How the coronavirus pandemic could change the way we think about retirement in Canada

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Over the past few decades, the concept of retirement has grown increasingly more sophisticated. Canadians preparing for retirement have been able to contemplate a variety of highly personalized approaches—from early (or even very early) retirement; to active, phased, or working retirement; and more.

All of these variations on the retirement theme have been built on a relatively steady set of economic conditions and assumptions: that housing and financial markets will remain stable, the economy will continue to function, and Canadians will continue to pay the Canada Pension Plan premiums and income taxes that keep CPP and Old Age Security payments flowing.

But what happens to retirement when the world is grappling with a global pandemic and the resulting worldwide economic fallout? Here are three ways the coronavirus could reshape retirement in Canada.

The movement towards “early retirement” will dwindle as employment security drops—and the average retirement age creeps up

Many of these newer approaches to retirement assume that if retirement goes wrong, retirees have fallbacks to rescue their finances, whether that’s returning to paid employment, harvesting home equity, or counting on continued asset growth to help meet budget shortfalls.

But if paid employment is suddenly in short supply, home values fall and stock markets tumble —such as the result of a global pandemic—these backup plans may not be available. As a result, more Canadians may opt to remain in their paid employment (if they’re employed) longer. That employment income will allow them to cover living expenses as well as putting aside savings for retirement, when it comes.

For those who are still several years away from being done with work: What if you don’t have a job today to provide the income you need to save for your future retirement? In that case, your retirement date may be pushed even further out.

For the foreseeable future, if you’re unemployed, the types of work you’re likely to find may be shorter-term contract, freelance and “gig” work (which StatsCan says is increasing sharply in Canada).

These nontraditional work arrangements don’t provide the security and stability of traditional employment, and typically leave workers ineligible for income supports such as Employment Insurance—meaning, the importance of building your personal financial safety net is more important than ever. They also don’t come with an employer-sponsored pension plan to help set aside funds for retirement. Finally, self-employed workers, independent contractors and gig workers also don’t benefit from employer contributions to CPP, but are responsible for both sides of the required CPP premiums, cutting into the income available for personal retirement savings.

On the other hand, however, opportunities for remote work may accelerate as employers and employees alike master working from home through the pandemic. A move towards more remote work could also allow workers with jobs in the city to move from higher-cost areas to areas with lower costs of living, reducing financial stress for the working-age population and allowing them to set aside more funds for retirement.

In general, however, today’s workers are likely to be facing more challenges in saving for retirement than in a pre-COVID world, meaning the average age of retirement will likely rise.

Although the cost of borrowing will remain low, fewer retirees will carry debt into retirement as Canadians seek to trim spending across the board

Over the last decade, Canadians have piled on record levels of household debt, and the over-65 crowd hasn’t been immune. StatsCan tells us that, compared to 1999, by 2016 senior families had almost doubled their mortgage debt, while non-mortgage consumer debt, such as loans and credit cards, was up by more than 50%.

The conventional rationale for borrowing and retaining debt later in life has been that, with interest rates so low, and stock and housing market returns so strong, there’s little impetus to pay off your mortgage or line of credit.

Now, even though interest rates have dropped even lower, the declines in stock markets associated with the pandemic mean many households will seek to shed risk, including by reducing debt. That is, even these new, lower interest rates may not be sufficient to motivate continued borrowing. (Reverse mortgages, however, may see continued growth.)

The economic fallout from COVID-19 also means that many highly indebted Canadians will need to take a fresh look at the spending that got them where they are, because the security of the income or assets they expected to use to retire the debt has diminished or even disappeared.

For many, this could mean reviewing spending patterns to see where expenses can be cut. For some, this could also mean making hard decisions to restructure household finances, whether that’s cutting out spending on vacations or other extras, putting off planned expenditures (house renos, buying a second property, or planning a return to school), or making other lifestyle changes, such as downsizing a primary residence to reduce or eliminate their mortgage.

These hard decisions may also mean entering into a consumer proposal or bankruptcy proceedings to resolve outstanding debt. (Some commenters are suggesting Canadians will face successive waves of consumer insolvencies as the impact of the COVID-19 pandemic rolls through the economy.)

Amidst the dark clouds of COVID-19, the good news is that the pandemic is spurring many households to discover how much of their monthly income has been spent on discretionary purchases (such as eating out) and work commuting (gas, parking, insurance, and maintenance)—expenses which they may be able to whittle down over the long term to reduce overall spending.

The allure of guaranteed income will rise, increasing the appeal of income annuities

In the midst of falling stock markets, the allure of retirement income that’s backed by the guarantee of a strong counterparty, such as the Canada Pension Plan, is hard to deny. When other sources of financial security flounder, Canadians become more attuned to the safety of their CPP and Old Age Security (OAS) retirement benefits, and to the importance of securing a base level of retirement income that isn’t subject to market risk.

The good news is that workers’ CPP premiums are paid into a separate fund managed by an independent advisory board whose president has assured Canadians that their contributions are safe even as Canadians’ personal investments plummeted due to COVID-19 market turbulence. The CPP failing to make the promised payouts to retirees “is one thing [Canadians] should take off their list to worry about,” says CPP Investment Board president Mark Machin, as the CPP fund “was designed to weather these types of significant market downturns once in a while.”

The Old Age Security benefit, for its part, is funded from general government revenues (the largest share—about half—of which comes from personal income tax). While the OAS benefit isn’t guaranteed like the CPP is, some form of old-age pension has been in place since 1927 in Canada, which suggests that government income programs can weather any storm.

If you’re planning for retirement during a global pandemic, securing your sources of retirement income becomes a new priority when an uncertain horizon is revealed. Many Canadians are hoping to retire on more than what CPP and OAS will provide, however. As a result, in the search for stable income, life annuities might gain new prominence. A life annuity is a financial product, sold by an insurance company, that pays a guaranteed monthly income to the annuitant(s) for as long as they are alive—sort of like a “DIY version” of a defined-benefit pension.

While academics, actuaries and economists have long sung the praises of the income annuity as a way to provide secure retirement income, retirees have never adopted the annuity solution en masse. But when a retiree’s other sources of income—housing wealth, assets held in the stock market via ETFs and mutual funds, and employment—disappear just as interest rates hit an effective rate of zero with no signs of an upturn, the conditions may be ripe for the income annuity to shine as a source of retirement income that’s backed by a well-capitalized life insurance company.

Consider, for example, how the Spanish Flu pandemic shaped the life insurance industry in North America. In 1918, when a young father or mother died of the Spanish Flu and an insurance company then paid out a death benefit, nobody questioned the need for, or value of, life insurance, writes finance prof Moshe Milevsky. That century-old pandemic “not only made the death of a breadwinner salient, it also legitimized its economic and financial antidote: life insurance.”

Today, the global pandemic arising from the COVID-19 coronavirus disease might do the same for annuities issued by today’s life insurance companies.

Re-examining unwritten assumptions

Today, many of the unwritten assumptions that have underpinned our ideas about retirement are being re-examined in the search for strategies to adapt to less certainty. In re-evaluating where we are now, Canadians need to re-think the risk in their approaches to retirement savings, the operating assumptions that have led to high consumer debt, and the value of guaranteed income once you’ve left the world of work. Retirement is about timing, and when the times change, we’re smart to look at what is revealed.

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