The next retirement security challenge: modest earners

This time last year, Canada’s retirement system achieved a major milestone with the enhancement to the Canada Pension Plan. While a momentous social policy achievement, the CPP enhancement should not lull us into complacency. Another retirement security challenge confronts us: providing retirement benefits for modest-earning Canadians.

To date, the retirement challenge has been understood largely as a middle-class issue. The conventional wisdom has that lower- and moderate-income Canadians shouldn’t, can’t and aren’t interested in saving for retirement. These Canadians, the argument goes, are well cared for under our system of government supports — CPP, Old Age Security, and the Guaranteed Income Supplement.

This may hold true for the lowest income earners, who are able to achieve an equal or better (albeit still meagre) standard of living postretirement. However, for a large and growing group of Canadians, the argument is not supported by the evidence. Call this group “modest earners” — those with income of between $25,000 and $50,000 for singles, and $40,000 and $80,000 for couples. Neither poor nor middle class, modest earners are often employed in precarious work situations, and usually lack access to a pension.

Evidence suggests that modest-earning Canadians are not on track to maintain their standard of living in retirement. Research commissioned by the federal government in 2009 found that only 60 per cent of modest earners were saving enough to maintain current levels of consumption. More recent research from the Broadbent Institute found that families within 10 years of age 65 with incomes between $25,000 and $50,000 and no workplace pension had average retirement assets of only $57,000, and median retirement assets of only $250. These are disturbing figures.

Research also shows that modest earners have the ability and will to save. A survey conducted for the Canadian Public Pension Leadership Council found that Canadians’ willingness to contribute to a high-quality retirement plan varied little across income groups. U.S. data from Vanguard has shown a nearly 50-per-cent increase in retirement plan participation among lower-income earners over the past decade.

Why aren’t modest earners on track for retirement? Our retirement system is stacked against them. Clawbacks on GIS and other benefits mean that income from RRSPs, pension plans and CPP can be subject to effective marginal tax rates of 50 per cent to 100 per cent. Sky-high mutual fund fees, often even higher for lower-income people, can consume 40 per cent or more of a worker’s nest egg. Morningstar has found that Canadians pay more for mutual funds than virtually anyone else.

Canada’s tax system is inappropriately tilted toward higher-income savers, offering higher earners a 50 per cent or more deduction for RRSP contributions compared to a 20 per cent or lower deduction for lower-earners. Finally, the recent CPP enhancement, while good for the middle class, does little to help lower-income Canadians.

Despite these obstacles, the right leadership can fix this problem of retirement security for modest earners. The private and social sectors can contribute by making better use of Tax Free Savings Accounts. When combined with characteristics of a high-quality pension plan — low costs, good governance and professional investment management — TFSAs can result in three or more times the retirement security for each dollar of contributions, compared to a typical RRSP.

Unions, associations and employers should consider working toward creating pension-like TFSA programs, showing initiative to help some of the more precarious workers in our society build long-term financial security. This leadership would build on recent work by the Atkinson Foundation, the Maytree Foundation, the Ontario Nonprofit Network, the Better Way Alliance and other leading nonprofits and employers to advocate for improved benefits for precarious, lower-wage workers as part of a decent work agenda.

Government also has an important role to play. Creating a more progressive tax system, with greater incentives for lower-income Canadians to save, would be a step in the right direction. Such reforms could build on international examples such as the U.S. Saver’s Credit and Canadian examples, such as the Canada Learning Bond and the Additional Canada Education Savings Grant. Modest earners have the need, ability and will to build long-term retirement security. Leaders from across sectors have an opportunity to step up to address this next retirement challenge for the benefit of many Canadians who can use and want the help.