There is a big idea that could improve Canadians' retirements. All that's needed is a politician willing to tackle the issue.
The right leader could open the doors to a category of financial products known broadly as longevity insurance. These products could be offered either by government or by the private sector. In either case, they would remove much of the guesswork from planning your golden years.
At the moment, a couple retiring in their early 60s has no clue whether their money has to last for 20 years, 30 years or even 40 years. This uncertainty means any financial plan becomes a game of chance.
If you indulge yourself early in retirement, you may be disappointed to find yourself at 90 in great health but without a nickel to your name.
On the other hand, if you pinch pennies to ensure your savings last until you're 100, you can be sideswiped if your health deteriorates and you never enjoy a chance to spend what you've so carefully conserved.
What's needed is a way to transform a great unknown – how long your savings must last in retirement – into a known quantity. Enter longevity insurance.
The core notion behind longevity insurance is that you buy a product that starts paying you only after you reach an advanced age – maybe 75, maybe 85. Once those payouts start, they continue until you die. As a result, you no longer face the risk of running out of money. Just as appealing, you simplify your retirement planning because you now know how long your other savings have to last – which is the span from when you retire to when the longevity insurance kicks in.
"You take a huge weight off your shoulders if you can secure the back end of your retirement," says Keith Ambachtsheer, director emeritus of the International Centre for Pension Management at the University of Toronto. He devoted a recent newsletter to ideas on how we can collectively do just that.
One ingenious notion comes from Bonnie-Jeanne MacDonald of Ryerson University. She proposes a government program that would sell a specialized form of annuities to Canadians between 60 and 65. The annuities – which would be entirely voluntary – would allow Canadians to ensure a stable income from the time they turn 85 and would sit on top of the existing Canada Pension Plan (CPP) and Old Age Security (OAS).
You can think of Dr. MacDonald's idea as a variation on current financial products. In Canada, insurers offer what are known as life annuities: You pay your money, start collecting right away and continue to do so for the rest of your life. But in this case what would be offered would be deferred annuities: You pay now, but don't start collecting until 20 years later.
What's the advantage in that? Dr. MacDonald estimates a well-run program would allow a 65-year-old to purchase income protection from age 85 onward for a tiny fraction of the cost of buying an annuity that starts paying right away. For the same cost as buying an annuity with a $10,000-a-year immediate payout, a 65-year-old could instead purchase a deferred annuity with a $106,000-a-year payout starting at 85 and continuing until death.
Such a deal would make retirement planning far, far easier than it is today. For a relatively modest sum, you could ensure your financial security after 85. You would be left with the much easier task of managing your other savings until 85.
Better yet, Dr. MacDonald's proposal would require very little government money. The cost of the annuities sold by the program would be borne by the people who purchase them. Since those purchases would be voluntary, there would be no element of coercion.
An alternative idea comes from researchers at the University of Sherbrooke. They propose building on the current system, which allows Canadians to defer collecting CPP and OAS until 70 in exchange for sweeter payoffs. Under the Sherbrooke proposal, Canadians would be able to defer until 75 in exchange for even larger payoffs. This, too, would provide a form of longevity insurance.
Simplest of all might be changing tax rules to encourage private insurers to start offering deferred annuities. Under existing regulations, the holders of such products have to pay income tax on the annuity's investment gains even during the deferral period when they're not actually receiving a payout. Removing that requirement would make such products far more attractive to potential clients.
"I think there's a tremendous opportunity for the first company that can offer a plan like this" under revised tax laws, Keith Ambachtsheer says. He's probably right. All that's needed is some fresh thinking in Ottawa.