Retirement might seem a long way away when you’re 31, but Mike Adam still thinks about it. Without a company pension to fall back on, the manager of a specialty wood-products mill in Kamloops, B.C., has been putting at least $5,000 into his RRSP every year since the age of 23. “I’m basically relying on myself,” he says. “I don’t have a lot of faith the government’s going to be there to give me much.” Whatever state the rest of Canada’s retirement income system is in, Adam is confident that he personally will be able to live the lifestyle to which he’s become accustomed when he leaves work for the last time.
That’s never a bad attitude to take. But even those of us who haven’t been saving so diligently from such a young age can take some comfort in recent trends. Even as calls for action to avert a looming retirement crisis still echo around provincial legislatures, labour conventions and Bay Street, most signs actually point to an improving state of retirement readiness across the land. Pensions are better funded, stock markets have rebounded and even fixed-income yields—the cash machine of retirement funding—are beginning at last to rise. Long before Ottawa moved to raise the age of old age security eligibility to 67, real retirement ages were edging up, reducing the need for greater savings. Independent assessments show our retirement system to be one of the most generous and sustainable in the world. According to one of the country’s most prominent actuaries, Canadians today may actually be over-saving for retirement. Far from a crisis, we may be entering a golden age for those in their golden years.
In retrospect, it’s easy to see why retirement hysteria reached a peak when it did. Many of the factors that gave rise to the dire predictions can be traced back to the market crash of 2008–09—Canadian pension funds lost 21.4% of their value in 2008—and its low-interest aftermath. That economic snafu postponed the retirements of more than a few Canadians, it lasted longer than other any other downturn in living memory, and it is by no means resolved. But this period should be looked at as an anomaly, a mere blip in the stretch of 40 to 70 years during which we amass, manage and consume our life’s savings.
The stock swoon and rock-bottom rates of the financial crisis conspired to put many corporate pension plans in the danger zone. In 2009 and 2010, we saw the high-profile defaults of pension plans of once great companies like Nortel Networks and General Motors. But take a look again today and the picture has brightened. Virtually all the indexes tracking the Canadian pension industry show marked improvement this year. The Mercer Pension Health Index, which calculates plans’ capacity to meet their members’ promised future income under current conditions, stood at 94% as of June 30, up from 76% in 2011. Canada’s defined-benefit plans are almost back to being fully funded. Not only that, but thanks to the market crash and subsequent low-interest-rate famine, actuaries have been forced to fortify them like never before.
“The first half of 2013 has been very good for pension plans,” says Manuel Monteiro, partner in Mercer’s financial strategy group. The biggest single reason is the rise in real interest rates. “Pension plans since the financial crisis have been in pretty rough shape because interest rates were held down by all the—I won’t call it manipulation—but all the activities by the central banks to keep interest rates low and to spread growth,” he says. “One of the victims of that policy has been pension plans, because pension plan liabilities are measured based on long-term interest rates.”
Monteiro notes that 10-year Government of Canada bond rates have risen from 2.3% at the start of the year to 3.2% as of late August. “That’s almost a one-percentage-point increase. That alone [decreases] pension-plan liabilities between 10% and 15%.” The belated recovery of stock markets in the U.S.—on April 10, the S&P 500 hit 1,589, finally topping its 2007 peak—along with the glimmer of an uptick in Europe have further helped put defined-benefit plans on an even keel. The same calculus is helping RRSPs and defined-contribution plans too.
The improvement in pension solvency is not simply a function of cyclical factors. The plans themselves have been adapting to the low-return environment over the past few years by hiking contribution rates from both employees and employers. A few companies, such as BCE and Canadian National, have voluntarily made special contributions worth hundreds of millions of dollars to their employees’ plans.
That’s all true enough, advocates of pension reform will say. But the problem isn’t with those covered by employer-sponsored pensions as with the growing majority who are not. Statistics Canada reports that just 38.8% of employees had an employer-sponsored pension plan in 2010, down from 45% in 1991. The other 61.2% have only taxpayer-funded benefits like old age security and the Guaranteed Income Supplement, the employer/employee-funded Canada Pension Plan and their own retirement savings to fall back on once they leave the workforce. Well, there’s some good news there too.
Compared with other countries around the world, Canada’s retirement system is actually in “relatively good shape,” says Fabrice Morin, an associate partner in McKinsey’s asset management and financial services group. France’s mostly taxpayer-funded public pension system may do better at ensuring every retiree is sufficiently funded (for now), and America’s mostly private pension patchwork may be more sustainable into the future, but our hybrid system of individual-, employer- and government-funded benefits ranks high on both criteria, sufficiency and sustainability—“which is uncommon,” says Morin
A study co-authored by Morin, based on a survey conducted in the winter of 2010–11, concluded that 23% of working-age Canadians are not saving enough to maintain their standard of living in retirement. But that does not mean they are facing poverty, Morin says. The study instead makes the assumption that the role of the retirement system is to at least maintain a person’s existing standard of living into retirement. On that score, we do it best for the poor. Just 4% of those in the lowest income group will see their lifestyle deteriorate in retirement; most will actually be better off. The group at the greatest risk of a lifestyle adjustment, in fact, are in the highest-earning category; 41% of those aged 55 to 64 with an average income of $140,000 a year are not saving enough to replace their spending after they stop working. They might have to downshift from the Mercedes to a Volvo, in other words.
But even studies like McKinsey’s err on the side of caution, argues Fred Vettese, chief actuary at human resources firm Morneau Shepell. In a paper entitled “Why Canada Has No Retirement Crisis,” published last spring in the Rotman International Journal of Pension Management, Vettese outlined why predictions of a mass retirement shortfall are off the mark. He noted few of the studies of retirement income factor in so-called fourth-pillar assets. The first three pillars of the retirement system include taxpayer-funded programs (OAS and GIS), the payroll-deducted CPP program, and registered savings vehicles such as company pensions and RRSPs. However the collective value of personal assets outside these first three pillars, including home equity, other real estate, unregistered savings and family businesses for all Canadian households was $4 trillion, once you subtracted associated debt. That far exceeds the $1.9 trillion contained within the three pillars. “Such assets can be, and routinely are, used to supplement retirement income—for example, by downsizing the family home at the point of retirement, collecting rent on an investment property, or selling off a business and investing the proceeds,” Vettese wrote.
Furthermore, Vettese observes that after falling to a low of 61 in 1998, Canadians’ average age of retirement is rising again. Currently at 62, it could rise as high as 67 as employers, facing a declining workforce, reach out to their older workers and make it more appealing for them to stay on the job, according to a 2012 commentary by the C. D. Howe Institute. But even if the average retirement age inched up to just 65—where it sat back in 1976—the extra three years paying into, instead of drawing out of, the nation’s retirement system would substantially change the funding calculus.
There are signs this is already happening. Since 1997, the workforce participation rate for Canadians aged 55 and over has increased 12 percentage points to 34% and is now higher than it was in 1976. Consider the case of Howard Levitt, a Toronto labour lawyer. Now 60 years old, he has a large portfolio of real estate and other income-generating assets in addition to a maxed-out RRSP. “I’ve done well and invested well,” he says. “I could retire easily now and live very, very well.” But he doesn’t. Instead, he works long hours and travels on business almost every week. “It’s stimulating work. I’m at the top of my game. So I don’t know what I’d do to replace it,” he says.
If you adjust the projections to account for the rising employment rate of people like Levitt, the drop-off in retirees’ spending as they age, and the value of fourth-pillar assets, Canadians may well be over-saving for retirement, Vettese adds. While that might sound like a good problem to have, he says it makes further moves to enhance government pensions and forced-saving programs counterproductive.
Morin, too, argues against any supposed cure-all for the Canadian retirement system, such as a major expansion of CPP with higher contribution and benefit levels. Providing for all retirees “is a problem with multiple facets and multiple sources. Therefore using one single lever is not the way to solve the problem,” he says. “It’s better to use multiple small levers.”
That’s pretty much what the federal government has been doing since 2006, with tweaks such as abolishing mandatory retirement, a graduated rise in the eligibility age for OAS benefits and new tax-sheltered savings vehicles in tax-free savings accounts and pooled registered pension plans. The latter are currently being made available in Quebec, Alberta, Saskatchewan and British Columbia. (Employers without a pension plan are not, as early proponents had hoped, required to offer PRPPs, however.)
Taken in combination with the emergence of exchange-traded funds, discount brokerage accounts and other low-fee investing tools, there are more options than ever for Canadians to save, and save more cost-efficiently, for retirement. Since the removal of foreign-content restrictions in RRSPs, they are better able to diversify their holdings and reduce their risk, as pension funds do. There are also more free educational tools from organizations ranging from non-profits to the federal government to help people improve their financial literacy.
One immovable challenge to Canadians’ comfortable retirements remains: demographics. “People start working later, they want to retire earlier, and they live longer and the equation just doesn’t work,” Morin says. Not only that, the arrival of the baby-boom generation at retirement age over the next two decades will see the ratio of seniors to working-age people (aged 20 to 64) go from just over 1:5 in 2006 to 1:2 by 2056. In fact, Statistics Canada projects that 2013 will be the year the number of 55- to 64-year-olds starts to exceed the number of 15- to 24-year-olds. Assuming historical employment patterns hold true, there will be more people leaving the workforce than entering it going forward.
The seldom-acknowledged upside to these numbers, however, is that not only are Canadians living longer than in the past, they are living better. “People are living into old age in much better health than they were years ago,” says Dr. Samir Sinha, director of geriatrics at Toronto’s Mount Sinai Hospital. Of the 20 or so years today’s average 65-year-old can expect to keep living, 17 will be spent in relatively good health. Demographers call this reduction in the typical span of age-related illness “the compression of morbidity” and attribute it primarily to improvements in the treatment of common ailments such as heart disease.
There is now no biological reason why people should quit working in their 60s. “We’ve created this social construct where your working life ends at 65 and retirement begins,” says Sinha, whose own parents are both still working as physicians—by choice, not financial necessity—in their 70s. With employers facing labour shortages and segments of the population wanting to shore up their income in retirement, this social construct seems the likeliest thing to give.
However, few would characterize the prospect of those who want to and need to continue working until 70 or longer as a retirement crisis. Notwithstanding rising life expectancy and declining workplace pension coverage, most Canadians working today can look forward to a longer retirement with a better quality of life than their parents. By and large, they will be healthier, wealthier and, in financial matters at least, wiser in their golden years.