Studies have shown that a significant portion of today’s working-age population is not saving enough to ensure that they will have sufficient income to maintain their standard of living in retirement. In the absence of change, this problem will likely worsen over time.
Part of the reason that retirement savings have become inadequate is that people are living longer. While increasing lifespans are a sign of higher living standards and better health outcomes, they put pressure on personal savings and pension plans to provide sufficient income for a retirement period that can last several decades. Low workplace pension coverage, low personal savings and high household debt have exacerbated the retirement savings problem. As a result, the possibility of “outliving one’s savings” has become a concern for many future retirees.
This risk is greatest for middle-income earners, who are less able to save and accumulate the wealth necessary to provide a secure and predictable retirement income for life.
Younger workers also face a challenge in ensuring their future retirement incomes will be adequate. This is due to factors such as delayed labour market entry, low pension coverage in the workplace, non-standard work arrangements, and having many jobs over the course of a career where pension plans may not be available.
Inadequate retirement incomes among future retirees will occur at a time when the population is aging and labour force growth is projected to slow. Taken together, these trends could create more pressure on programs directed at seniors, and an even greater transfer of resources from the younger, working-age population. Additional transfer of resources from the working-age population to retirees could, in turn, negatively affect productivity-enhancing investments and economic growth.
Adequate personal savings, efficient investments and better access to pension plans will enable Ontarians to be prepared financially for their retirement future. To help ensure better retirement income security for future retirees, the government is taking steps to strengthen the retirement income system for all Ontarians.
Research by a range of public policy institutes and governments suggests that a significant number of working-age households are not saving enough to ensure that they will have sufficient income to maintain their standard of living after they retire.
Retirees can usually maintain their standard of living with less income than they had during their working years because their living costs, such as mortgages, children’s education and work-related expenses, tend to fall. Also, there is no longer a need to save for retirement. This is why many retirement experts recommend that people aim to replace 50 to 70 per cent of their pre-retirement earnings to maintain a similar living standard.
Determining whether people are saving enough to meet these suggested targets is complex. There are data on contributions to registered retirement savings plans (RRSPs) as well as on pension plan coverage. However, there is only limited information on the assets and investments that people will use to generate income in retirement and on their household debt. Projecting whether households will have adequate savings in the future requires assumptions about future earnings, savings behaviour, debt accumulation and repayment, investment returns and longevity.
A range of studies have found that approximately 20 to 50 per cent of households are expected to have insufficient income replacement to maintain a similar standard of living in retirement, even after potential income from home equity is taken into account (see Chart 6.1). While people are adaptable, a significant decline in post-retirement living standard has the potential to place considerable strain on individuals and their families, the Ontario economy and the Province’s finances.
The findings of these studies are consistent with analysis by the Ontario Ministry of Finance that suggests that, overall, more than 35 per cent of households will not have sufficient savings to maintain similar living standards throughout their retirement years.
Many people are able to sell their home — or “downsize”— to help finance their retirement. However, owning a home does not necessarily prevent a standard-of-living drop in retirement. Most of the research on retirement savings cited in Chart 6.1, and analysis by the Ministry of Finance, factors in home equity as a potential source of retirement income. The studies and analysis conclude that a significant share of households is undersaving, even with home equity taken into account.
The retirement savings problem is rooted in several economic and demographic factors, the most significant of which are:
Workplace pension plans have traditionally been an important part of retirement income for many Ontarians. Many plans have faced funding shortfalls in recent years, in part due to persistently low long-term interest rates, poor investment returns and demographic pressures. Some employers are following a global trend to switch from defined benefit to defined contribution plans1 in an effort to obtain certainty over pension costs.
Most workers in Ontario do not belong to a workplace pension plan, either because they are not offered one by their employer or because they are self-employed. As shown in Chart 6.2, only 34 per cent of Ontario’s working population belonged to a workplace defined benefit or defined contribution pension plan in 2012; this is down from about 42 per cent in the early 1990s.2
Since most Ontarians do not participate in a workplace pension plan, they must rely to a greater degree on personal savings through RRSPs and other savings or assets to supplement the benefits provided by federal Old Age Security (OAS) and the Canada Pension Plan (CPP).
Years of low interest rates and unpredictable financial market performance have contributed to lower accumulation of personal savings, lower returns on existing savings and higher personal debt levels, especially mortgage debt. For example, between 2002 and 2012, Canadian household mortgage debt as a share of personal disposable income rose from 68 per cent to 103 per cent.3 Low interest rates may have also prompted many individuals to move long-term savings from low-risk financial products, such as guaranteed investment certificates (GICs), to riskier investments that offer the potential for greater rates of return but are subject to more volatility. For example, the 2008 market downturn had a negative impact on personal savings, which, by some estimates, took three years to recover.4 This was especially difficult for those who had just retired or were near retirement at that time.
These factors may have also contributed to workers not making full use of the retirement savings vehicles available to them. In 2011, there was about $680 billion in unused RRSP room in Canada, including $260 billion in Ontario alone.
For those who do manage to save consistently, traditional investment vehicles like mutual funds can involve high management fees. These fees can significantly erode savings growth, regardless of the real rate of return on the investments. Chart 6.3 illustrates how management fees affect retirement savings over time for an individual making annual contributions of $6,000 to an RRSP. Compared to the potential savings portfolio value in the absence of fees, management fees of 2.4 per cent over the 40-year period could reduce the potential portfolio value by more than 44 per cent. However, if fees were low (1 per cent), the potential portfolio value would be reduced by less than 25 per cent over that same period.
Building an effective and efficient retirement savings plan requires time and a certain amount of expertise to achieve consistent and adequate growth over many years. The high degree of choice in savings instruments, vehicles, approaches and management expense ratios can be confusing, even for those with knowledge of investing.
Some experts expect that future investments will not achieve the high rates of return that have been experienced historically.5 This presents challenges for investors in achieving sufficient returns to meet long-term savings objectives without taking on increased risk. Lower future returns also make efforts to lower investment fees and to increase transparency around the impact of fees on long-term returns even more important.
Canada currently has one of the lowest seniors’ poverty rates according to the Organisation for Economic Co-operation and Development (OECD). This is largely due to universal retirement income programs, namely federal OAS and the Guaranteed Income Supplement (GIS), plus provincial top-up programs, such as the Ontario Guaranteed Annual Income System (GAINS).
These programs effectively ensure that eligible seniors have an income floor in retirement and ensure that those who have lower earnings during their working years have a high level of income replacement in retirement. The OECD finds that low earners in Canada have an income replacement rate of about 80 per cent in retirement, compared with an average replacement rate of 71 per cent for low earners across all OECD countries.6
But Canada’s retirement benefit programs do not, and were never intended to, provide sufficient income replacement for those with middle or higher earnings. This means that most Canadian seniors must rely on other sources of income for their retirement. For example, according to the OECD, the share of seniors’ total income provided by public pensions or income security programs is only about 40 per cent in Canada, compared to an average of almost 60 per cent across the OECD.
The limited income provided by public retirement benefits is primarily due to the modest nature of the CPP. The CPP replaces only 25 per cent of career average pensionable earnings, and workers cannot contribute on earnings above $52,500 (2014). These limits mean that the current maximum CPP benefit is only about $12,500 per year. The average CPP annual benefit paid out is far below that, at about $6,400 in Canada and $6,800 in Ontario.7
The large difference between the maximum CPP benefit and the average benefit occurs for two reasons. First, many workers opt to take their CPP benefits before the normal retirement age of 65. In this situation, the level of the CPP benefit is reduced to reflect the additional years that the benefit payments will be made. Another reason for lower benefit payments is that CPP benefits are based on a worker’s earnings over his or her whole career. Earnings can vary widely over the course of a working life, particularly at the beginning and end of a career. The $52,500 cap on CPP pensionable earnings (2014) means that many people are unable to make up for years of lower earnings in years when their earnings are higher.
The current parameters of the CPP make Canada’s publicly administered retirement benefits very modest. For example, Social Security in the United States has an earnings ceiling of $117,000 (2014) and an average income replacement rate of about 40 per cent.8 Average Social Security benefits in the United States were about $15,200 in 2013, while the maximum benefit was $30,400. This compares with retired workers in Ontario who, on average, received about $13,000 in 2013 from OAS and CPP combined. The maximum benefit from OAS and CPP combined is about $19,000.
Because the CPP is so modest, most earners must supplement their retirement incomes through other savings, such as workplace pension plans and personal savings. For example, as shown in Chart 6.4, individuals with incomes of $40,000 or $75,000 have significant gaps to fill if they are to reach a 70 per cent earnings replacement target.
Life expectancy at age 65 has increased significantly. This has put pressure on pension plans and personal savings to provide retirees with adequate income throughout retirement.
As shown in Chart 6.5, Ontario men at age 65 can currently expect to live another 19 years. It is projected that, by 2035, Ontario men aged 65 will have, on average, 23 more years to live. For Ontario women aged 65, life expectancy is currently 22 more years and is projected to rise to 25 years by 2035. While these projections are averages, a significant portion of future retirees will live well beyond the average.
Increasing longevity in the future means that people will need to accumulate even more savings during their working years to finance additional years of retirement.
Middle-income earners and younger workers have been identified as being more vulnerable to undersaving.
Middle-income earners represent a substantial share of workers in Ontario. For example, in 2011, about 46 per cent of all workers in Ontario had total incomes between $25,000 and $75,000.9 These workers are likely having the most trouble saving enough to ensure adequate future retirement income.
The absence of a workplace pension plan tends to leave those with middle incomes particularly vulnerable to inadequate retirement savings.10
Middle-income earners are less likely to belong to a workplace pension plan than those with higher incomes. Also, pension coverage in the private sector — where most middle-income earners are employed — tends to be lower.
For example, in 2011, only about one-quarter of private-sector workers with earnings between $25,000 and $50,000, and only about 45 per cent of private-sector workers with earnings between $50,000 and $75,000, made a contribution to a workplace pension plan or had a contribution made on their behalf. Pension coverage has also declined over time for both groups.
Middle-income earners, particularly those without workplace pension coverage, need to have a consistent approach to saving to ensure they accumulate enough wealth to provide for retirement.
However, most middle-income earners do not make contributions to RRSPs and those who do may not save enough. In 2011, only about one-third of Ontario private- and public-sector workers, including the self-employed, with incomes between $25,000 and $50,000 made an RRSP contribution. These contributors made an average contribution of $2,700. In the same year, about half of workers with incomes between $50,000 and $75,000 contributed to an RRSP, with average contributions of about $4,300. The average RRSP contribution of workers in both income groups has declined in recent years.
Middle-income workers who do not have access to workplace pension plans must rely on personal retirement savings. However, in 2011, nearly two-fifths of Ontario workers with incomes between $25,000 and $75,000 had neither contributions to a workplace pension plan, nor to an RRSP.
Many middle-income earners may also be heading into retirement with lingering debt or while financially supporting adult children who are participating in postsecondary education or transitioning to employment. These ongoing obligations will make it more difficult for middle-income earners to prepare effectively for retirement.
Most of the studies on retirement savings cited earlier in the chapter (see Chart 6.1) find that today’s younger workers are at particular risk of undersaving compared with previous cohorts at the same age. Several economic and social factors have led to different career trajectories for younger workers. These factors are contributing to this group likely being less financially prepared for eventual retirement.
The overall labour force participation rate of Ontario’s youth aged 15 to 24 has declined since the late 1980s, falling to an all-time low of 60.1 per cent in 2012 before edging up in 2013. One reason for this is that younger adults are spending more time pursuing postsecondary education. While this helps improve long-term incomes, it also means delayed entry into the labour market and potentially more student loan debt.
Also, recent economic conditions have led to higher youth unemployment rates. In 2013, the youth unemployment rate in Ontario stood at 16.1 per cent, up from 13.0 per cent in 2007. This has further delayed entry into the labour market for many recent graduates.
Once employed, younger workers experience lower pay and are less likely to have access to defined benefit workplace pension plans than were their older counterparts in the same type of employment.11 It is also anticipated that today’s younger workers will change jobs more frequently and have less standard work arrangements (e.g., contract or temporary).
These factors — later entry into the labour market, many employers during a career, limited access to pension plans, inconsistent or interrupted earnings — will make it more difficult for younger workers to accumulate adequate savings to fund their future retirement under the current retirement income system.
Analysis conducted by the Ontario Ministry of Finance shows that — aside from middle-income earners and younger workers — renters, homeowners with an outstanding mortgage, single parents, recent immigrants and those with lower levels of educational attainment are at a greater risk of having insufficient savings compared to other families with similar income levels.
Ontario is entering a period of accelerated population aging and slower labour force growth. It is projected that, by 2035, Ontario’s working-age population (age 15 to 64) will account for 60.5 per cent of the population, down from 68.6 per cent in 2013. This could contribute to a slower rate of real gross domestic product (GDP) growth in Ontario in the future.
Today, seniors account for 15 per cent of Ontario’s population; by 2035, that share is expected to have risen to 23.8 per cent. Population aging and slow labour force growth have implications for a number of areas of government expenditure, such as seniors’ benefits and health care.
Health care and other costs associated with population aging will likely accelerate in the 2020s as baby boomers enter their seventies in large numbers. At the same time, those without sufficient income from pensions or personal savings will be forced to rely to a greater degree on government programs and services. This would compound the pressure on government spending.
Inadequate retirement savings will put pressures on federal and provincial resources. Specifically, there could be even higher expenditures on seniors’ benefits, such as the federal OAS and GIS, Ontario’s GAINS programs, as well as services such as long-term care, and community and social services, all primarily funded by the Province.
Population aging and slow labour force growth over the next few decades, combined with potentially lower incomes among retirees, would likely have a negative impact on the distribution of wealth and income between generations.
If a significant portion of future retirees do not have adequate incomes, younger cohorts will bear the cost burden, either through higher taxes to support programs for seniors or through direct financial support of older family members. A decline in living standards for older members of society has the potential to put overall downward pressure on the living standards of the working population.
Inadequate retirement savings today could also work to increase long-term income inequality. As discussed previously, middle-income earners are facing the greatest risk of undersaving for retirement, and the risk appears to be growing over time. Inadequate saving could lead to a drop in living standards for many middle-income earners in retirement, pushing some into low-income categories.
By contrast, high-income earners are better able to accumulate assets and are generally able to devote more resources to retirement saving and planning. This means that their likelihood of accumulating significant wealth over the longer term is much greater than that of middle-income earners.
A greater divergence in future retirement incomes could mean worsening income inequality among seniors.
In addition to ensuring that future retirees have sufficient income, improving retirement savings now would have important long-term economic benefits.
The public debate surrounding retirement readiness has often focused on concerns about the short-term impact of higher mandatory savings on the economy. For example, some have opposed an enhancement to the CPP because they are concerned about the shared responsibility of employers in this program, especially when some businesses are facing challenging economic conditions. There is also concern about the potential impact on jobs and the economy resulting from increased CPP contributions.
However, a notice period and an adequate phase-in of the enhanced contribution rate would moderate any immediate negative effect on the economy by giving businesses and workers time to adjust. Also, monetary policy may further offset any short-term negative effects.
Over the longer term, higher retirement savings would have a positive impact on the Ontario and national economies. Higher retirement savings by households would lead to an increase in the national saving rate, thereby contributing to higher investment and stronger economic growth over the long term.12
More savings among households now would mean more capital being available for investment, such as in machinery, equipment and infrastructure. Increased investment would result in higher productivity, leading to stronger economic growth and job creation. In turn, this would contribute to higher living standards in Ontario for both the working population and retirees.
Greater retirement savings could also help rebalance household investment towards financial assets (such as those owned by pension plans) and away from residential housing.
Higher savings today would also mean greater incomes and consumption in the future, resulting in a higher quality of life for future retirees and less reliance on government programs and services. Also, more wealth in the hands of future seniors would help families and the Ontario economy better cope with population aging. This could help avoid the need for higher taxes on future workers and reduce the need for intergenerational transfers from workers to retirees.
As described previously, the size of the labour force relative to the population is expected to shrink over the coming decades. The longer today’s workers delay saving more and building up wealth for the future, the greater the challenge will be for the government and all Ontarians.
Efforts to improve retirement savings should be accompanied by policies that encourage better labour market outcomes, as they also have a positive effect on overall savings and retirement preparedness.
Planning well for retirement usually means a long-term, consistent approach to saving that can be difficult to maintain. The challenge is much greater for those who do not have access to a workplace pension plan and must rely on their own savings to carry them through retirement.
The retail market aimed at retirement savings is large, with many service providers, products and strategies from which to choose. Individual investors must be able to effectively navigate the options and have a firm grasp of how various factors (e.g., transaction costs, management fees and taxation) impact their overall long-term rate of return. Those with higher incomes can obtain
advice from professionals to assist with long-term planning. But many people lack the resources for this and must rely on their own judgment or recommendations from the media.
Better financial literacy at younger ages, including an understanding of budgeting, long-term approaches to savings, and the impact of taxes and fees on accumulated savings, would help people plan better for retirement and ensure more consistent household saving over the long term.
To help individuals make informed savings and investment choices, the Ontario government is promoting financial literacy through organizations such as the Financial Services Commission of Ontario, the Ontario Securities Commission (OSC) and the Investor Education Fund (IEF), a non-profit organization established by the OSC.
The IEF website has the most popular financial education material of its kind in Canada. Its consumer-focused content provides unique tools that give Ontario investors the information they need to make better decisions about retirement, education savings, investing, fees and debt repayments.
Increasing lifespans and better health at older ages mean opportunities for greater labour force participation among older workers if they so choose. Working longer provides households with earnings for more years, alleviating some of the need for retirement savings.
There is evidence that many seniors are choosing to stay in the workforce longer. The average age of retirement in Ontario has increased over the last decade by about three years from age 61 in 2002 to age 64 in 2013. Also, between 1998 and 2013, the labour force participation rate of those aged 65 to 69 has more than doubled from 12.5 to 27 per cent.13
Policies that would help older workers remain in the labour force voluntarily for longer periods include a gradual reduction of work time while still accruing pension benefits; more flexible work schedules, such as more part-time options; more investment by employers in lifelong learning; and promoting the health and well-being of all workers in the workplace.
Better employment opportunities for young workers would help facilitate better and more consistent retirement savings over the course of a career, either through access to workplace pension plans or greater contributions to voluntary savings vehicles such as RRSPs. Better employment opportunities at earlier ages may also lead to higher CPP benefits in retirement.
The Province is investing in initiatives, such as the Youth Jobs Strategy, to create better job opportunities for younger workers.
Ontario is committed to enhancing and improving retirement income security so that today’s workers are better prepared for the retirement phase of their lives.
The 2013 Ontario Economic Outlook and Fiscal Review announced a three-pronged strategy to strengthen the retirement income system for Ontarians without workplace pension plans, Ontarians with self-directed retirement savings, and Ontarians with defined benefit pension plans.
For Ontarians without workplace pension plans, the government is committed to developing innovative pension models to promote increased retirement savings. For Ontarians with self-directed retirement savings, Ontario is working to improve the efficiency and stability of capital markets to help investors work towards their financial goals and to provide the tools to encourage informed decision-making about financial savings. The government is also continuing to work with employers and employees to enhance the sustainability of defined benefit pension plans.
Part of the government’s strategy for Ontarians without workplace pension plans also included a strong commitment to securing agreement among provinces and the federal government to enhance the CPP.
The CPP is an efficient and effective mandatory public pension program, with contributions shared equally by employers and employees. It provides Canadians with a secure pension that is predictable, indexed to inflation and paid for life. It also provides survivor benefits.
Because the CPP is fully portable, it allows workers who change jobs frequently (e.g., younger workers) to have ongoing pension coverage. It also supports a gradual transition to retirement by allowing older workers to claim benefits while continuing to work and accruing further benefits. And it covers virtually all types of employment, including self-employment. These features mean that the CPP, by design, supports a modern and mobile labour force.
However, the modest nature of the CPP prevents it from providing effective income replacement in retirement, especially for middle-income earners who rely on it most. Enhancing the CPP is one of the most effective ways to ensure workers, and especially middle-income earners, have more adequate retirement income.
At this time, it appears unlikely that an agreement to enhance the CPP can be reached. But Ontario remains committed to improving the retirement income security of workers. Therefore, the Province is moving ahead with a made-in-Ontario plan. Ontario is committed to helping workers, particularly middle-income earners, maintain a comparable standard of living when they retire.
With input from former Prime Minister Paul Martin, leading pension experts, and participants from other provinces, the Province is currently examining the possible structure, feasibility, costs and benefits of a made-in-Ontario plan.
1 In a defined benefit plan, benefits at retirement are based on a predetermined formula incorporating average earnings and years of service. In a defined contribution plan, benefits at retirement are based on accumulated contributions and investment returns.
2 When the self-employed are excluded from the calculation, the rate of pension coverage among employees was about 40 per cent in 2012, down from 49 per cent in the early 1990s.
3 Statistics Canada, “National Balance Sheet Accounts.”
4 Certified General Accountants, “Money Talks: Emphasizing Wealth in Household Finances,” (2013), 17.
5 R. Guay and L. Allaire Jean, “Long-Term Returns: A Reality Check for Pension Funds and Retirement Savings,” C.D. Howe Institute, Commentary 395, (2013).
6 OECD, “Pensions at a Glance 2013: Canada,” (2013), 2.
7 Employment and Social Development Canada. Reflects CPP average benefit payment as of November 2013.
8 U.S. Social Security Administration website.
9 Includes tax filers between the ages of 15 and 65 with earnings from employment and/or self-employment.
10 Analysis by the Ontario Ministry of Finance suggests that middle-income households with no workplace pension coverage are much more likely than those with pensions to experience a decline in living standards once they retire.
11 P. Gougeon, “Shifting Pensions,” Perspectives, Statistics Canada, (May 2009).
12 Evidence over the past several decades for advanced economies suggests that higher domestic saving rates are highly correlated with domestic investment rates. See forthcoming: D. Dodge and R. Dion, “Macroeconomic Aspects of Retirement Savings,” (Spring 2014).
13 Statistics Canada.
This chart shows the results of six selected studies by academics, research institutes and financial institutions on the adequacy of retirement savings in Canada. Selected results from these studies indicate a low of 19 per cent to a high of 50 per cent of households are likely undersaving for retirement.
About 34 per cent of Ontario’s workforce belonged to a workplace pension plan in 2012. About 25 per cent of workers were covered by a defined benefit plan and 9 per cent were either part of a defined contribution plan or some other type of plan. About 66 per cent of working Ontarians did not have workplace pension plan coverage in 2012.
Given a 2.4 per cent management fee (management expense ratio or MER), the value of those savings after a 40-year horizon would be $434,872. With a low 1 per cent fee, the value of those same savings would be $605,689 after 40 years. Under a no-fee scenario, the value of those same savings over the same period would be $784,630.
All case examples assume that pre-retirement income is constant in real terms over a 40-year career. An individual with pre-retirement income of $20,000 will meet their 70 per cent replacement target of $14,000 through CPP, OAS and GIS benefits and does not face a potential savings gap. An individual with pre-retirement income of $40,000 would need an additional $11,795 annually over and above benefits provided by OAS and CPP to meet a 70 per cent income replacement target. An individual with pre-retirement income of $75,000 would require an additional $33,329 to meet this target.
Life expectancy has increased steadily since the late 1970s. In 1979, Ontario males could expect to live another 14 years, compared to another 19 years for females. By 2011, this had increased to 19 additional years expected for males and 22 additional years expected for females. Projections show that this trend will continue. By 2035, life expectancy at age 65 is projected to rise to 25 years for females and 23 years for males.