In this article, I will offer a summary of the key information in the “Pari du perdant ravi” working paper (Bachand, Lemelin, Monette, 2024), which explores the timing for starting to receive QPP retirement benefits. It sheds light on the cognitive biases that influence this decision and the resulting financial impacts. It also offers practical tips for advising Quebecers.
Background: A weighty decision
- A costly reflex
Every year, thousands of Quebecers decide to claim their QPP retirement benefits as soon as they can, when they turn 60. In 2020, the average starting age for the pension was 62.2, and barely 7% of new beneficiaries decided to defer their pension until after age 65. And yet the decision to start early can cost up to $160,000 over the course of retirement, while the potential gain in the event of premature death generally does not exceed $52,000.
- A “wager” on longevity
The authors of the working paper illustrate this choice with a striking analogy: would you agree to play a game where you have a 90% chance of losing big-time and only a 10% chance of winning a modest sum? Well, this is the exact wager that the majority of Quebecers make when they claim their pension at age 60. Behind this decision lurk powerful cognitive biases that influence decision-making.
QPP parameters: The basics
As you know, Québec’s retirement system relies on four pillars: Old Age Security (OAS), QPP, pension plans and private savings. The QPP is a mandatory public plan that pays a life annuity in an amount that varies based on the age at which it is claimed (between 60 and 72). Claiming the pension early entails a permanent reduction (6% per year, up to 30% in total), while deferring it to age 72 increases the amount significantly (by 8.4% per year, up to 59% in total). This choice clearly has a major impact on lifetime retirement income.
Cognitive biases: Obstacles to optimal decision-making
Loss aversion
People prefer to avoid a loss rather than realize an equivalent gain. This aversion encourages many Quebecers to claim their pension early, rather than “lose” money in the event of premature death.
Denial of hidden losses
The reduction in the monthly amount related to an early claim is often underestimated because that loss is less visible and spread across the person’s whole retirement.
Inappropriate reference point
Lots of people compare the amount received at 60 with the amount received at 65, without considering life expectancy and the cumulative value of the instalments.
Underestimation of survival probability
People tend to overestimate their risk of premature death, even though most people live well beyond the age of 70 (95% of women reach the age of 70).
Present the choice as a wager: A powerful teaching tool
To counter these biases, the authors of the working paper recommend presenting the choice of when to start claiming the benefit as a game of chance. For example, a woman who claims her pension at age 60 has a 95% chance of living at least until she turns 70, which makes deferring the pension far more beneficial in the majority of cases. This approach makes the consequence of the choice more tangible and encourages more rational decision-making.
The F.Pl.’s role: Educate, raise awareness, guide
1. Education and awareness
F.Pl.s have to clearly explain to their clients how the timing of their claim will affect them, using concrete examples and personal simulations. It is crucial to demystify the QPP’s mechanisms and demonstrate the cumulative effect of their decisions.
To facilitate understanding, I recommend talking in terms of the impact on your listeners’ lives. Don’t be afraid to use forceful arguments at this stage, because this is a choice that can have a major impact on your clients’ retirement:
- The QPP retirement pension provides longevity insurance: The longer it is deferred, the more protection it provides against the risk of living for a very long time and running short of money.
- The money amount increases significantly if the pension is deferred: Every year of deferral after the age of 65 increases it by 8.4%.
- Most people live well beyond 70: It is statistically more beneficial to defer the pension, except in the case of precarious health or urgent financial needs. Emphasizing the importance of maximizing life income, especially at a time when longevity is increasing, is a key argument for encouraging deferral.
- The cost of a hasty decision is often underestimated: Based on the 2021 data presented in the working paper, nearly 73% of people apply for QPP retirement benefits before the age of 65, committing themselves to a wager in which they have a 90% chance of losing up to $160,000 compared to just a 10% chance of winning a maximum of $52,000. Although no reasonable person would agree to these probabilities in a game of chance, these figures prove that many Quebecers are taking this risk without hesitation when it comes to their retirement, illustrating what has been called the pari du perdant ravi or “delighted loser’s wager.”
2. Visual tools
Graphs and tables comparing the scenarios (for example, pension at 60, 65 and 70) make the consequences tangible and assist comprehension.
3. Discussion of cognitive biases
Openly addressing biases that are influencing the decision, especially loss aversion and underestimation of longevity, can help the client take a step back and be more objective. Moreover, the decision to start claiming QPP retirement benefits is not a choice to be made only at age 60, 65 or 70. This option should be discussed annually with the client at follow-up meetings, assessing the possibility of deferring it one year at a time.
Key factors to remember to optimize QPP advice
Help your clients make informed decisions by:
- Explaining cognitive biases: Identify and discuss these biases to foster thoughtful choices.
- Presenting probabilities: Clearly illustrate the financial consequences of the various options. For example, according to the working paper, women who choose an early pension at age 60 face a loss in 91% of cases (89% for men), compared to those who wait until age 65. Choosing a start date at age 60 also means that the maximum potential losses could be up to $438,000 (in future dollars), compared to a gain limited to $60,000 (in future dollars). These figures show that the wager of taking an early pension involves considerable financial risks, with a high probability of significant losses.
- Using simulation tools: Personalize the scenarios for the greatest impact.
- Drawing on rational analysis: Encourage planning based on life expectancy and real needs.
- Encourage deferring the pension: Recommend this option except in justified exceptions, by exploring alternatives to taking the pension early, if necessary.
- Customizing your advice: Take each person’s unique situation into account and associate emotions with the figures. For example, explain that a difference of $50,000 could represent a mid-range vehicle; $150,000, a four-season RV for travelling; and $300,000, a small cottage.
Conclusion
As financial planning professionals, it is our responsibility to help Quebecers make informed decisions about their retirement. The QPP, often perceived as a “losing wager” if claimed too soon, can become a major asset for long-term financial security. By helping your clients understand the QPP’s mechanisms, raising their awareness of cognitive biases and using the appropriate tools to illustrate the consequences of their choices, you can help them make an informed decision. Using these practices will make you better equipped to serve them and contribute to their long-term financial well-being.
To learn more about this important topic, I encourage you to read the entire working paper.
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