Why today’s Canadians may be slowly drifting towards retirement shortfalls

A broad trend away from saving could reinforce the case for enhancements to the CPP, argues one advisor

Why today’s Canadians may be slowly drifting towards retirement shortfalls

The majority of responses to the proposed enhancement of the Canadian Pension Plan (CPP) by 2019 hinge on one key question: are Canadians better off leaving their retirement in the hands of a government-managed investment fund? Some argue that the public should be left in charge of their own financial future, but one financial professional says that people left to their own devices aren’t doing enough.

“You would think conscientious Canadians would be saving more as [employee] pension coverage diminishes,” said Jason Heath of Objective Financial Partners in a think piece on the Financial Post. “Quite to the contrary, our savings rate has declined steadily from a peak of 19.9% in 1981 to 4.2% in the fourth quarter of 2017 according to Statistics Canada.”

Aside from employers paring their employees’ pension benefits, Heath noted shifts toward temporary and contract workers, as well as rising self-employment. But despite the growing onus for Canadians to save, he said savings rates among Canadians over the past decade have wallowed below 5%, and the average proportion of annual income they felt they should set aside for retirement was 13% — well below the 18% maximum annual RRSP limit.

“Real estate and lifestyle have taken precedence over retirement,” he continued. “Now 18% of Canadians say their top priority for their disposable income in 2018 is debt repayment, more than double the global average across 30 other countries.”

While Canadians prioritizing debt repayment isn’t necessarily a bad thing — Canada’s high debt levels and prospects for rising interest rates, it’s definitely not a back-burner concern — Heath said it suggests a future where people would need to tap into their home equity to fund their retirement. And while the mutual-fund industry should enable private retirement saving, he thought it “does an underwhelming job of helping Canadians save for retirement”.

Citing figures from Statistics Canada, he also noted that the average annual CPP retirement pension and the maximum annual Old Age Security (OAS) pension were $8,303 and $7,075, respectively. Meanwhile, average expenditures per household for those aged 65 and older in 2016 amounted to $58,121, including income tax — roughly $60,394 in 2018 dollars. All told, it means a married couple earning the average CPP and maximum OAS would be able to cover just around 51% of their retirement needs from government pensions alone.

“On that basis, I support the federal government’s enhancement of the Canada Pension Plan,” he said. “There is still a degree of responsibility for Canadians to save independently for retirement, as there should be, but I think it is wise for government to help limit the margin for error.”