Mixed views on retirement readiness

Fabrice Morin, a partner at McKinsey & Company, presented one view by sharing the results of 2014 research conducted by the consulting firm regarding the subject of Canadians’ retirement readiness.

“We started this work with a debate that was going on and a perception across the country that there’s a widespread retirement crisis in Canada,” said Morin. “[The] reality is not perfect but different — a reality that says 83% of Canadians are on track for retirement.”

McKinsey used its retirement readiness index, which is based on the ratio of funds available for consumption in retirement compared to pre-retirement expenditures. The calculation purposefully avoids the traditional wisdom that retirees require 70% of their pre-retirement income in retirement, as income replacement is often unrelated to expenditure replacement, said Morin.

Individuals have expenses during their work lives that do not need to be replaced in retirement such as mortgages, work-related expenses and saving for retirement, he explains.

Morin’s research found that most low-income households are ready for retirement, with 93% being on track, thanks to government assistance programs such as the Old Age Security (OAS), the Guaranteed Income Supplement (GIS) and Canada Pension Plan or Quebec Pension Plan assets.

Slightly more than three-quarters (77%) of mid-to-high income households are on track for retirement. Conventional wisdom does apply here as those with an employer-provided pension plan are more likely to be ready for retirement (84%) than those without any type of workplace plan (63%). Canadians who will not be ready for retirement are either not contributing enough to their workplace plan or they are simply not saving enough, said Morin.

Glen Hodgson, senior vice president and chief economist of the Conference Board of Canada, used Canada’s current economic and demographical situation to provide an alternative view.

Canadian economic growth has been holding steady at 2% for the last five years but our expenses are increasing by 3%, said Hodgson.

“Where that matters to us as a country [is] we’ve gotten used to funding health care, education, infrastructure and retirement,” he explained.

And Canada is falling victim to issues faced by many industrialized countries, such as an aging population, slowing workforce growth and heavier demands on the pension system.

After 2020, labour force growth in Canada will fall below 1%, according to Hodgson. This is a problem as the country’s job creation has been growing at about 1%. If this continues, there will not be enough individuals to fill those new positions.

And it will have a notable impact on pension availability for Canadians.

“That’s a big challenge because it reduces sources that are available for pension plans and to pay for public services, which will drive our economy forward,” Hodgson said.

The tie-breaking opinion went to Jim Keohane, president and CEO of Healthcare of Ontario Pension Plan, who stated multiple reasons as to why the retirement picture is not as rosy as Morin indicates.

Among those reasons are that low-interest rates are making it more challenging for Canadians to save; people are living longer and may not be saving enough for that increased life span; and the higher numbers of individuals leaving the workforce to retire will put significant stress on OAS and GIS programs.

However, the most problematic trend is the move from defined benefit pension plans to defined contribution plans in the workplace.

“Shifting people into defined contribution plans puts them into the position where they have to make decisions about their retirement savings plans that they’re simply not equipped to make,” said Keohane. “What you’ll find is most people who aren’t forced to save don’t save.”