OTTAWA – “There’s pretty much wide agreement among leadership across the country that there is a real problem and that people in their 20s and 30s and 40s are not saving enough. One of the things that we can do as government, and I believe is our responsibility, is to put in place a structure that allows people to save so that they don’t have to retire in financial insecurity — which is exactly what is confronting us right now.
“It is a crisis. It is a crisis that is confronting us and if we don’t deal with it now then we will be in trouble down the road.”
— Ontario Liberal Leader Kathleen Wynne, May 12
The Ontario Retirement Pension Plan is a showpiece of the Liberals’ re-election campaign platform. The proposal calls for a mandatory program in which workers contribute 1.9 per cent of their annual income (up to $90,000), matched by their employers.
Liberal Leader Kathleen Wynne says the Ontario pension plan is needed to address a looming retirement-savings crisis. But Prime Minister Stephen Harper and members of his Conservative government have panned the Ontario Liberals’ plan, saying people favour tax breaks as an incentive to save for retirement. The federal Tories also argue it would hurt the economy, still wobbly from the global financial meltdown, if workers and employers are forced to contribute to an Ontario pension plan.
So, is there a retirement-savings crisis?
Spoiler alert: The Canadian Press Baloney Meter is a dispassionate examination of political statements that culminates in a ranking of accuracy. On a scale of “no baloney” to “full of baloney” (complete methodology below).
This one earns a rating of some baloney. Here’s why.
First, let’s take a quick look at the proposed Ontario Retirement Pension Plan. The 2014 Ontario budget estimates the contributions from workers and employers would be about $3.5 billion a year. An arm’s-length board would be responsible for investing that money.
A worker with an annual salary of $90,000 would contribute about $1,643 to the plan, which their employer would match. In return, that person could expect a benefit of up to $12,815, indexed to inflation, when he or she retires. The plan would start in 2017.
If Canada Pension Plan payments are included, that person would receive combined benefits of up to $25,275 annually for life.
Next, let’s look at retirement savings in Canada — specifically, if there is indeed a crisis.
The Oxford English dictionary defines a crisis as “a time of intense difficulty or danger” and “a time when a difficult or important decision must be made.”
Is that the case here? Let’s consider Statistics Canada poverty data.
Poverty among the elderly has dropped sharply since the mid-1970s. Statistics Canada’s low-income measure — the most commonly used standard for comparing countries to each other — shows the low-income rate among seniors was 30.6 per cent in 1976. That was the first year people aged 65 were eligible for full public pensions.
The low-income measure fell to a low of 3.7 per cent in 1995. It rose to 11.5 per cent in 2009, the last year for which Statistics Canada data are available.
The drop in the number of seniors living in poverty has widely been attributed to the introduction of the Canada Pension Plan and Quebec Pension Plan in 1966 (full pensions were not available until a decade later), along with Old Age Security and the Guaranteed Income Supplement.
So while the low-income measure has risen from the lows of the mid-1990s, fewer seniors are living in poverty today than they were in the 1970s, although the number seems to be on the rise again.
Using the poverty line to determine whether the current crop of seniors are in the middle of a retirement-savings crisis is perhaps a crude measure, but it offers at least one basic indication of the state of their finances.
Turning away from only seniors now, let’s look at how Ontarians both young and old are saving for retirement.
The Ontario government says people are saving far less now than they were in the early 1980s. In 1982, Ontarians saved 22.7 per cent of their disposable income — an all-time high for the province.
That number fell steadily until it hit a historic low in 2005, when people were saving only 1.7 per cent of their disposable income. As of last year, Ontarians were putting 4.7 per cent of their extra cash into savings.
The Ontario numbers are in line with the national picture.
By that measure, it would seem that people are saving less money for retirement than they used to. Precisely how much is not certain, since the household savings rate does not specify if the money is being put away for retirement or for any other purposes.
What the experts say
Pension expert Malcolm Hamilton of the C.D. Howe Institute says the household savings rate is an often-cited source, but doesn’t tell the full story.
Statistics Canada tracks contributions to pension plans and RRSPs separately, Hamilton said.
Canadians contributed $35.7 billion to registered retirement savings plans, according to Statistics Canada data from 2012. That was higher than the year before, and is part of an upward trend going back to at least 2000.
So why has the savings rate fallen if people are putting more money into retirement savings plans?
Hamilton says it’s because the savings rate treats all withdrawals from retirement savings plans — including all pensions paid from public-sector plans — as negative savings. So while Canadians are putting more aside for retirement, he says, they’re also collecting more from retirement savings plans. The increased benefit payments have the effect of neutralizing the increased contributions.
Another factor to consider is the investment income earned on the plans themselves, Hamilton said.
“Now the investment returns on the accumulated savings are lower than they used to be,” he said. “And that’s the thing, more than anything else, that’s dragging the savings rate down.”
The household savings rate also doesn’t factor in capital gains and losses, Hamilton added — so if interest rates go down and people shift their savings into stocks, none of the capital gains count.
Keith Ambachtsheer, a finance professor at the Rotman School of Management at the University of Toronto, agrees the household savings rate omits important information, such as capital gains.
He also agrees there’s no retirement-savings crisis at the moment. That said, Ambachtsheer says he sees no harm in Ontario setting up its own pension plan.
Susan Eng of CARP, an advocacy group that represents older people, says describing the current situation as a crisis is probably too strong, but adds there is an urgent public policy issue that should be addressed.
Fewer and fewer private-sector workplaces are offering their employees pension plans, she notes. That leaves people with fewer options to save for their retirement.
“Then, the question becomes: how do people who have average skills in finances save for their own retirement?” Eng said.
The experts agree that there is no retirement-savings crisis — at least for now.
They acknowledge that no one really knows what the economy will look like in the future, and it’s certainly possible another global downturn could wipe out people’s retirement savings.
But at the moment, while people could always be saving more money, the experts say Ontarians don’t find themselves in the middle of a crisis.
For this reason, Wynne’s claim has some baloney.
The Baloney Meter is a project of The Canadian Press that examines the level of accuracy in statements made by politicians. Each claim is researched and assigned a rating based on the following scale:
No baloney — the statement is completely accurate
A little baloney — the statement is mostly accurate but more information is required
Some baloney — the statement is partly accurate but important details are missing
A lot of baloney — the statement is mostly inaccurate but contains elements of truth
Full of baloney — the statement is completely inaccurate
Ontario 2014 budgethttp://www.fin.gov.on.ca/en/budget/ontariobudgets/2014/ch4.html#s4-5
Statistics Canada, Low-income rates among seniors 1976 to 2009http://www.statcan.gc.ca/pub/75f0002m/2012001/fig/fig3.2-eng.htm
Statistics Canada, Household saving ratehttp://www.statcan.gc.ca/pub/13-605-x/2012002/c-g/c-g04-eng.htm
Ontario pensions and retirement savingshttp://www.ontario.ca/government/ontario-pensions
Statistics Canada, Survey of Financial Security, 2012 (released Feb. 25, 2014)http://www.statcan.gc.ca/daily-quotidien/140225/dq140225b-eng.htm
Registered retirement savings plan contributions, 2012http://www.statcan.gc.ca/daily-quotidien/140325/dq140325b-eng.htm