The pension crisis myth
Posted: February 16, 2010. By Jack M. Mintz
With the 2009 Registered Retirement Saving Plan season soon coming to an end, Canadians are being buried with an avalanche of claims that they are not saving enough. Sure, it is critical for Canadians to be vigilant about their retirement savings, but claims that most Canadians are not saving enough are based on assertions or faulty studies. Recent evidence suggests most Canadians make pretty good decisions for themselves.
Specifically, three false claims are typically made to promote saving products: the pension system is in crisis, Canadians are not saving enough or earning sufficient returns to provide for an adequate level of retirement income, and three-quarters of private sector employees do not have an occupational pension plan and therefore do not have an adequate saving plan.
The myth that the pension system is in crisis grew out of the 2008 financial crisis. Canadians saw an average 20% loss in their portfolios. Pension plans had a similar experience with some becoming insolvent. Nevertheless, a 2009 DBRS survey of 70 defined benefit plans showed that most pension plans were in relatively good shape. The OECD has ranked Canada’s pension system as one of the most sustainable in the world with elderly Canadians having disposable income equal to 95% of working Canadians, third highest of industrialized economies. The poverty rate among the elderly — less than 5% — is one of the lowest among OECD countries
Household net worth at the end of the third quarter of 2009 is six times disposable income, roughly the same as in 2000 at the height of the high-tech boom. Canadians have $5.9-trillion in net assets, including $2-trillion in Canada/Quebec Pension Plan assets, Registered Pension Plans and RRSPs. Housing and real estate equity accounts for another $1.9-trillion and other financial and non-financial assets, net of consumer debt, total $2-trillion (the latter is likely underestimated since Statistics Canada measures private corporate shares at book, not market value).
Given that pension and RRSP withdrawals are fully taxed, Canadians have more retirement assets in the form of housing or financial assets than they do in pensions or RRSPs. These other assets, including housing that can be downsized at retirement, cannot be ignored in any assessment of retirement income adequacy. Certainly, the system is not perfect. But there is no pension crisis. Ask the provincial ministers of finance after surveying the evidence. Dwight Duncan, Finance Minister of Canada’s largest province, was pretty clear about this point after the December Whitehorse meetings. The claim that Canadians are not saving enough is generally not true — at least 80% are saving sufficiently for retirement. As several studies concluded, Canadians with less than $40,000 have been well protected by government transfer programs, the C/QPP and tax policies with retirement income adequacy at 90% or better. High-income Canadians (those with more than $100,000) have lower replacement income (ranging from 50% to 70%). However, the OECD argues that 50% replacement income at retirement is often adequate for upper-income households, much less than the 70% typically claimed.
The middle-income group is the current focus. But here studies, once incorporating other financial assets besides pensions and RRSPs, show that most have adequate levels of retirement support. The best study by Statistics Canada suggests that about a fifth to a quarter of middle-income Canadians (about 600,000 retirees) have inadequate retirement income below 60% of after-tax working income.
However, the analysis does not incorporate tax-free housing and private corporate assets, which are significant retirement assets. We also do not know how much of this middle-income group with low retirement income has lost jobs during their career, suffered from family breakups, arrived to Canada late in their working lives or have significant assets tied up in their own private business whose income is not included in tax files. This information is needed to figure out the best policies to address any shortfalls.
The third myth is that Canadians must have an occupational pension plan to have adequate retirement savings. A recent Statistics Canada study by Ostrovsky and Schellenberg published late in December raises serious doubts about this claim. The authors show that individuals without occupational pensions have better replacement income at retirement than those who do. Obviously, the investment returns net of fees for various saving instruments have not undermined the ability to ensure adequate retirement income. Even if one ignored employment earnings after the age of 65 (people without RPPs work more in later years), Canadians without pensions have more RRSP, financial income and capital gains compared to market income of those who have a pension, regardless of income.
Some have argued that the RRSP system has failed but even this claim is not supported by evidence. Most lower-income Canadians do not always contribute to RRSPs since they have sufficient retirement income through other means. Over 60% of unused RRSP contribution room is in this category. Leaving out this group, a large proportion of Canadians contribute to RRSPs for many consecutive years. Compared to pension funds, RRSPs provide flexibility to savers since the funds could be used for family emergencies and other contingencies without being locked-in.
Some argue that, unlike existing retirees, working Canadians will have difficulty earning good investment income in the future. However, this is just an assertion and not based on any particular modeling. Instead, a different argument could be hypothesized. The return on assets could rise if global saving rates, expected to decline due to heavy indebted governments and aging in industrialized countries, are inadequate to support abundant capital spending on infrastructure, alternative energy supply and economic growth in emerging countries. With excess demand for saving, the return on investment rises, making it easier to fund retirement needs. Certainly, no easy conclusion can be reached without better analysis.
Overall, Canadians have shown that they have made good decisions for themselves. True, some Canadians might have inadequate savings for their retirement and the system could always be made to perform better than now. Those issues will be addressed by Ministers in the future. In the meantime, we should not panic into adopting measures that are not evidence-based.
Jack M. Mintz is the Palmer Chair in Public Policy, School of Public Policy, University of Calgary.
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