Why there is no retirement crisis

Seniors are richer than ever, and that won't change soon.

If Canada faces a retirement income crisis, you wouldn’t know it from talking to Don Ho. Having spent much of his career developing housing for seniors, the 68-year-old is building something different for his own retirement, a waterfront dream home on 10 acres. In fact, he and a partner are developing 59 such properties on Bowen Island, a short ferry ride from West Vancouver. “I’m looking at it from my own perspective,” Ho says. He figures there are plenty of well-off seniors like him who want their own custom-built home-cum-tax-sheltered-investment-property. Unlike the condominiums and rental units he used to build, he says, “it’s not meant to be affordable.”

Granted, few Canadian seniors are in so privileged a position, but even the broadest statistics indicate that Canadians retiring today are as well off financially as they have ever been, and their circumstances compare favourably with their peers in other countries. All of which flies in the face of a chorus that has been growing louder over the past three years, that Canada faces a retirement income crisis.

Breathless news reports would have you believe employer-sponsored pensions are crumbling. Personal savings are inadequate. Investment returns are way down. And even the Canada Pension Plan is underfunded. Swelling ranks of seniors with ever-increasing lifespans will soon be confronted by a retirement in poverty while a diminishing number of working taxpayers are saddled with a crushing public-services liability.

Don’t believe the hype. While all these alarms have roots in real problems that ought to be addressed, they don’t add up to Retiremageddon. There is no pension crisis in Canada — not now, not 10 years from now, not even, so far as we can foresee, in the more distant future. In fact, elderly couples have become the wealthiest family category in Canada. And it doesn’t look as if that’s going to change any time soon.

The current round of hand-wringing over pensions got its start in late 2007, when the British Columbia and Alberta governments appointed the Joint Expert Panel on Pension Standards to examine the existing retirement system. The panel concluded that of the three pillars holding up Canada’s retirement income system — government pensions and transfers, employer pensions, and individual savings — it’s the latter two pillars that have weaknesses. Workplace pensions are covering a smaller and smaller percentage of workers — in 1991, 45% of workers had an employer-sponsored pension; today it’s more like 33% — and those who don’t have a pension through work aren’t saving enough.

The panel’s solution was the so-called ABC Plan, a supplementary pension plan sponsored by the Alberta and B.C. governments (with the possibility of others joining in). All employees would automatically be enrolled, though they could decide to opt out. It would be easy for small and medium-sized employers to administer, involving not much more than making the existing payroll deductions for CPP and employment insurance. And due to its economies of scale and zero marketing needs, it would have very low management fees, less than half a percentage point.

Other provinces soon struck their own task forces. The CD Howe Institute produced a report authored by Keith Ambachtsheer, director of the Rotman International Centre for Pension Management at the University of Toronto, recommending the creation of a Canada Supplementary Pension Plan akin to the ABC option. Around the same time, a number of defined-benefit plans sponsored by troubled companies, including Nortel Networks, GM Canada and DaimlerChrysler, began to falter in the wake of the 2008 stock-market market meltdown and had to be restructured. Thousands of retirees saw their promised pension income reduced, drastically in some cases.

As the pension issue hit the news, trade unions and seniors groups turned up the pressure. The Canadian Labour Congress conducted a campaign through the fall of 2009, calling for contributions to and benefits from the Canada Pension Plan to be doubled. Financial institutions issued their own often self-serving remedies, such as raising contribution and age limits on registered savings accounts, without explaining how these would cause people not already saving for retirement to do so.

The term “pension crisis” became a feature of the media coverage as finance ministers gathered in Whitehorse last December and again in June in Prince Edward Island. Federal Finance Minister Jim Flaherty first commissioned his own study, authored by University of Calgary tax-policy expert Jack Mintz, then in March initiated a public consultation process, by which time talk of a government-run supplemental pension plan, whether regional or national, began to fade.

Ontario Finance Minister Dwight Duncan in particular attacked the idea as difficult to set up and administer. The focus now was on expanding the Canada Pension Plan, either by increasing contributions and benefits, or raising annual contribution limits, or both.

It’s easy to see how this series of events — and the associated media coverage — has fomented a panic over pensions. But when one takes a step back and looks beyond the temporary pension underfunding issue (which has already been largely rectified by market moves), things don’t seem nearly as dire. “There is no crisis,” Ambachtsheer, one of Canada’s leading independent authorities on retirement finance, says flatly. Survey after survey places Canada near the top of the OECD heap in terms of the adequacy, sustainability and soundness of its pension system. In the Melbourne Mercer Global Pension Index last year, for example, Canada placed a close second to Australia, based on the quality of our pension system among a select group of 11 countries.

Not only is Canada doing well compared to other countries, it is performing better than it ever has in the past. The incidence of seniors in poverty has improved from around one in three during the 1950s to one in 10 today, roughly in line with the general population. Despite being generally healthier and longer-lived, fewer seniors than ever before are working. The average after-tax income of elderly families in 2008 was $55,900, more than single-parent families of working age headed by either sex. Indeed, seniors’ income growth, which has outpaced that of every other age group for four decades, continues to do so. Between 2000 and 2005, the median total income of individuals over 65 increased 6.6%, to $20,430 in constant dollars. Over the same period, the median income of those aged 25 to 44 declined by 1.3%. Our senior couples are now the wealthiest demographic in Canada, with an astounding median net worth of $443,614, as of 2005.

If retirement income is to fall, then, it will take an epic reversal of economic trend lines that have been in place for decades (not to mention a reversal of the growing political clout of the senior vote). Nonetheless, the crisis talk has spurred Flaherty to action, starting with unspecified changes to the CPP, the one pension pillar that’s actually working well. Many have pointed out that the emphasis should instead be on increasing workplace pension coverage and educating those still not covered to save more and save more effectively, using lower-fee options such as exchange-traded funds. To do this, pension experts like Ambachtsheer and Greg Hurst, a principal with retirement benefits administrator Morneau Sobeco, recommend creating a new kind of multi-employer pension plan into which every working Canadian would be automatically enrolled, though they could opt out or alter the standard contribution rates. The employer would not be required to contribute. Since critics, including the private insurance industry, shot down his idea of a Canada Supplementary Pension Plan, Ambachtsheer has thrown his support behind changing the law to allow the private sector to offer essentially the same thing: portable plans that meet certain criteria for governance, performance and low management fees.

That would likely help close the private pension gap, but even if we did nothing, it is far from certain that Canada will face a pension crisis 20 years hence. Yes, fewer Canadians will have employer-sponsored plans to fall back on. But, as Ambachtsheer observes of today’s retirees, “even the ones that don’t, most of them for whatever reason seem to have been able to figure out how to generate enough money to retire on.” Much of that money resides in what many in the retirement-benefits business call a “fourth pillar” of the pension system: non-registered investments, including private businesses, home equity and investment property, inheritances, financial support from children, ongoing employment earnings and, since they were created in 2009, tax-free savings accounts.

Ambachtsheer views this diversity of income sources and the flexibility to accommodate individual circumstances as one of the strengths of the Canadian system, rather than a weakness. By contrast, he calls the centralized, tax-funded pensions of France and Italy “disasters waiting to happen.” Given Europe’s low birthrate and coming decline in the working-age population, “the kids are going to pay through the nose.”

It’s more difficult to pinpoint who exactly would suffer from a pension crisis in Canada. Broadly, they would be among the roughly two-thirds of working Canadians without a workplace pension (three-quarters in the private sector). A TD Economics report singled out people in the middle-income bracket, between $30,000 and $80,000 a year, who are most at risk of experiencing a drop in their standard of living. But even then, it is hard to distinguish between those with and without “fourth pillar” assets such as home equity into which they’ve been devoting their savings. As the Mintz report concluded, “It is not always clear precisely which Canadians are under-saving, by how much, and why especially.”

It’s also worth asking what we even mean by under-saving. As far as the financial services industry and virtually all the exhaustive research is concerned, meeting retirement needs means replacing a percentage — the most commonly cited figure is 70% — of earnings during your working life. But which earnings are those? Typical defined-benefits plans calculate benefits based on the average of the employee’s last five years of employment, usually his or her peak earning years. Yet long-term plans like CPP calculate their benefits on the basis of earnings over the course of a worker’s career, indexed for inflation, which may be quite a bit lower.

Regardless of how you calculate it, in practice most retirees disregard the 70% benchmark anyway. In fact, it is the most affluent who are least likely to meet the threshold upon retirement. Consider a two-income couple earning $200,000 a year in their prime. Then they retire. The kids are out of college, the home is fully paid for, their taxes drop, and of course they no longer have to save for retirement. They can exist very comfortably on just 40% of their previous income.

Indeed, Statistics Canada figures reveal that most retirees get along on considerably less than 70% of their peak earnings. A report commissioned by MoneySense magazine looked at individuals who retired between 2002 and 2005. Those who earned between $30,000 and $39,999 at a job in 2002, for example, took in just 55% of that income, on average, three years later. Those in the $60K range, 51%. And those earning six figures? They made do with just 34% of their working income in retirement.

Why aren’t these people protesting in the streets, Greek-style? The fact is, many working families are already living on far less than 70% of their income when you take out non-discretionary expenses like mortgage payments and the feeding and care of children. The 70% benchmark, like most assumptions used to calculate retirement needs, fails to take in all the variables.

What we know for sure is that the current crop of retirees is doing well financially, and the next one, the baby boomers, will almost certainly enjoy a comfortable retirement too. The older boomers represent the most affluent generation of Canadians ever, for two reasons: one a blessing of economic history and the other due to their own behaviour. They benefited from rising property values mostly after they purchased their homes, and once they burned their mortgages and their kids left the nest, they set about saving for retirement in a big way.

When it comes to the generation after that, those currently in their 40s, it’s harder to predict exactly how well prepared they are for retirement. That’s because most people at that age are just paying off their houses and starting to think about incubating their nest eggs. “You can’t look at a 40-year-old Canadian and say that they’re saving enough or they’re not saving enough,” says Malcolm Hamilton, a principal with Mercer Human Resource Consulting in Toronto. “You can’t see what they’re going to do for the next 25 years.”

If they pay off their debts, do a lot of “back-end saving” in their 50s and luck into a period of good investment returns, they will do as well as their predecessors. History shows people respond to their economic environment too. Canadians were better savers in the 1980s in large part because it paid off: double-digit interest rates meant double-digit rates of return on GICs and savings accounts.

Declaring a retirement crisis at this stage seems premature at best, and at worst, it could be dangerous. We risk doing harm to a demonstrably effective retirement income system, not to mention taking even more money out of the pockets of working families who are already hard-pressed to pay their bills.

Those yelling “crisis” the loudest are making the classic mistake made by all doomsayers: they fail to account for our ability to react to changing circumstances. History shows that Canadians can quickly change their behaviour if it’s in their own best interest. As interest rates rise and employer-sponsored plans are watered down, we will save more on our own, and we will invest our money more effectively. Exactly how that’s done should be left at the individual worker, taxpayer and retiree’s discretion. Given the tools and incentives to take care of themselves, Canadians will continue to do so, just as they’re doing right now.

An earlier version of this article referred to defined-benefit pension plans maintained by several companies including Weyerhaeuser Canada. The article should not have included any reference to Weyerhaeuser’s Canadian defined-benefit pension plan. Benefits in that plan have not been reduced. Canadian Business regrets the error.