Canadian families at the top of the income scale are now better prepared for retirement than they were 20 years ago. That’s the good news. The bad news is that families with more modest incomes have seen virtually no growth in their financial wealth since the mid-1980s.

The gap leaves many people vulnerable as they get closer to retirement, and may lead to increased inequality among seniors in the future. It also underscores the importance of the Canada and Quebec pension plans to many Canadian families.

A number of reports have looked into how well prepared individuals are for retirement, but they didn’t assess how Canadian families are doing in their preparations. In a recent report for Statistics Canada, however, René Morissette and Yuri Ostrovsky of the agency’s business and labour markets division, used a variety of sources and measures to see how pension coverage and retirement savings of Canadian families have evolved in the past 20 years.

They found that couples in the top quintile, in terms of earnings, saw substantial increases in their combined RRSP and registered pension plan contributions during the 1986-2003 period. Those in the middle quintile also saw some growth, albeit to a lesser degree. But families in the bottom quintile saw the sum of their RRSP and RPP contributions stagnate over the same period. (See right-hand chart.)

It is troubling that lower- or modest-income families are not saving any more than they did a decade or so ago, says Scott Perkin, president of the Association of Canadian Pension Management, which represents pension fund managers and their advisors. The ACPM is also concerned about the decline in defined-benefit pension coverage for the Canadian workforce, a trend that wasn’t taken into account in the StatsCan study.

Morissette and Ostrovsky say the growing gap in retirement preparations reflects increasing inequality in family earnings in the past 20 years. For instance, for couples in which the husband was aged 35 to 54, earnings in the top earnings group jumped to $170,000 in 2003 from about $123,000 in 1986, and contributions to RRSPs and RPPs went to $11,300 from $8,000 in the same time frame. For those in the bottom group, earnings stagnated at about $25,000, and average contributions to RRSPs and RPPs were about $1,200 a year at both the beginning and end of the period. (The dollar figures are adjusted for inflation.)

The study did not measure the degree to which current retirement savings will allow couples to maintain their living standard in retirement. Nor did it take into account the move away from DB RPPs to defined-contribution plans in Canada in recent years. The increase in life expectancy was not considered, either.

Still, the authors say, the report has important implications. Recent research has shown the maturation of the Canada and Quebec pension plans led to a substantial reduction in income inequality among the elderly between the early 1980s and mid-1990s.

“Part of this reduction in income inequality might be lost in subsequent years,” say the report’s authors. “This is because the growing inequality in contributions toward retirement among families could, in the absence of offsetting factors, make the distribution of family income among seniors more unequal in years to come than it currently is.”

HIGH EARNERS CONTRIBUTE

Terence Yuen, a research economist with benefits consultants Watson Wyatt Worldwide Canada in Toronto, says the findings of the study are consistent with other findings. Canadians have accumulated a great deal of unused RRSP room over the years, mainly because only a tiny portion of lower-income people contribute to RRSPs, he says. Most RRSP contributions are made by high-income individuals.

Yuen notes, however, that the wealth measure used in the StatsCan report did not include housing. The situation of some families would actually be even worse if housing were also taken into account.

“For many older people, their main form of savings is their home,” says Yuen. As a last resort, they may hope to tap into the home’s value as an additional source of financial support during retirement.

Families with many financial assets are more likely to own a home than those at the lower end of the earnings scale, he says. So, if the study had included housing, the gap between higher- and lower-income families in terms of readiness for retirement would have been even greater, especially given the rapid increase in house prices in recent years.

@page_break@Yuen also says the information about prime-age couples in the top quintile in terms of earnings shows total pension savings (which includes both personal and employer contributions) increased by about $3,000, or 20%, between 1991 and 2003; the savings of couples in the bottom quintile increased by only $100.

Yuen was shocked to see almost all the increase in savings by higher-income couples came from increases in RRSP contributions, and not from improved pension-plan contributions. In other words, he says, improved retirement readiness among the higher-income group is almost entirely due to their own savings.

“Employers have done very little to increase their pension savings over the past 10 or 15 years,” he says, noting this confirms data about declining pension coverage in the past decade or so.

As well, Yuen argues, although higher-income families appear to be setting aside more for retirement, it doesn’t mean they are preparing any better. “They’re saving more because they’re earning more,” he says. Earnings of the top quintile increased by about 40% during the 1986-03 period, which is roughly the same as the increase in their RRSP savings. In effect, he says, their saving rate is not increasing.

“For low-income families, it’s not looking very promising,” he adds. Most in the group do not own homes, are not covered by workplace pension plans and don’t have enough money to save using RRSPs. They will have to rely on public pension programs such as the CPP and old-age security in retirement.

For high-income families, he adds, “The message in this difficult environment is they have to save more on their own if they want to maintain their standard of living in retirement.”

He also says the move away from DB pension plans, in which a pension related to earnings and length of service is guaranteed, to DC plans, in which no particular pension amount is promised, will definitely affect the variability of retirement income in the Canadian population.

Perkin says the ACPM is also concerned that many members of DC plans don’t fully understand what benefits their pension plans will provide in retirement.

“There’s a huge question of education here,” he says. “And the industry will have to do a better job of educating Canadians.” IE