More Canadians will face a meaningful drop in their standard of living after retirement if current trends persist, warns a new report from the C.D. Howe Institute.

No single reform idea is likely to avoid this problem, the report cautions.

The report uses a simulation tool developed at Statistics Canada to project consumption before and after retirement for Canadians who have not yet reached retirement age. It finds that Canada’s retirement system has supported post-retirement consumption relatively well, especially for lower-income individuals over the past 20 years, but warns that will likely not be the case in the future. “If ongoing behavior and economic circumstances were to persist indefinitely, however, more Canadians may find maintaining their working-life consumption in retirement more difficult,” the report says.

The study estimates that while about 16% of recent retirees are in circumstances that imply a substantial reduction in consumption, current trends imply that 44% of those in the 25- to 30-year-olds range now risk “a marked reduction in their standard of living after retirement”; including “a substantial majority” of those in the two upper income quintiles.

Indeed, the report finds that among the top 20% of earners, the proportion who might not achieve 75% earnings replacement is very high, exceeding 50% for those retiring after 2025 and reaching nearly 70% for those retiring in 2050. However, the trend applies across all income groups, including the bottom 20% of workers.

“This trend is robust to differing assumptions within reasonable ranges for future real wage growth, inflation, rates of return, [pension plan] coverage and saving rates,” the report says.

It points to the fact that Old Age Security benefits, which are indexed to inflation, are projected to lag increases in earnings and the declining share of private-sector workers participating in workplace pensions, as the key factors behind this growing risk.

“These numbers are large enough to justify a conclusion that in order to maintain their standard of living in retirement, many workers may require a better balance between consumption before and after retirement,” the report says. It doesn’t recommend how to find that balance, although it does warn that “since the prospect of low replacement rates increases with each successive retirement cohort, those currently in their late 20s and early 30s have the greatest needs in this regard.”

“We also note that, since the projection results vary substantially among generations, earnings groups, and sources of income, no one reform option would likely be able to address every situation efficiently,” the report says. “Care is needed in assessing how the retirement prospects of various groups, including the time at which people cease work, are likely to change in response to various policy-reform scenarios.”

IE