A working paper asks why rising assets and net worth aren’t propping up retirement incomes proportionately
On the heels of a commentary on technology adoption in the wealth industry, the C.D. Howe Institute has released a working paper looking into how Canadians approaching retirement have seen their wealth rise over the decades — but haven’t seen as great an increase in retirement income.
“The extent to which Canadians have accumulated private wealth is measured in Statistics Canada’s Survey of Financial Security (SFS),” wrote Bob Baldwin, proprietor of Baldwin Consulting and a member of the institute’s Pension Policy Council.
Aside from measuring both total assets and net worth, the SFS provides data on specific forms of wealth including retirement wealth, principal residences, and pension wealth. Baldwin’s paper focused primarily on forms of wealth designed to provide retirement income, including workplace pension plans (WPPs), registered retirement savings plans (RRSPs), and registered retirement income funds (RRIFs).
Looking at median figures for SFS respondents aged 45-54 and 55-64, he found that the real dollar value of total assets and net worth grew quite strongly between 1999 and 2016. In 2016, net worth in real dollars was 1.68 to 2.04 times what it was in 1999 for various age groups. Total assets, meanwhile, were 1.75 to 1.98 times higher than 1999 levels.
“The fact that net worth grew a little more slowly than total assets suggests that wealth was leveraged to a slightly higher degree in 2016 than in 1999,” Baldwin said. In line with that thinking, he found that debts expressed as a percentage of assets are higher in 2016 compared to 1999 for all age groups; the incremental change was larger for older age groups.
The strong growth in net worth and total assets was supported by increases in all the main asset types owned by Canadians. For both the 45-54 and 55-64 age groups, he found the strongest growth in principal residences (2.09 and 1.95 times, respectively). All asset types grew more among the 45-54 age group than the 55-64, which Baldwin suggested could be due to more 55- to 64-year-olds starting to run down their assets as they enter full or partial retirement.
“At the same time, however, the assets required to provide a dollar of retirement income have increased,” Baldwin said. He noted two factors that contribute to the rising cost of providing retirement income:
- Improvements in mortality, which spell an increased length of time over which pensions have to be paid; and
- Lower interest rates, which mean rising costs of low-risk income
While declines in interest rates have raised the cost of retirement income, they have also exerted an opposite effect by encouraging consumer borrowing — particularly for housing — and increased the leverage on assets, thus leading to a positive overall effect on total assets and net worth.
Baldwin also noted that the increase in the cost of a dollar of retirement income is less than the growth of private pension wealth, and is somewhat less than the increase in net worth and total wealth. In other words, “the developments with respect to asset growth in the middle of the wealth distribution should allow some enhancement in real incomes in retirement.”