Prime Minister Stephen Harper’s speech in Davos last week set off a mini firestorm when he briefly touched upon the need to make social programs sustainable as the population ages rapidly:

We have already taken steps to limit the growth of our health care spending over that period. We must do the same for our retirement income system. Fortunately, the centerpiece of that system, the Canada Pension Plan, is fully funded, actuarially sound and does not need to be changed. For those elements of the system that are not funded, we will make the changes necessary to ensure sustainability for the next generation while not affecting current recipients.

Newspapers immediately started speculating that the Federal Government is contemplating raising the age of eligibility for Old Age Security (OAS) from 65 to 67. Other rumours suggested that the Government might lower the threshold at which OAS benefits are clawed back. We might have to wait for Finance Minister Jim Flaherty to table the budget document for insight into exactly what the Federal Government is planning to do.

The current brouhaha clearly illustrates the futility of detailed retirement planning for anyone under 40 years of age because a lot can change in the quarter century left until retirement. Perhaps, as the rumours suggest, Old Age Security will be radically altered by the time today’s 40-year olds retire. There may even be significant changes made to the Canada Pension Plan. Therefore, younger Canadians should spend most of their energies in building a strong financial base — establishing a savings habit, investing the savings prudently, paying down debt etc. — and worry about the minutiae of retirement plans as they get closer to retirement.

This article has 24 comments

  1. I agree that in so far that things are difficult to predict 25-40 years into the future, tax rates, policies, etc.

    I disagree with you that we can “forget” about retirement planning. Questions like how much should I spend and how much should I save, are important and should not be forgiven. That these questions do not have rock solid unchanging answers over the course of 25-40 years does not mean that it is without purpose or value.

  2. I also misread this. The title makes it seem like I should stop worrying about saving and go on a couple extra vacations a year. If anything this should tell people that they should base their retirement calculations entirely off their own money and take any government money as a bonus.

  3. The article should be titled:

    Under 40? Forget Government help in Retirement

    I’m not banking on any government help during retirement. A single government in the next 25-30 could drastically change any programs currently available to seniors. Now I could still be eating cat food in retirement. All it would take is a few years of hyper inflation (either by government mismanagement or by design) to drastically reduce the buying power of any saved funds.

  4. In my opinion the government should look at the public service pensions before CPP and OAS. These pensions have gotten out of hand. For CPP and OAS give me an opt-out option which would lower my taxes and let me take care of myself thank you very much.

  5. I differ in degree. Canadians under 40 should plan, but not in the very detailed manner in which they should as they march toward retirement. If you don’t have any map at all, you risk never getting anywhere.

  6. @Slacker: Fair enough. I just think that the spending and saving projections are more useful when one is 20 years away from retirement. The numbers will still be somewhat uncertain but at least they will be approximately right. I have a hard time trying to guess how much CPP and OAS will pay out 25 years from now and these two income streams are very important for a vast majority of Canadians. Also, I have less confidence in spending projections that are out a quarter century or so. Quite a lot can change in that time frame.

    @Alex C: I don’t think it is practical for most people to completely discount Government transfers. It would mean they have to save a crazy amount and so many find it difficult to save even modest amounts for retirement.

    @Paul T: I think there will be *some* Government transfers still available when we retire. It’s just that there is no certainty over *when* and *how much* we will end up receiving.

    @Pete: I don’t disagree that public service pensions are rich and must be addressed. However, the demographic challenges facing us must be addressed as well and it is better if we get started early on this. That will give us plenty of time to adjust to new CPP and OAS realities. Unfortunately, opting-out won’t be an option for us.

  7. A bit of perspective: OAS currently costs 2.4% of our GDP. If no changes are made to the program, OAS will peak at 3.1% of GDP in 2030. A crisis? Hardly. No more than minor tweaks are required, but we’ll have to wait and see what this ideologically-driven (i.e. libertarian) Harper government does.

  8. How boring to go through life just waiting for a day thirty years from now when you can elect to no longer participate in the work force.

    Thirty Year olds plugged into a meaningless job because they will get good benefits thirty five years from now.

    You wake up at sixty six with a wonderful Pension but lumps where you aren’t supposed to have lumps, I see this very frequently.

    No debts, small Home, you will be surprised at how little you actually need to have a meaningful retirement.

    More and more I meet people with very large portfolios that they do not spend and most say they are leaving it to their children.

  9. At 26, the only thing I’m planning for is to have enough money to not worry about the government pension. If it’s there, awesome. If it’s not, I want to take care of myself.

  10. Forget retirement planning under 40? I don’t think so. In my field of expertise, I want people thinking of their own future as early as they can do so. Seeing as many of my clients are already sitting on $500k accounts in their 30s, the right planning from age 20-50 means not having to rely on anyone IF retirement is planned. Even that idea seems implausible to most of us in our 30s.

  11. @Howard: Without a plan, care free people will overspend and undersave, the carefull will oversave and underspend. Without a plan how do I know if I’m saving too much or not enough?

    That plans and assumptions change does not negate the value of planning or that somehow you got it “wrong”.

    When the facts change, I change my mind.

  12. I guess I’m in the minority (of one) on this one. I definitely did not mean that saving for retirement for young people is not important. It absolutely is. Things like paying down the mortgage, saving diligently and investing wisely will pay off down the road. But I hear you that having some kind of map helps, even if the map may prove to be way off the mark in the future. And appropriate course corrections can be done when the maps are updated in the future. Thanks for your comments.

    @Gary:Health care is the elephant in the room that will need to be tackled at some point in the future. However, though OAS is a smaller issue, I think it should be addressed as well. The 0.7% increase might seem small when compared to health care costs but rising OAS eligibility to 67 sounds like a good idea to me because every little cutback will help in handling the increase in health care costs.

  13. CC- I get what you are saying and I am with you. Of course young people should plan – it is just that their plan should not count on much from the social assistance.

    I think RSPs are even debatable (certainly at low incomes and income tax rates) becuase – unlike non-registered savings – you are committing your money to a different set of government rules down the road.

    Government programs as they currently exist cannot continue as teh number of seniors rise. Demonize Harper all you want, but this crosses every range of the political spectrum and there are no easy answers. Every government in every developed country is dealing with this now, or kicking the can down down the road. Despite this announcement (or test balloon), Candian’s are still kicking 98% of the can down the road.

    The future is going to see a lot of poor people and it won’t be pretty. 85% of people are completely unprepared financially.

    Higher savings rates and fast debt pay-down = lower standard of living. The lower standard is the norm and correct, for lack of a better term. The higher standard of living over the past 15 years has proved itself to be a lie and an illusion.

  14. I don’t agree with your premise at all. Although one certainly has to be flexible and ready to adjust one’s planning as circumstances and policy change, the only people who will be able to retire successfully without a detailed plan established early are those with very significant resources.

    Regarding OAS cutbacks, there’s something fundamentally unfair about targeting OAS for cutbacks while leaving public servant pensions untouched. The unfunded liability for public servant pensions is roughly six times larger than OAS at the federal government level alone. What they’re effectively doing by pruning OAS is cutting back a program that benefits all Canadians, particularly those who are relatively poor (the maximum OAS benefit is only around $6k/year), in favour of preserving relatively large payouts to a small proportion of Canadians who are unlikely to be financially distressed in retirement. It’s not a fraudulent preference in a legal sense, but it is a preference, and it’s deeply unfair from my perspective.

  15. I agree with you CC. Retirement planning is a waste of time for someone who isn’t retiring for 20 plus years.

    What I think most of the other commenters are missing is that a lack of retirement planning does not mean a lack of financial planning.

    A good financial plan for someone in their 20’s, 30’s might be to save 10% of their income, stay out of or reduce debt. Plan to pay off any mortgage at a reasonable age etc. Those kinds of actions will set them up well for proper retirement planning when they are older.

  16. @Rob: I agree with you. I’ve long thought that OAS and CPP will see changes by the time I retire (which is more than 25 years away). CPP has already been tweaked and though the Government backtracked on OAS, I think changes are coming.

    @Viscount: To be fair, I think the Government, as an employer, is addressing public sector pension plans. They have boosted contribution rates and are working to push them closer to 40% (the maximum according to collective bargaining). I think they will be forced to do more. A good solution, IMO, is to make sure that total public sector compensation is in line (or perhaps a little less, reflecting the more stable nature of PS jobs) with that of the private sector for jobs where such comparisons are possible. This would mean that PS workers are trading higher current income for richer pensions.

    @Mike: Bingo! You’ve put it much better than I did in the post. I think there is so much uncertainty, not only about income sources such as CPP and OAS but around expenses as well. It is very hard to judge one’s expenses that far ahead of time. Like you say, that doesn’t mean one should be irresponsible financially: the basics still matter and that would make retirement much easier down the road. Just that it’s too far out to worry about right now.

  17. Thanks! I’m quite under 40 and am just embarking on a group RRSP plan with my employer. I had been brooding over whether I will need other savings. You may have saved me countless hours as I now realize that there is no crystal ball.

  18. You know what, I say those under 40 SHOULD worry about OAS – I’ll be most don’t even know what the acronym stands for.

  19. I think that too many people think that public service DB pensions are a bad idea. I think that they are great, and everyone should have one. I do think that contribution levels need to be higher though on the part of the employee. It is a way to force savings and prevent disaster in the future. As for people who want to opt out of CPP or OAS and get taxed lower, that is ridiculous. The human rights commission won’t let people starve in the streets by cutting them off government assistance. People have shown already they are incompetent at saving and being able to opt out would just raise everyone’s taxes as people would have contributed nothing to the future and would draw government money they haven’t contributed to by using welfare. Do you really think that just the smart financially sound people would opt out or would everyone that lives beyond their means want a tax cut to live for today? Forced savings works, and I think to prevent a retirement disaster for the working class people need to be forced to contribute a higher amount now so they can get a larger pay out when they decide to retire with a mortgage and debtdeclare bankruptcy and destroy the economy. By the way, OAS shouldn’t have the age raised. It should begin clawbacks at $50K and you should be completely cut off at $65K (adjusted for inflation). If you’ve managed to save that much per year for retirement you wouldn’t need OAS anyway.

  20. @Dave: The thing is that I don’t trust the government to manage my retirement. Who says that any DB plan provided by the government will be safe from future governments? All it takes is one “crisis” for the government of the day to use the DB funds for other government expenses / programs.

    The worst thing that could happen is to pay into a system and the funds not be there when we need them (As I expect could happen with OAS and CPP)

  21. Reducing the thresholds on the OAS makes a lot of sense. Currently the amount paid only starts being reduced at around $68,000 in retirement income which is a lot of money. It is only cut to $0 at around $112,000 in retirement income.

    Why would someone with $100,000 in retirement income need a government handout. OAS is bizarre. I’m all for supporting older people who need the help but not giving welfare to the rich people who happen to be old.

  22. I have a public service DB pension (only 7 years of service in so far…and probably not much more once Harper’s done hacking at the ranks). But I don’t want to rely on it because I don’t trust that it won’t disappear. Same with OAS & CPP; I am operating under the assumption that it doesn’t exist, because who knows what will happen by the time I’m old enough to retire (at least 35 years from now). The only thing tangible to me is my own RRSP. I realize that could go to hell in a handbasket too, but at least it feels like I have a tiny bit of control over it.

  23. Pingback: Under 40? Forget Retirement Planning | Canadian Capitalist – Retirement How To

  24. There are two things that investors should worry about, regardless of age. They are broadest possible diversification and lowest possible expenses. Anybody investing should always be concerned about those two things regardless of age or what may happen in the future. Losing 1% annually to high expenses (relative to cheap index funds) is inexcusable and trivially avoidable. I agree that precise risk control in the portfolio does not become important until later in life (and at higher portfolio worth), but minimizing expenses is always paramount.