Since Canadians rely on a patchwork of incomes to fund their retirement, the worry by many of running out of money is a real possibility.
A new report from the C.D. Howe Institute proposes a pooled risk savings program that could provide more security for retirees of advanced age. “Retirement will span beyond age 85 for more than half of 65-year-old Canadians,” wrote Bonnie-Jeanne MacDonald, senior research fellow at the National Institute on Ageing at Ryerson University and resident scholar at Eckler Ltd., in the report.
“Retiring Canadians want to protect their later years. We need innovative solutions now — ones that add definitive value but place no new pressures on the Canadian public purse.”
Annuities don’t always appeal to seniors, as they prefer to maintain control over their savings, the report suggested. Instead, longevity insurance could replace annuities as an income stream. However, the tax environment in Canada doesn’t favour private market longevity risk products, according to the report.
As such, MacDonald recommends a voluntary, national program — dubbed Living Income for the Elderly (LIFE) — that would allow retiring Canadians to buy into a pooled fund that would begin to provide steady income at age 85. At their discretion, Canadians would begin to allocate money to the fund at age 65, she suggests, and proportional monthly payouts would start at 85. They wouldn’t be able to make commuted-value cash withdrawals during the deferral period or the payout stage.
Those who live longer would benefit from additional security as the fund would distribute the investments of deceased participants equally among the remaining members. The so-called mortality premium would allow lump-sum bonus payouts as members age.
During the accumulation period, a members’ account in the fund would allocate investments in a relatively aggressive manner, the report noted. Upon reaching 85, the investments would revert to a more conservative portfolio designed to provide a stable, monthly payout. And the retirees wouldn’t have any investment decisions to make as a government institution would manage the fund’s capital, says MacDonald.
She stresses that the government, in addition to administering the fund, would need to address some of the proposal’s unfavourable tax implications.
Overall, the concept would increase stability for seniors living longer without putting added pressure on Canadians as a whole, says MacDonald. “LIFE will encourage retiring Canadians to proactively prepare for advanced ages while allowing them to maintain control of the vast majority of their financial savings,” she said in the release.
“The program will benefit not just Canada’s elderly population, but Canadians on the whole.”