Younger Canadians may have higher debt loads and lower incomes than those who are middle-aged, but they have a higher propensity to put aside money for retirement, according to a new report from CIBC World Markets Inc.

CIBC’s latest Consumer Watch report reveals that Canadians are beginning to increase their RRSP contributions after largely standing on the sidelines during last year’s recession, with women and younger investors leading the way. Higher disposable incomes, rising savings rates, renewed confidence in the stock market and lack of confidence in government and corporate retirement plans are factors leading Canadians back into mutual funds and other RRSP plans, says Benjamin Tal, senior economist and author of the report.

“The impressive improvement in the stock market since March 2009 almost guarantees that the current RRSP season will fare better this time around, with more money likely to find its way into income and equity mutual funds,” he says.

The return to RRSP investments will mark a significant change from last year, when the number of Canadians who contributed to their RRSP fell by 1.8%. Even those who managed to take advantage of the retirement investment vehicle ended up cutting their average contribution by 0.4%, resulting in an overall decline in total RRSP contributions of 2.2% for 2008 – the largest drop in six years.

In 2008, approximately 24% of taxpayers aged 24-65 made a contribution to their RRSP, with the distribution clearly skewed towards wealthier and older people. In absolute terms, the RRSP participation rate among Canadians aged 45-55 is much higher than among the 25-35 age group, largely since older people, on average, earn much more than younger people, and thus have more capacity to contribute.

But during a year in which contributions dropped, participation among younger investors increased. When comparing contribution rates among different age groups with the same income level, the CIBC study shows that in most cases, Canadians aged 25-35 have a higher propensity to contribute to their RRSPs than Canadians aged 45 to 65.

“If they have the means to do so, younger Canadians are more inclined to contribute to RRSPs than their older counterparts,” explains Tal.

RRSPs to gain importance in the retirement landscape

Tal believes that this trend reflects the fact that younger generations are learning to rely more on their own savings than pension plans to fund their retirement.

“Young people are much more cynical about the sustainability of the Canadian and Quebec pension plans, as well as private pensions,” Tal said in an interview. “They don’t believe that there will be anything else waiting for them in retirement — they’ll have to rely on themselves.”

While employer-sponsored pension plans are by far the largest component of the retirement pie, their relative importance is shrinking. Recent Statistics Canada data shows that the number of employer-sponsored registered pension plans fell from more than 18 million in 1991 to less than 10 million in 2008, and the number of employees covered by such plans has likewise declined.

“In that environment, RRSP investments will need to play an increasingly important role in the Canadian retirement landscape,” says Tal.

A vast majority of young Canadians still do not contribute to an RRSP: just 4.9% of those aged 25 to 34 contribute, compared to 12.6% of those aged 45 to 64. Low income levels and high levels of student debt are significant barriers preventing younger Canadians from saving for retirement.

“Unfortunately, many of them simply don’t have the money and they don’t contribute,” Tal says.

But he says the fact that younger Canadians are showing a higher propensity to save is encouraging. He expects this trend will help younger Canadians be better prepared for retirement, and will reshape and strengthen the RRSP market in the long term.

He points out that in the current low-interest rate environment, it takes longer to grow a portfolio of savings, which makes it important to start saving as early as possible.

“The fact that they do contribute is definitely a very encouraging sign, suggesting that they’re willing to sacrifice today’s consumption for the sake of tomorrow’s consumption,” says Tal.

Women more inclined than men to contribute to RRSPs

The CIBC report also shows that the share of female RRSP contributors surged in 2008, as women generally fared better economically during this past recession.

@page_break@The RRSP participation rate among men is still higher than women, at 53% compared to 47%, since women, on average, earn 20% less than men. But when comparing the RRSP participation rate among men and women in the same income group, the report shows that women are more inclined to contribute.

“The higher participation rate among men is not a gender issue, but an income issue,” says Tal. “The propensity of women to contribute is actually higher.”