Do Canadians save too little?

Author:Hamilton, Malcolm
Position::COMMENTARY NO. 428

Reports of undersaving by Canadians for retirement are exaggerated. They rely on faulty assumptions, questionable numbers and ignore the diversity of individual retirement goals.


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The common notion that Canadians save too little for retirement, which often underpins discussions of pension reform, requires closer examination. The author brings fresh thinking to the issue and comes to a very different conclusion.

First, he assesses the assumptions underlying the assertion that few middle-income workers have sufficient retirement savings. They are:

  1. the household saving rate, which is calculated by Statistics Canada as a by-product of Canada's National Accounts, is a reliable estimate of the amount that Canadian workers set aside for retirement; and

  2. to maintain their pre-retirement lifestyle after they retire, Canadians need to replace 70 percent of their gross employment income.

    Neither assumption is correct, says the author. To demonstrate why, he examines the failings of the household saving rate as a measure of retirement savings; takes a closer look at the factors that have contributed to the decline in household saving and to explain how this decline has been misinterpreted; discusses the limitations of the 70 percent replacement target and asks how much Canadians really need to save for retirement. Finally, he questions the reliability of the studies on which the Province of Ontario has relied in making the case for the Ontario Retirement Pension Plan and discusses the policy implications.

    Canadians are reasonably well prepared for retirement, he concludes. Most save more than the 5 percent household saving rate. Most can retire comfortably on less than the traditional 70 percent replacement target. The greatest challenges come early in their adult lives when the burdens of acquiring a home and supporting young children strain the family budget. After that, things get easier.

    As studies of our retirement system become more sophisticated, we focus more on the distribution of outcomes and less on the averages. We inevitably discover that while many appear to be saving too much relative to the arbitrary thresholds chosen for these studies, others appear to be saving too little. The size of the group that appears to be "at risk" cannot be accurately determined nor can the attributes of its members be usefully described.

    When studies conclude that gross replacement targets are unreliable measures of retirement income adequacy due to the diversity of our population, they are also concluding that programs like the Canada and Quebec Pension Plans can go only so far in addressing our retirement needs. They can establish a lowest common denominator--a replacement target that all Canadians should strive to equal or exceed. Beyond that, we need better-targeted programs--programs that are better able to recognize and address our individual needs.

    "Canada's retirement income system is working reasonably well for today's retirees. However, a number of studies from pension experts, academics and public policy institutes show that future retirees may not be saving enough for retirement and this gap will likely worsen over time."

    --Ontario Retirement Pension Plan: Key Design Questions, Government of Ontario.

    Canadians frequently read that they borrow too much, spend too much, save too little, retire too early and live too long. The drumbeat intensifies during RRSP season but it is always there in the background, and has been for decades. I cannot remember a time when Canadians were thought to be saving enough.

    Our undersaving problem is attributed to many things: financial illiteracy, personal irresponsibility, a lack of foresight and insufficient self-control, to name just a few. The young are accused of being less frugal than their parents, just as their parents were accused of being less frugal than their parents. And so it goes.

    The province of Ontario recently cited undersaving as the prime motivation for the Ontario Retirement Pension Plan (ORPP):

    Retirement experts recommend that workers aim to replace 50 to 70 per cent of their income in retirement to maintain a similar living standard. However, for a variety of reasons, many workers I are not meeting that savings goal. As a result, a significant portion of Ontario workers may face a decline in their standard of living after retirement. (Ontario 2014b.)

    In support of its decision to act unilaterally on pensions the province made the following points.

    * The household saving rate has declined from 20 percent in 1980 to 5 percent today.

    * Fewer than 35 percent of Ontario workers participate in a workplace pension plan.

    * Canadians have over $730 billion of unused RRSP room.

    * Canadians are living longer.

    * The Canada Pension Plan is inadequate, replacing only 25 percent of employment income up to $52,500. (1)

    Several studies were cited; each based on Statistics Canada's LifePaths model; each predicting a grim future for retired Canadians (Moore et al. 2010; Wolfson 2011; Tal and Shenfeld 2013).

    None of the problems mentioned by the province are new. Firstly, the household saving rate plummeted in the 1980s. It has averaged 4 percent for the last 20 years. Secondly, while only 35 percent of Canadian workers currently participate in a workplace pension plan there was never a time when participation rates were high. They peaked at 43 percent in 1982--more than 30 years ago. (2) Thirdly, RRSP contributions were about 50 percent of the new room granted to taxpayers in the 1990s. More recently, this has fallen to about 40 percent. The unused room, which is carried forward indefinitely, increases by about $50 billion per annum and will do so indefinitely. Fourthly, human longevity has been increasing for decades, if not centuries. And lastly, the Canada Pension Plan has paid full pensions to those who turned 65 since 1975. It is no more or less adequate today than it was 40 years ago.

    The one thing for which the province has no obvious explanation is the present. If low saving rates, low pension plan participation rates, increasing longevity, mountains of unused RRSP room and an inadequate Canada Pension Plan are serious problems, the consequences should already be evident, but they are not.

    Comfortable seniors? The incidence of low income among seniors, after tax, is about half the incidence among working age Canadians and compares favorably to the incidence in other developed countries. Also, according to a 2008 OECD study (Whitehouse 2009), the average income of Canadian seniors, adjusted for tax and family size, is about 91 percent of the average income of working age Canadians, similarly adjusted. Since working age Canadians devote more than 10 percent of their adjusted incomes to retirement savings and mortgage payments, seniors appear to be better off, financially, than younger Canadians. (3)

    Rising net worth: On the wealth and savings side, according to Statistics Canada's Survey of Financial Security, between 1999 and 2012 Canadians doubled their aggregate net worth from $4 trillion to $8 trillion after inflation. On a per household basis, net worth increased by 76 percent, from $368,000 to $646,000. The Pension Satellite Account, (4) maintained by Statistics Canada, shows that pension assets (5) increased from $0.5 trillion (1.5 times employment earnings) at the end of 1990 to $2.6 trillion (3.2 times employment earnings) at the end of 2012. Contributions increased from 11 percent of employment earnings in 1990 to 21 percent in 2012.

    Behaviour in retirement: The behavior of today's seniors is equally difficult to reconcile with the province's dire assessment. Most retire voluntarily before the age of 65. In retirement they spend less than they could--choosing not to access their largest asset, the equity in their homes. They do not annuitize their savings even though this would allow them to spend more with confidence. They do not maximize their RRSP/RRIF withdrawals. They do not like to encroach on capital. They continue to save, to donate to charity and to financially support children who need help.

    Other studies: Recent studies (6) of Canada's retirement system, with the exception of the aforementioned LifePaths studies, have been reasonably positive about our financial preparedness for retirement.

    When theories predicting a dire future cannot explain a comfortable present perhaps it is time to ask the obvious questions. If Canadians save 5 percent of income, as the province suggests, where does all the money flowing into retirement savings plans come from? How did Canadians manage to double their aggregate real net worth between 1999 and 2012 while...

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