Canada has been facing a pension crisis for many years. Millions of Canadians do not have a workplace pension plan.
According to this article, Canadians without an employee pension plan represent about 47% of those aged 55-64. This means this cohort will have to do one or more of these things to stay out of poverty in retirement: save on their own (likely more than they thought), work longer or spend less as they get older.
While all sorts of registered accounts (examples: RRSPs, TFSAs) exist to help Canadians stash money away tax-deferred or tax-free for retirement few Canadians have the “savings gene” to do so. Back to the article to demonstrate: “the value of retirement assets for those without employee pensions are shockingly low. Canadians making $20,000-$50,000 have an average of $250 saved for their golden years. Half of the demographic has less than half a year’s income saved. The average single senior falls $5,600 below the poverty line, with a median income of under $20,000.”
Those are scary numbers for many Canadians.
More sad savings stats
Another statistic – according to the Financial Consumer Agency of Canada, “Canada’s personal saving rate (savings as a share of after-tax income)—around four percent in 2015—has fallen sharply from 20 percent in the early 1980s.” A working-Canadian-couple saving 4% of their hypothetical, combined take-home income of $60,000 per year wouldn’t generate much for retirement. Some quick math tells me 4% of $60,000 per year is $2,400. That $2,400 invested each year into an RRSP (for tax-deferred retirement money) would amount to only $250,000 after 30 years at 7% average rate of return. While $250,000 might seem like a good chunk of cash for retirement I would prefer this amount for us to be far safer. While some costs like saving for retirement will be gone in retirement, other costs like property taxes, healthcare, utilities, insurance and food prices are not going down in your financial future. When you think about costs in your financial future never forget about the silent portfolio killer – inflation.
Trying to live the dream
Competing with today’s retirement savings is the dream of home ownership in Canada, and our Bank of Canada is doing everything it can to keep interest rates low to keep that dream alive for us. Depending upon how you see it, our dirt-low interest rates are keeping some semblance of housing affordable in many Canadian cities – Toronto and especially Vancouver excluded. I believe most Canadians entering the housing market today are foregoing retirement savings to buy into the aforementioned dream but owning a home is not a retirement plan – far from it.
The decision to expand our Canada Pension Plan (CPP) is absolutely the right thing to do. Workplace pensions for Canadians are becoming extinct, we’re living longer, and on the personal side of savings, we’re saving far less that we used to. Expanding the CPP insulates Canadians from bad saving behaviour, our lust for home ownership and the mantra of living for today. Living for today is great but planning for tomorrow is important too.
Employers and employees will need to dig deeper into their pockets to pay for their enhanced pension plan but fast forward a few decades from now and your future self will definitely thank you.