Fears of retirement unpreparedness are overblown.
We have often heard that Canadians are unprepared for retirement. Low interest rates have meant low returns to saving and have accelerated the demise of defined-benefit pension plans in the private sector. People — we are told — are not saving enough for retirement to compensate. But such fears of retirement unpreparedness are overblown.
Studies on the subject have typically ignored retirement savings beyond the three traditional retirement pillars of: 1) Old-Age Security (OAS and the Guaranteed Income Supplement); 2) CPP and the Quebec Pension Plan; and 3) workplace pensions and RRSPs. Specifically, gloomier reports have neglected wealth accumulated in the fourth pillar of retirement, made up of non-pension assets. As Fred Vettese and Bill Morneau (now the finance minister) wrote in their widely acclaimed 2012 book on retirement, “pillar 4 assets amount to a staggering sum.”
Let’s look at these fourth-pillar assets in more detail. Most households own their homes at retirement and have equity accumulated in them. Some others own rental properties, land, or a cottage. Then there are investments in mutual funds, stocks, and bonds in taxable accounts, and in TFSAs. For many small-business owners, retained profits and capital investments in their businesses can be converted into long-term retirement capital.
Insurance products are often forgotten in the discussions, but they can play a role in protecting against events that may derail retirement plans, and cash values can accrue on a tax-efficient basis in permanent life-insurance policies. And although not wealth per se, inheritances are another important source of funding. The potential role for inheritances is large, as baby boomers have had fewer children than the previous generation.
In a recent paper, we used granular data from a 2014 Statistics Canada household survey to assess the potential importance of fourth-pillar assets in retirement planning. We found a large number of working households between the ages of 35 and 64 who are already sufficiently prepared for retirement when we factor in RRSPs and fourth-pillar assets.
About three in five households are made whole by OAS, CPP, and workplace pensions. That leaves about two in five households needing to accumulate enough in RRSPs and fourth-pillar assets to achieve a standard of living in retirement comparable to the one they currently enjoy.
So what happens when we factor in the sizeable amount of fourth-pillar assets, and to a lesser extent, RRSPs? Slightly less than half of this targeted group has accumulated enough value to retire comfortably in the future, at 65. Instead of the “at-risk” targeted group being two in five Canadian households, it is actually one in five. While still an important group, it is much smaller than many policy-makers would like us to think.
Additionally, about a third of the remaining at-risk group is actually in the top-income quintile. This is positive, in a sense, since top-income households have the most opportunity to increase savings during their ongoing careers to get to the point they need to be at in retirement. They also have the most flexibility to downsize in retirement.
So overall, the results in our study cast doubts on the narrative that voluntary savings are inadequate for most people who do not have a workplace pension. It also means that many of those who will be compelled to save more via CPP may not in fact need it to ensure living-standard continuity in retirement. There is no retirement-preparedness crisis, and the savings shortfalls are certainly more targeted.
That is not to say there aren’t potential benefits to enhanced CPP. The CPP Investment Board has acquired a reputation of delivering high returns and is able to tap into investment opportunities unavailable to most individuals. It can also provide protection against outliving retirement wealth at a lower cost than that available to retail investors. But here the CPP is not alone. Large life insurers, for example, have also shown to be adept pension managers, at competitive costs.
The bottom line is that households accumulate wealth through many different channels. Mandating new retirement wealth accumulation through one channel may impact the level of accumulation in other channels. Therefore, it is important to assess the impact of each pillar of retirement wealth, including the fourth pillar, to get a fuller picture of retirement preparedness.
Jeremy Kronick and Alexandre Laurin are co-authors of the C.D. Howe Institute study “The Bigger Picture: How the Fourth Pillar Impacts Retirement Preparedness"
