June 4, 2015 – Reports that Canadians are undersaving for their retirements are exaggerated, according to a new report released today by the C.D. Howe Institute. In “Do Canadians Save Too Little?,” author Malcolm Hamilton takes a fresh look at all the assumptions and finds that Canadians are reasonably well prepared for retirement.
“Assumptions that Statistics Canada’s household saving rate is a reliable estimate of the amount that Canadian workers set aside for retirement, and that Canadians need to replace 70 percent of their gross employment income in order to maintain their pre-retirement lifestyle are not correct,” says Hamilton. To demonstrate why, he takes a closer look at the factors that have contributed to the decline in household savings and explains how this decline has been misinterpreted. He also discusses the limitations of the 70 percent replacement target, and asks how much Canadians really need to save for retirement.
The report finds that between 1990 and 2012, as the household saving rate headed sharply lower, the amounts contributed to retirement savings plans as a percentage of employment earnings headed sharply higher. “Contributions are not 4 percent or 5 percent of earnings – they are 14 percent of earnings. They are not falling – they are rising,” says the author. Even if one believes that the reduction in the household saving rate is important, the reduction was not caused by the amounts Canadians set aside for retirement or by a reduction in the accumulated retirement savings of Canadians. It was caused by a number of other factors; a significant reduction in saving unrelated to retirement;a significant increase in withdrawals from pension plans and RRSPs; and, a significant reduction in the rate of return on retirement savings.
Hamilton also finds that most Canadians can also retire comfortably on less than the traditional 70 percent replacement target. He notes that “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.”
The author questions the reliability of studies on which the Province of Ontario has relied in making the case for the Ontario Retirement Pension Plan (ORPP). He notes that the undersaving problem, to the extent that there is one, is supposed to be for middle-to-high-income workers in the private sector. Yet according to the province’s estimates, one-third of ORPP participants will make less than $15,000 per annum and almost one-half of these will be under the age of 25. “Why should workers save for retirement when they are young and poor? Wouldn’t it make more sense for them to save when they are older and better able to afford it?” Hamilton argues that in making the case for the ORPP the province exaggerates the gap between what Canadians save and what they need to save almost beyond recognition.
He concludes that gross replacement targets are unreliable measures of retirement income adequacy, due to the diversity of individual goals and circumstances, even for workers with similar incomes. This means that programs like the Canada and Quebec Pension Plans can go only so far in addressing retirement needs. “These programs can establish a lowest common denominator – a replacement target that all Canadians should strive to equal or exceed, but beyond that, we need better-targeted programs – programs that are better able to recognize and address our individual needs,” says Hamilton.
Click here for the full report.
The C. D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. It is Canada’s trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review. It is considered by many to be Canada’s most influential think tank.
For more information contact: Malcolm Hamilton, Senior Fellow at the C.D. Howe Institute, and a former Partner with Mercer; or Alexandre Laurin, Director of Research, C.D. Howe Institute; 416-865-1904, or email:amcbrien@cdhowe.org.