Future retirees may face "steep decline" in living standards

Millions of Canadians may face a “steep decline” in living standards once they retire, according to a report by the deputy chief economist at CIBC. Benjamin Tal says that dire stats indicate that a change in the retirement income system is necessary. While a portion of Canadians close to 65 “are on a path to the retirement of their dreams,” those who are younger and those in middle-income brackets are not, according to Tal. The report notes that in total, about 5.8 million working age Canadians will see a more than 20% drop in living standards post-retirement. With lowered costs of living factored in, Canadians born during WWII and baby boomers will see nearly 100% of their pre-retirement income—meaning their standard of living will be unaffected. However, the report states that the children of baby boomers—the millennial generation—will be much less fortunate due to reduced private pension coverage and lower savings rates. There has been a 23% decline in private defined benefit pension plan coverage in 10 years (from 2001 to 2011), as workplace pensions are not as widespread as they once were. Also, low bank interest rates mean that Canadians who are trying to save for retirement in the next few decades are not building their wealth as easily as their parents did. Finally, high personal debt levels from larger mortgage payments and student loans are also distracting younger Canadians from focusing on saving for their golden years. A 2013 BMO study revealed that 46% of young Canadians are more concerned about paying down debt than saving for their retirement. These factors all contribute to why nearly 60% of Canadians born between 1985 and 1989 and almost half of those born in the late 1960s will end up with a below 80% retirement income, according to Tal. In fact, those born in the 1980s will see 70% of their current income once they retire, meaning they will face a 30% drop in living standards. In contrast, an average 70-year-old today has enough income to maintain the standard of living they enjoyed before retirement, having benefited from RRSPs, OAS and workplace pensions, writes Tal in the report. These options still exist for younger Canadians—it’s just up to them to actually take advantage of the services. A recent study by TD found that 47% of Canadians polled aren’t contributing to a Registered Savings Plan at all. That’s why for future retirees, the government is considering the option of increased mandatory or voluntary contributions to the CPP. The change means Canadians could be forced to save for retirement and may receive higher pay-outs when they enter their golden years. Whether the proposed changes are approved or not, an adjustment to the current system needs to happen, says Tal. “The time to act is now.”