Pension experts split on outlook
Increase in inflation could make it more difficult to save
Are Canadians on track to have enough money for retirement, or will the slowing economy, aging population and shift away from traditional pension plans leave a generation of seniors scraping by?
The Conference Board of Canada’s annual Pension Summit heard both sides on Monday.
The two-day conference brings together economists and actuaries, as well as experts on pension plans and retirement savings.
“It’s hard to talk in averages to assess a retirement system,” Fabrice Morin, partner at consulting firm McKinsey & Company, told the business crowd. “Overall, it’s a good system with pockets that aren’t doing so well.”
About 83 per cent of Canadians are on track to have enough money for retirement, according to McKinsey’s latest research, released in February.
The study, dubbed the Retirement Readiness Index, runs counter to the widespread perception that a retirement crisis is brewing in Canada.
Among lower income Canadians, that figure jumps to 93 per cent, largely because of federal government programs such as Old Age Security and the Guaranteed Income Supplement.
About 77 per cent of mid-to-high income earners have saved enough. Households that do not save enough or have no access to workplace pension plans tend to be the worst prepared for retirement, according to the study. It surveyed 9,000 working Canadian households and 3,000 retired ones.
Conventional wisdom says that Canadians need about 70 per cent of their working income to live comfortably in retirement.
That figure is “relatively arbitrary. It seems reasonable, but there’s no data to underpin” it, Morin said.
Most Canadians cut their spending by as much as one-quarter to onethird as they approach retirement, he added.
The current situation on retirement savings may look reasonably good, but “when we look out over the years, it doesn’t look so rosy,” Jim Keohane, president and chief executive officer of the Healthcare of Ontario Pension Plan argued.
Costs for the federal government’s Old Age Security and Guaranteed Income Supplement programs will increase dramatically in the coming years as baby boomers retire en masse. At the same time, the decline in long-term interest rates and an unexpected increase in inflation could make saving for retirement even more difficult.
“Most people are better off being in a defined benefit plan,” Keohane said.
Defined benefit pension plans offer members a guaranteed payout in retirement. Payments are based on salary and years of service. Investment decisions are made by professional investment managers.
By contrast, workers who have a defined contribution pension plan make their own investment decisions. The payout in retirement is not guaranteed; it depends on how much was contributed to the plan and how well the investment performed.
Australia, for instance, has had the highest rate of senior poverty among developed countries after shifting workers into defined contribution plans, Keohane noted.
The switch to defined contribution plans is “a disaster in the making. It’s like watching a slow motion train wreck,” Keohane said. “Defined benefit plans are seen as part of the problem when they should be seen as part of the solution.”
The provincial government is still in the process of developing the legislation for the Ontario Registered Pension Plan, slated to get off the ground in 2017.
“It will be soon,” associate finance minister Mitzie Hunter responded when asked by reporters when the legislation would be unveiled.
The government received more than 1,000 submissions, held consultations in 10 communities and has held talks with businesses and other stakeholders, she added.
“We’re working on making sure that when we do put forward the plan design that we get it right.”
Canada is stuck in a rut of 2 per cent growth, Glen Hodgson, chief economist at the Conference Board of Canada told the gathering.
The problem is, “we got used to funding health care, infrastructure, and pensions by growing at 3 per cent,” Hodgson said.