If you are interested in some good thoughts on Canadians and retirement, you should check out research by Jack M. Mintz, Research Director and Palmer Chair in Public Policy, School of Public Policy, The University of Calgary. Jack, who spoke at The Distinguished Advisor Conference in Monterey (see www.knowledgebureau.com/dac) released a research paper in December 2009 to the Department of Finance overviewing the adequacy of Canada’s Retirement Income System. Amongst many findings, you might find these as interesting as I did:
- On amount of savings required by Canadians. Low-income Canadians need a higher level of replacement income to avoid poverty. Some middle- and high-income Canadians may need even less than 60 percent of their pre-retirement income to sustain an adequate standard of living (for example, the OECD suggests 50 percent for individuals with incomes over $90,000 in Canada, twice the median).
- On poverty and the adequacy of CPP/OAS/GIS. Canada has one of the lowest poverty rates among elders in the OECD countries, and that our public pension system, that is, OAS/GIS, CPP/QPP and provincial top-up programs are ensuring that low-income Canadians are able to achieve high income replacement rates, even exceeding 100 percent. Due to high replacement rates from public pensions, those earning $20,000 achieve a replacement rate of about 90 percent, even with low levels of RPP/RRSP savings. However, low income earners will require more money to avoid poverty in the future.
- On Participation in Registered Pension Plans (RPP) vs. no RPP . Contrary to the impression that individuals without private pensions are not saving enough in RRSPs, some very recent evidence has shown that Canadians with RPPs or employer-sponsored plans have somewhat less retirement income than those without RPPs. How can this be? It seems that non-RPP holders tend to have other assets to support their retirement. In addition, they tend to be more likely work after the age of 65. It’s the RPP holders, therefore need more help in saving to expand wealth to draw on in retirement.
- On the Role of Financial Advice. This should be somewht worrisome to financial advisors and their clients, too. The report suggests that retirement income adequacy depends not only on your ability to save money, but also on the investment performance of retirement funds. Of course that makes sense. What is new from a research point of view, is that Canadians may not be well served in the retirement marketplace by their financial advisors. The research suggests that active management does not provide returns on a consistent basis any better than passive management–and this appears to be true for both pension plans and mutual funds. Once taking into account active management costs, passive managed assets would provide superior returns, according to the report.
So, here are three thoughts for you: Why not consider a broad collaboration amongst all stakeholders to the retirement income adequacy issue ? Over the next five years, for example, government could slowly increase the contributions of the CPP, which helps employed and self employed people, but not by breaking the backs of small business contributors.
We could then consider eliminating restrictions of age and income for RRSP and TFSA purposes, so that tax assistance is available to all people—even those without required contributory earnings or earned income. This would allow the savers to contribute as much as they want towards their retirement in peak earning years, in whatever vehicle they want, leveraging any tax savings from an RRSP contribution to increase their CPP, TFSA or other non-registered savings rate levels?
Finally, let’s talk about what changes are needed within the financial services industry to reduce fees to retirement savings investors. Perhaps regulation could streamlined? What other costs could be cut to the financial services business to make financial products and advice more affordable?
What do you think? Remember, it’s Your Money. Your Life.
Evelyn Jacks is President of The Knowledge Bureau, a national educational institute focused on excellence in financial education, and a member of the federal Task Force on Financial Literacy. For information about self study courses and books visit www.knowledgebureau.com