Why do I have to collect my pension already?

Ontario's Ford government has a plan to induce professors over 71 to retire. I wrote a column in the Globe and Mail about it. Here's a sneak peak:

Nearly one in 10 Ontario university professors is over the age of 65. As of 2016, these professors were earning, on average, $184,947 a year. Moreover, because federal legislation requires all taxpayers to start drawing down their retirement savings at the age of 71, septuagenarian professors can collect a six-figure pension on top of a six-figure salary.

It sounds expensive – and it is. A report from the Higher Education Quality Council of Ontario on universities’ fiscal sustainability estimated that, if mandatory retirement was still in place, and Ontario universities had been able to replace all of their professors over 65 with junior scholars, their annual salary costs would be $89-million lower, and more than 1,200 new PhDs could have been hired.

In its April budget, the Ontario government committed itself to ensuring “a more sustainable postsecondary sector” and “employee renewal.” The details of the government’s plans are not yet known. However, a discussion paper released earlier this year reported that “the ministry is giving consideration to a policy that would … require institutions to reduce salary payments so that salary and pension payments combined are not greater than the employee’s salary prior to pension payments commencing.” Professors aged 71 and older would have their salary clawed back, giving them every incentive to retire.

The rest of the article is here. In it I talk about the various objections to the Ford government's plan, and what I see as a reasonable alternative. One thing I couldn't fit within the 800 word limit, however, is the answer to the question, "Why do I have to collect my pension already?" Why couldn't the problem of double-dipping be solved by allowing septuagenarian professors to defer their pensions. Here I explain why this will not, and should not, be an option.

Canada has income supports in place for Canadians over the age of 65. If older Canadians were allowed to choose when to start drawing their pension, and how much to draw out, they could simply choose not to withdraw that income, and thereby take advantage of means-tested benefits to which they would otherwise not be entitled. Allowing high-wealth taxpayers to collect Old Age Security, and take advantage of other means-tested benefits, would not be equitable, even if said taxpayers had low taxable incomes.

Furthermore, any time someone defers their pension, they defer paying tax on their pension income. The returns earned on retirement savings can then be re-invested, and used to generate higher investment income in the future. There are good reasons to give pensions some preferential tax treatment. It makes it easier for people to save for their own retirement, for example. However there need to be some limits on that preferential tax treatment in order to prevent excessive tax avoidance.

For these reasons, every taxpayer over the age of 70 is required to convert any Registered Retirement Savings Plans (RRSPs) they hold to Registered Retirement Income Funds (RRIFs) and start collecting investment income from those funds. Similar rules apply to every form of tax-deferred retirement savings, including employment pensions. It would be highly undesirable to eliminate these rules entirely.

But why not claw back professors' pensions instead, and give that retirement income to someone else?

Canadian pension plans are partly funded by an employee's own contributions. In that sense, employees "own" a share of their pension plans. They are entitled to receive back the funds that they have invested in the plan. Allowing employers to claw-back professors pensions could, potentially, undermine the principal that employees are entitled to the pension they have earned.

For these reasons, ending double-dipping by allowing professors to defer their pensions, or ending double-dipping, is not a desirable solution to the problems created by the elimination of a standard retirement age.

Comments

[Bob Smith]

I'm not convinced by the anti-deferral argument - certainly not in the context of the double-dipping discussion.

So long as the pension plan earns a return on investment greater than the government cost of capital, the fisc would be further ahead, in the long-run, to have the pension plan continue to accrue tax-free gains and then tax them when the pensioner ultimately decides to collect. It would be a poorly managed pension plan which fails to exceed that threshold. Moreover, given a progressive tax system, fewer, but larger, payments from the pension plan might also generate higher tax revenues over time.

I think the two compelling counter-arguments are (i) it would allow pensioners to collect means (income) tested benefits that they shouldn't need to collect (OAS, maybe in the limit GIS, though I would expect few people with access to a decent pension plan being comfortable living at the level necessary to qualify for GIS), and (ii) if withdrawals are deferred to later, the pensioner might extract less from the pension plan, further pushing back the taxation of pension plan assets (or resulting in a surplus and contribution holiday for the employer).

The second argument strikes me as one that isn't really something we need to worry about - it's not in the interests of DB pensioners to, collectively, withdraw less from their pension plan, creating a potential surplus for their employer. Moreover, in the context of defined benefit pension plans (where this might be a concern), even if it did happen this would probably be good for the fisc. since most defined benefit pension are in respect of public sector workers and many have significant unfunded future liabilities WHich would ultimately need to be satisfied by the fisc.

The first argument is generally more compelling - though in the context of double-dipping, probably isn't a real concern (anyone collecting a professor's salary is going to have OAS substantially clawed back anyhow). But preventing deferral is an imperfect, and unnecessary, way to address it.

The policy concern is that "wealthy" people shouldn't be able to collect OAS while sitting on a big pile of assets because those assets aren't generating taxable income (it's an imperfect policy, since we only worry about it in the cost of tax-deferred asset - one could do the same thing by sitting on a collection of mutual fund trusts in a taxable account which make significant return of capital distributions, but we don't address that). That's a fair concern,but it seems to me that one could allow deferral in pension plans or RRSPs and still prevent people with significant pension (or RRSP_assets) from collecting OAS by attributing to them income (for OAS purposes) based on the current minimum withdrawal/distribution schedule. People may have different reasons for not wanting to melt down their retirement savings early (maybe they have a younger spouse with an entitlement to survivor benefits or RRSP rollover), maybe they want to leave a big pot of money to support their kids (less of an issue with DB pension plans, but surely a consideration for DC plans or RRSPs)

AT the end of the day, people should be making decisions about how to withdraw their savings from their pension plans/registered accounts based on their needs, concerns and interests, not based on tax rules which fail to take into account their specific circumstances. If you have to force people to melt down their retirement savings (as opposed to them doing it freely) that's not a welfare enhancing policy.

Mind, this is a distraction from your main thesis - namely that university professors having bargained for a employment/pension regime premised on mandatory retirement at 65 have, effectively, unilaterally re-written their contract (in the courts) in their favour. Essentially, Professors are getting more than they bargained for, universities are paying more than they bargained for. Allowing deferral doesn't address that problem.