s also a means-tested benefit for the elderly, known as supplemental security income. In 2016, individuals aged 65 years or older without an eligible spouse can receive a monthly payment of up to US$733, or US$8,796 ($11,194.30) annually.

The information in this post was taken from Pensions at a Glance and a story by Jennifer Paterson on How does Canada measure up against other countries. Published in BenefitsCanada

Pension Plan performance world wide is good

There are many who want to take away pensions and some cite poor performance as one of the reasons to allow the individuals to run their own plans. However when we look at the performance of Pension Funds Positive investment returns in 2014 and also over the last 5 and 10 years we can see that the growth of pension fund assets in 2014 was underpinned by positive investment returns. 

All the reporting OECD countries recorded positive real net 3 investment returns in 2014, ranging from 1.2% in the Czech Republic to 16.7% in Denmark, with an OECD weighted average of 5.0% (Figure 7).

The simple average is higher, at 6.8%. Twenty-one OECD countries experienced real returns higher than 5%. Outside the OECD area, the performance of pension funds in terms of real net investment returns was also positive, but returns were lower than in the OECD area on average: 1.2% for the weighted average and 4.6% for the simple average (Figure 8). 

India experienced the highest level of investment returns among non-OECD countries at 19.1%. Only four non-OECD jurisdictions had real negative investment returns in 2014: Armenia (-1.7%), Nigeria (-1.7%), Hong Kong (China) (-3.2%) and the Russian Federation (-7.4%). The existence of management costs reduces nominal returns which combined with high inflation may lead to negative real return

Figure 7. Pension funds' real net rate of return on investment in selected OECD countries, Dec 2013 - Dec 2014 In per cent Figure 8. Pension funds' real net rate of return on investment in selected non-OECD countries, Dec 2013 - Dec 2014 In per cent. Source: OECD Global Pension Statistics.

The results are positive and even more so when they are compared to real growth rates in these countries. (same source)

A lesson from Behavioural Finance

Behavioural Economics and Finance studies show that consumers find it hard to manage their spending. In the UK this may cause some concerns as they have moved to a program which allows pensioners a great deal of choice about how they will receive their pension. 

The issue is that the experts fear that people who choose to receive a lump sum payment when they retire, will spend it all quickly, rather than investing for the long term. This may mean that some pensioners will run out of money and be forced onto welfare.

Ms Seaton, chief executive for financial forecasters eValue, said

“I believe there is a ticking time-bomb in the UK’s new found pensions freedom. While freedoms and flexibility can be a great thing, education is vital to make sure people are saving enough for retirement, and that pensioners do not run out of money too early in retirement.”

Her comments came a week after think-tank the Social Market Foundation published a report showing that pensioners in the US and Australia have not used their pension freedom wisely, with approximately 40 per cent of them spending their pension pot by age 75.

So if people are spending their money by age 75 this is not a problem unless they are living longer than 75, which most of us are. 

So how can the industry and the government counter this urge to spend money. According to Martin Brown, managing partner of National IFA Continuum, said: “As a modern financial planning business, we recognise that it is our duty to educate our current and future customers on their lifetime planning needs.”

Education is the key to helping retirees understand they cannot spend all their money quickly. The question is will retiree's learn the lesson or will governments have to abandon the plan to give retirees the freedom they have know in those countries. 

I am willing to bet that the government will soon move to restrict the freedoms so that individuals do not run out of money before they die.

Are you bored in retirement? Try these ideas

As we wait to go home, I find that my day keeps filling up with lots of things to do and I enjoy spending time and playing with my grandson. I also know that many of my friends are doing so much that they do not have time to be bored but some retirees wonder what to do next. I count myself and my friends among those who are having trouble managing our time because there is something new to do every month. 

I do know that one of the biggest concerns I hear from people approaching retirement is "what will I do with my time".

Some retirees know exactly how they will spend their days when they no longer have to work, while others who decide to play it by ear may find themselves battling boredom but those folks are in a minority in my circles.

Throughout most of our lives, we are defined by what we do, when we are young we are students, when we leave school we are workers and for all of us, our jobs keep us busy and provide a sense of purpose in our lives. But just because you no longer have an office to go to every day does not mean life cannot be as fulfilling or even more fulfilling than it was when you were still working. 

If you feel that you are succumbing to retirement boredom. Try these ideas:

Work part-time. Though it might seem odd to start working right after you retire, a part-time job can provide the type of structure you have grown accustomed to without all of the responsibility that comes with a full-time career. Part-time jobs can range from consultancy work that makes use of your professional experience to something entirely different like landscape maintenance at a nearby golf course that gets you out of the house and enjoying the warmer seasons. Whichever you choose, make sure it's something you find fun and interesting.

Embrace a new hobby. Working professionals often say they wish they had time to pursue a hobby. Now that you are retired, you have all the time in the world to do just that. Whether it's perfecting your golf game, writing that novel, learning to cook like a gourmet chef or whatever else you might have always wanted to do, retirement is a great time to do it.

Get in shape. If retirement boredom has started to negatively affect your mood, one great way to conquer your boredom and improve your mood at the same time is to start exercising. Exercise is a natural mood enhancer. When the body exercises, it releases chemicals known as endorphins, which trigger positive feelings in the body. In addition, regular exercise has been shown to reduce stress, boost self-esteem and improve sleep. Working out at a gym also is a great way to meet fellow retirees in your community, and the energy you have after exercising may give you the boost you need to pursue other hobbies.

Volunteer. If a part-time job is not up your alley, then consider volunteering in your community. Volunteers are always in demand, and volunteering with a local charity can provide a sense of purpose and provide opportunities to meet like-minded fellow retirees, all while helping to quell your boredom. Retirees who love to travel can combine their passion for volunteering with their love of travel by signing up to work with an international relief organization that travels abroad to help the less fortunate.

Pension freedom day in England is getting mixed reviews

In England, pensions freedom gives retirees complete control over their retirement income options.   So this should be good news as people will have some control and conventional economic theory states that people will make rational decisions about their money. 

However, Behavioral economic theory shows that people don't make rational decisions. What  does influence behaviors around money?  According to the paper in this month's Journal of Political Economy  .it is in our genes. A new study of twins has found that people are genetically predisposed to save or spend the money they have, regardless of their wealth, sex or upbringing. One third of our behavior when it comes to money is explained by natural factors, rather than being someone's choice to consume or save earlier in life. 

According to Barclays head of behavioral investment philosophy Greg Davies thinks there will be trouble on the horizon for many.

"When we look at the pension world and what has happened to it over the past few years – and indeed, what is about to happen – from our perspective, what is happening is very strong behaviorally."

Davies, who has written Barclay's' latest white paper Humanizing Pensions on the topic, says auto-enrollment was put in place to combat the notion that people do not do what is in their own best long-term financial interests. 

"We think something such as auto-enrollment is absolutely crucial because it prevents people from being in a situation which is just terribly wrong for them. 

"But we also think it is not the whole solution. If you put someone in a default, one-size-fits-all solution, it gives them the impression that someone has thought about this for them. It disincentives people to engage any further. It has unintended consequences.

"The pension changes that are coming make very different behavioral assumptions." 

He adds: "If automatic enrollment is there to say 'if people are left to their own devices, they don't necessarily do what is best for them', then freedom of choice interestingly gives the impression that in the intervening decades they have magically acquired the ability to process huge amounts of information and make complex choices in the right way for them.

The reality is there is a need for foresight – that is, care in providing for the future. But the fear is by behavioral economist is that many people will spend all their money at once showing little foresight.

Freedom is not licence. Just because people have the freedom to spend their pensions as they please does not mean they have licence to spend their money unwisely.

It is lazy thinking for people to think that advice is not important, or that the adviser community is simply out to feather its own nest.

My hope is that more and more people will realize that they owe it to themselves to make good decisions about their retirement income, because if they get it wrong the only people who will lose out will be themselves and their families. To do this they need to be educated and without the education about long term planning, investing and the new rules, many will follow their genes and this may cause problems later.

Too many Canadian women are at a disadvantage economically

A study done by Sun Life Financial shows that men and women have similar ideas on retirement but there are some differences.

Men are more likely to be satisfied with their retirement savings
We asked respondents how satisfied they are, and 33% said either “very satisfied” or “somewhat satisfied.” Not a bad number, given the capital market volatility we’ve seen in recent years. Men appear in better shape, however, with 38% saying they were “very” or “somewhat” satisfied. Among women, the total is 29%. Almost half of women (47%) are “very dissatisfied” or “somewhat dissatisfied” with their savings. By comparison, just 36% of men said the same.

More than a third of women expect to be working part-time at 66
While men and women expect to work past 65 in roughly equal numbers, women are more likely to be planning on part-time work while men are more likely to keep working full-time. We asked respondents what they thought they’d be doing at 66; 34% of women said “working part-time” (versus 29% of men) and 31% of men said “working full-time” (versus 21% of women).

Men are much more likely to work past 65 by choice
Among those who expect to be working at 66, 42% of men said they’ll do so “because they want to” (versus 31% of women). Almost seven in 10 women expect to be working at 66 “because they need to.”

More men pay themselves first
It’s one of the principles of personal finance — put a sum of money aside in savings each month before paying your living expenses and making discretionary purchases. About three in 10 (29%) men said they do it every month, while 23% of women said the same. One third of men and women do it sometimes.  And 41% of women said they never do it (versus 34% of men).

Saving for retirement is a top priority among many more men
We asked respondents to name their top financial priority. Among men, 27% said it was “saving for retirement.” Just 19% of women said the same.  In both cases, the highest percentage said their No. 1 priority is to “pay down personal loan(s) or other debt(s).”

Men are more likely to be confident about their understanding of financial matters
Well over half (56%) of men answered yes to our question: “Do you feel you have the financial knowledge to be able to make a plan for your retirement?”  Among women, 48% said yes.

Yet men are less likely to worry about dying in debt
Surprisingly, 27% of Canadians said “no, it does not matter if I die in debt.” The gender split adds to our understanding: 35% of men aren’t worried about debt in the afterlife, while just 20% of women said the same.

That last item aside, it’s hard to look at these numbers and not feel it supports an argument that too many Canadian women are at a disadvantage economically (relative to men at least).

You can read this article and others in Sun Life Financial’s Understanding Unretirement

No pension savings crisis: an alternative view of the Canadian situation

Happy Canada Day to all of you. On this glorious day, I thought an alternative view of the upcoming pension crisis would be worth reading. All is not gloom and doom in the world of pensions and retirement. The following alternative view of our pension crises was posted May 15, 2013 here and was written by. Ian Lee and Vijay Jog.  Canadians have $7.1-trillion in net worth savings

Canadians have been told repeatedly by pension experts that we are not saving enough for our retirement and therefore will face difficult times in retirement unless contributions to the Canada Pension Plan (CPP) are increased.

These advocates, relying on behavioural economists, argue that Canadians must be forced to save significantly more through a major expansion of the Canada Pension Plan, often characterized as “big CPP,” as Canadians clearly do not understand they are saving insufficient amounts to provide an adequate pension in their retirement.

We believe that Canadians are smarter than they are given credit and, more importantly, that the data simply does not support the conclusion. More specifically, we believe that the “inadequate savings” argument ignores a significant component of savings, namely the investment in real estate including principal residence, other forms of real estate and business ownership.

An analysis of Statistics Canada National Households Balance Sheet reveals some important data. Canadians have gross assets of approximately $8.8-trillion of which $3.5-trillion is held in primary and secondary residences and raw land (reflecting a home ownership rate of 69%), $3.7-trillion is invested in cash, mutual funds, equities etc. and $1.6-trillion is in registered pension plans. When the much debated indebtedness of Canadians of $1.7-trillion (of which two-thirds is mortgage debt) is subtracted, the personal net worth of Canadian households is approximately $7.1-trillion or $199,700 per capita.

This data reveals that Canadians have $7.1-trillion in net worth savings and not the $1.6-trillion pension savings claimed by pension critics. And more importantly, principal residence assets can be transformed into tax-free income that can be used upon retirement through “downsizing” to a less expensive home or community or using new financial innovations such as “reverse mortgages.”

This exclusion of non-pension investment personal wealth from determinations of pension adequacy has been recognized by Statistics Canada in an article on Income Adequacy in Retirement by John Baldwin et al: “income as normally measured captures only part of what is available to seniors if households possess assets. Indeed, when after-tax estimates are used, the potential income per adult-equivalent in senior households exceeds the income of households headed by younger adults.”

Moreover, according to the Statistics Canada 2008 Survey of Household Spending, 43% of Canadians had no mortgage while the mean age of those Canadians mortgage free was 62. In other words, significant amounts of home equity are (logically) skewed towards older people for they have had much longer periods of time for the property to increase in value and to reduce or eliminate debts. And it is older people who can and do use their home equity during their retirement.

Some may argue it is unfair to expect Canadians to downsize or to obtain a reverse mortgage or even sell their home during their retirement years. Yet the justification for a larger CPP has been grounded on the assumption that Canadians are not saving enough for retirement. This argument fails to recognize that many Canadians view their home as a nest egg just like any other forms of wealth , e.g. RRSPs, financial investments, which can be converted to cash and used during retirement years. Even more importantly, they are smart enough to recognize that investment in their principal residence is free of taxation. The wealth classification of “pension savings” is not intrinsically financially or morally superior to wealth classified as “real estate equity” or “mutual funds” or “GICs” or “business ownership.”

It has also been argued these aggregate statistics exclude those in the bottom quintile who may not own their own home and thus cannot avail themselves of home equity. While this may indeed be true, researchers such as Professor Kevin Milligan at UBC have shown that the bottom quintile actually do better in retirement due to OAS, GIS and CPP and their pension income is typically higher than the income earned in their working years.

This observation is further validated by the OECD Pensions at a Glance that showed only 5% of elders in Canada were below the poverty line – the fourth lowest elder poverty rate in the world. Moreover, Canadians in the lowest quintile would be hard pressed to save a higher percent of their income when they may not need more than what they would receive from OAS, GIS and CPP.

Thus, the claim that Canadians are not saving enough for their pensions ignores how smart Canadians actually are and what the data is telling us. Behavioural economists and pension advocates should analyse the empirical savings behaviour of Canadians more closely.

Ian Lee is an assistant professor, and Vijay Jog is the Chancellor Professor, at the Sprott School of Business at Carleton University.

Issues related to Canada's public pensions

For those of you in Canada who want to know about Pension Planning check out the following reports before the government pulls them:

Reports: Public Pensions

The following reports examine issues related to Canada's public pensions and the overall retirement income system, including the Canada Pension Plan (CPP) and Old Age Security (OAS). The findings and recommendations in these reports are based on data and information gathered from various research studies.

Public Pensions

• Old Age Security Program - Actuarial Reports (Office of the Chief Actuary, Office of the Superintendent of Financial Institutions)
• Canada Pension Plan - Actuarial Reports (Office of the Chief Actuary, Office of the Superintendent of Financial Institutions)
• Retirement Income Programs: An inventory of data/information available at Statistics Canada(Gabriella Martello, Christine Arsenault and Karen Maser, Statistics Canada. March 2000)
• The Maturation of Canada's Retirement Income System: Income Levels, Income Inequality, and Low-Income among the Elderly (John Myles, Statistics Canada and Florida State University. March 2000)
• Social Security Privatization: Experiences Abroad (Congressional Budget Office, United States Congress. January 1999)