Retiree spending drops off after age 70, so indexing pensions is unnecessary: study

Automatically raising workplace pension contributions in tandem with the cost of living is unnecessary because Canadian retirees spend less money once they reach age 70, according to a new study.

The report by the C.D. Howe Institute, which was published days before Finance Minister Bill Morneau is scheduled to meet with his provincial and territorial counterparts to discuss Canada Pension Plan reforms, argues that tying up the extra funds in pension contributions is an inefficient use of scarce financial resources for Canadians.

The study’s recommendations mainly target private pension plans, rather than the CPP. However, its author Fred Vettese, chief actuary at Morneau Shepell and one of Benefits Canada‘s expert panelists, writes that CPP contributions should not be subject to any reductions since the public plan is designed to cover basic needs such as food and shelter for middle-income workers after they retire.

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“Retirees in Canada and other developed countries demonstrate a strong tendency to reduce their out-of-pocket spending in real terms starting at around age 70 and accelerating at later ages,” he wrote. “This decline can hardly be attributed to insufficient financial resources because older retirees save more on average than people who are still working.”

The report cites evidence showing that compared to a household where the head is age 54, the average Canadian household headed by a 77-year-old spends 40 percent less. Given this, Vettese added, indexing pension contributions to the cost of living could be reeled back without sacrificing consumption later in life.

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Focusing on public-sector pension plans, which are fully indexed to inflation, Vettese wrote that his findings show these plans could move to partial indexation, generating significant savings.

“Given that more than 3.1 million active members are contributing to public-sector pension plans, the total annual savings could add up to billions of dollars,” he wrote. “At the individual level, these savings would allow public-sector employees to increase current consumption or to reduce debt.”

Read the full report