The Longevity Pension from Every AngleLinkedIn
There, in black and white
NB Bulletin Vol. 16 N. 4, may 2013
The Expert Committee on the Future of the Quebec Retirement System, chaired by Alban D’Amours, released its report on April 17, 2013. Among the Committee’s 21 recommendations is an innovative measure that has created quite a buzz, the longevity pension. This bulletin explains this new pension.
The longevity pension is a new fully funded defined benefit pension plan that would be offered to all Quebec workers to reduce the risk of outliving retirement savings. The longevity pension would not be a new provision of the Quebec Pension Plan (QPP) but rather an additional pension plan funded by all Quebec workers between age 18 and 74.
This new component of the Quebec retirement system would provide a life annuity payable as of age 75, without any early or deferred payment options. The longevity pension would thus increase the retirement income of Quebec workers as of the first month following their 75th birthday.
The longevity pension would accumulate through annual pension credits equivalent to 0.5% of a worker’s earnings, up to the maximum pensionable earnings (YMPE) of the contribution year ($51,100 in 2013). No pension would accrue during periods of inactivity. Earnings considered in the pension formula would be indexed before retirement to age 75 based on average YMPE of the last five years at that age.
There would be no maximum number of years of pensionable service. A worker could accumulate an annual pension credit of 0.5% throughout his or her entire career, from age 18 through 74. As there would be no retroactive recognition of years of service when the plan is introduced, the longevity pension would mainly benefit young workers. For example, a worker who is 25 years of age and plans to work to age 70 without any periods of inactivity would accumulate a longevity pension equivalent to 22.5% of his or her indexed earnings (that is, 0.5% multiplied by 45 years of service).
After payment starts, at age 75, the pension would also be indexed annually based on the increase in the consumer price index, subject to conditions related to the financial position of the plan. In addition, the pension would be guaranteed for five years after retirement in the event of the death of the pensioner.
Funding and tax treatment
Unlike existing social programs, the longevity pension would be fully funded based on conservative assumptions to ensure intergenerational equity. The longevity pension would be administered by the Régie des rentes du Québec, with assets managed by the Caisse de dépôt et placement du Québec.
All Quebec workers between age 18 and 74 and their employers would together contribute 3.3% of earnings up to the YMPE. The cost would be shared equally between workers (1.65%) and employers (1.65%). Self-employed workers would pay both shares.
Costs of the longevity pension were estimated conservatively assuming a 3% expected real rate of return. In estimating the costs of a plan funded like the longevity pension, this assumption is highly important, much more so than in the case of a plan like the QPP which is entirely funded on a pay-as-you-go basis.
Quebec workers would be entitled to a tax credit for contributions made to fund the longevity pension, and there would be no pension adjustments based on plan contributions. As for employers, they would be able to deduct contributions made to fund the longevity pension.
Integration with the existing system
The cost of the longevity pension could be reduced or even entirely eliminated in some cases through reallocation of existing savings. If the longevity pension is introduced, contributions currently made to supplemental pension plans or personal savings could be reduced in favour of the new pension plan:
Quebec workers currently saving little or not at all for retirement would not benefit from a reallocation of savings. For these workers, the longevity pension would be new retirement savings.
Objectives and considerations
The longevity pension is designed to meet a number of concrete objectives identified by the Expert Committee:
Why the longevity pension instead of