A steep decline in savings rates combined with scaled back company pension plans could spell a sharp decline in retirement living standards for millions of Canadians, a new report from one of the country’s big banks warned Wednesday.
“A growing gap will leave close to six million Canadians facing a more than 20 per cent drop in living standards as they leave the workforce,” economists from the Canadian Imperial Bank of Commerce said, “even accounting for savings on some expenditures that retirement brings.”
CIBC says savings behaviour looks to have “fallen off a cliff” since the 1980s. Though habits improved following the recession, bouncing off lows seen during the boom years of the mid-2000s, the average amount saved by people each year continues to hover in the low single-digits compared with rates of 15 and 20 per cent a few decades ago.
The lack of savings, especially among younger cohorts in the workforce, will amount to a “steep decline” in living standards during retirement years, the study said.
A day earlier during a speech in Fredricton, CIBC’s chief executive Gerry McCaughey, said the most promising solution is to overhaul the Canada Pension Plan.
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The executive proposed to allow individuals to make voluntary contributions above what is automatically taken off their pay-cheques. Once deposited with the CPP, the funds wouldn’t be accessible again until retirement age.
There are different reasons for the declines seen since the late 80’s. To start, lower- to middle-income families simply cannot afford as much as they once did, with every dollar having to stretch further, making saving more difficult.
For higher income earners – like middle aged workers in their prime saving years – lower returns on investments because of the ultra low interest rate environment and volatile stock markets have hit at savings, the report said.
Pension plans, another “key slice of the retirement pie,” have also been pared back in recent years both in the number of workers being enrolled and in the benefits they provide after retirement, CIBC noted.
If trends continue, some 5.8 million workers born between the late 1960s and through the 1980s will see their living standards drop 20% or more in their post-work years.
In contrast, those who have left the workforce in recent years or plan to over the next few years are on average, in much better shape.
“The bottom line is that it wasn’t just good fortune,” Benjamin Tal and Avery Shenfeld, the report’s authors and senior economists at the bank, said.
“Savings rates were substantially higher, private pension plans were more comprehensive and the public system, through CPP, GIS and OAS filled in the remaining gaps.”
Ottawa is moving now to address the matter. So-called Pooled Registered Pension Plans could be permitted to be sold by banks and insurers in the coming years, products that act as a kind of personal pension program for individual workers.
Finance Minister Jim Flaherty has also said he is looking for ways to expand the CPP.
“To some extent, the fact that the problem is more severe for those who are now in their early working years is a blessing,” the bank said. “They have time to address these future shortfalls with shifts in savings, pensions or public policies.”
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