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Normandin Beaudry

Changes to the Quebec Pension Plan: Will They Affect My Retirement?

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There, in black and white

NB Bulletin, Vol 14, N. 5, July 2011

On June 13, 2011, the Quebec government passed the changes to the Quebec Pension Plan announced in its latest budget. The change concerning the pension reduction for early retirement (before age 65) has captured popular attention. From January 1, 2012 until 2016, the actuarial adjustment factor will gradually increase from 0.5% to 0.6% for each month between the time the pension payment begins and age 65. 

The announcement of this change appears to have caused some concern. Some articles have drawn attention to the insecurity created as regards retirement planning, and others have even alluded to the idea of ''freedom 70'' in reference to the well-known expression ''freedom 55.'' But what does it really mean? To answer this question, the worker's entire situation at retirement must be considered. 

What are the retirement income sources? 

Studies typically indicate that around 70% of the pre-retirement income is needed to have a sufficient post-retirement income to maintain an accustomed lifestyle after retirement.

The table below presents the different income sources based on retirement age: 

 Retirement
before age 60
Retirement
between age
60 and 64
Retirement at
age 65 or later
Individual retirement savings
plans, employment income or
other income sources
Yes Yes Yes
Private group pension plans Pension
reduced or not
reduced with
conditions
Pension
reduced or not
reduced with
conditions
Yes
QPP No Reduced pension Yes
Old Age Security (OAS, GIS) No No Yes

As the above table illustrates, workers who wish to retire before age 65 must rely on a private group pension plan or perhaps even individual savings because they are not eligible for Old Age Security benefits until age 65. They will also receive a reduced pension from the Quebec pension plan because it is payable before age 65 and averaged out over time as it will be payable for a longer period.

How does this change impact my QPP pension if I still want to retire at age 60?

Let's look at the example of a worker named Bernard. Bernard's employment income is $50,000 and he plans to retire in 2016, at age 60, with a retirement income of $35,000 (income replacement ratio of 70%). The table below illustrates the different monthly income sources, including the QPP pension before and after the announced change:

 Before the changeAfter the change
OAS $0 $0
QPP (1) $672 $615
Other sources $2,245 $2,245
Monthly total $2,917 $2,860
Replacement percentage 70,0% 68,6%
(1)Assumes that Bernard is entitled to the maximum QPP pension at age 60.

Even though the QPP pension that Bernard will receive after the change is lower ($615 versus $672), the impact on his total retirement income is fairly minimal (pension reduced by $57/month before tax).

What is the impact if I want to receive the same QPP pension that I would have received before the changes?

Bernard could opt to postpone his retirement until he reaches his retirement income goal of $35,000. When would Bernard be able to retire? Taking into account only the increase in the QPP pension, Bernard would be able to retire with his target retirement income ($35,000) if he were to postpone his retirement for a maximum of 10 months.

The table below indicates the retirement postponement period (months) necessary for offsetting the effects of the QPP reform for a retirement before age 65, beginning in 2016:

Desired retirement age (years)Postponement period
60 10 months
61 8 months
62 6 months
63 4 months
64 2 months

Therefore, to offset the effects of the QPP changes on retirement income, a worker who plans to retire in or after 2016 will need to postpone his or her retirement for up to 10 months. This is nowhere close to ''freedom 70.'' And this postponement period would be even shorter if an increase in retirement income from other sources (private pension plan, personal savings) was taken into account. 

Conclusion 

By targeting the Quebec Pension Plan in its latest budget, the government has created a great deal of insecurity among Quebec workers concerning retirement planning. If we examine the situation more closely, we can see that the impact on workers is rather limited, whereas the benefits of these changes on the sustainability of the QPP are, in our opinion, undeniable and for everyone's greater good. 

The proposed changes to the QPP were also tempered to limit the impacts on low income workers. Beginning in 2016, the actuarial adjustment factor for a retirement before age 65 for these workers is limited based on average employment income. For an average income below $12,075, the QPP pension will be reduced by less than $4 a month. 

 

Please feel free to contact us for additional information.

514.285.1122
 
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Montreal, Quebec, H3B 1S6