Why Canada has no retirement crisis by Fred Vettese
There is a widespread perception in Canada that the country is on the brink of a major retirement crisis. A more considered view is that while most recent retirees are faring reasonably well, Canada faces a slowly deteriorating situation in which a growing proportion of future retirees will experience a substantial drop in their standard of living.
This article challenges the credibility of even this more considered view, demonstrating that several important sources of future retirement income are being underreported and understated.
Further, most projections do not factor in the near-certain increases in the average retirement age that will unfold over the next 20 years. Generalizing from these findings, it is unlikely that the conclusions set out in this article apply only to Canada.
Perceived Indicators of the Coming Retirement Crisis
In Canada, as in other developed countries, the perceived retirement crisis is a logical conclusion based on the following set of observations:
- In Canada’s three-pillar retirement system, Pillar 1 – the government-provided Old Age Security (OAS) pension and its companion program, the income-tested Guaranteed Income Supplement (GIS) – confers only a subsistence level of retirement income. Moreover, Pillar 1 will gradually diminish in importance because the OAS and GIS amounts are indexed only to price inflation, not to wage inflation. The rising proportion of one-person households and the recent government decision to push the starting age for OAS benefits from 65 to 67 are also contributing factors.
- The universal Canada/Quebec Pension Plan, funded by employer and employee contributions, provides a benefit equal to roughly 25% of the average national wage. This important Pillar 2 component offers a buffer against outright poverty but, even when combined with Pillar 1, falls well short of providing a comfortable level of retirement income for middle- and high-income households. The other part of Pillar 2 is the voluntary, employer-sponsored Registered Pension Plan (RPP), but private-sector RPP coverage has been declining for decades and currently stands at just 21% of the private-sector workforce (which constitutes 80% of the total workforce).
- Pillar 3, consisting of tax-assisted vehicles either sponsored by employers or maintained by individuals, is intended to top up pensions from the government-sponsored programs for workers without RPPs. The main vehicles in Pillar 3 are group and individual Registered Retirement Savings Plans (RRSPs). The problem is that Pillar 3 vehicles are voluntary, and coverage is low: only 30% of taxpayers set aside money in an RRSP in any given year.
- Prospective returns on capital accumulations are widely forecast to be lower than we have seen in recent decades, which will further diminish the effectiveness of both RPPs and RRSPs.
- People are living longer. As measured from age 65, average life expectancy is now about five years longer than it was a half-century ago, and this trend is expected to continue for decades to come, increasing the chances that a growing number of people who have to rely on capital accumulations will outlive their savings.
But does the resulting widespread perception of a retirement crisis hold up to closer scrutiny?