Why ranking our relative ‘retirement security’ is misleading
Natixis Global Asset Management just released a report that shows Canada ranks 10th for retirement security among 43 developed countries. If there is one area where Canadians overachieve, it is in our preoccupation about retirement security so coming in 10th place may not sound so great. For people planning their retirement, it is important to put this result into perspective.
First off, we probably do not want to come in first place in a global survey. Planning for retirement is important but obsessing over it can lead to counterproductive behaviour, such as over-saving. A majority of recent retirees have more disposable income in retirement than they had when they were working. We need to remember that one can go overboard when it comes to saving.
Second, that ranking does not take into account the recently announced CPP enhancement which will improve our retirement income prospects significantly. The maximum CPP pension will eventually rise by as much as 50 per cent for higher income earners and by a third for lower-income earners.
Third, it seems that the average layperson knows more about retirement planning than the typical planning professional. Another Natixis survey shows that respondents think they need to replace 60 per cent of their current income whereas planning professionals put the replacement ratio at 75 to 80 per cent, according to Natixis. In fact, the non-professionals are closer to getting it right as 60 per cent is on the high side for anyone who is raising children and still paying off a mortgage close to retirement.
This is not to say we can afford to be smug. While an enhanced CPP will shore up much of the pension gap that exists among middle-income earners, we are still facing a bleak economic future in which interest rates and investment returns will stay low for a very long time. That combined with longer life spans and maybe higher lifestyle expectations means retirement presents a greater challenge for us than it did for our parents.
We can offset these negative factors by saving more, but educating millions of people to do so tends not to be too effective. A better solution would be for the country to embrace Pooled Registered Pension Plans (PRPPs) combined with auto-enrolment. After years of making minimal progress on this front, the provinces are finally starting to roll out regulations that will enable PRPPs to become a reality.
The trouble is, only Quebec is showing any real enthusiasm so far for encouraging coverage in PRPPs and so this effort could very well fail. That would be unfortunate given that less than 25 per cent of workers in the private sector are covered by workplace pension plans. A concerted campaign by provincial governments to adopt PRPPs could make a real difference in closing whatever remains of a pension gap among middle-income workers. We might even improve our international retirement ranking.