No single proposal to fix Canada's retirement savings headache, such as expanding the Canada Pension Plan or increasing retirement age, will be enough, a new study says.
Policy makers would do much more to alleviate the problem of Canadians having enough to live on in retirement years, if they were to make a series of minor changes to various aspects of the retirement system, concludes a new report by McKinsey & Co.
It comes as Ottawa is being lobbied by various interest groups that are strongly backing one proposal, such as the creation of pooled registered pension plans, over others. But the report, which is to be released Wednesday, suggests there is no single solution to the problem.
Pushing any one proposal too far could cause some people to save too much for retirement while barely helping some people whose savings aren't up to snuff, the report says. A number of small, targeted measures would be more effective, it says.
"If you use only one lever, some households might be helped [while]others [are]forced to over-save …" said Fabrice Morin, one of the authors. "Using multiple levers in an incremental manner appears to be more effective than using only one lever."
The report does not specify which type of levers should be used. In general, they could include measures to increase workplace savings, to increase individual savings or to encourage people to work longer.
The report adds to previous research suggesting that Canadians are overly confident about their retirement savings, even though a large percentage of Canadians face a big drop in income once they retire. The stock market has offered limited returns since its peak 12 years ago, hurting the returns of both pension funds and individuals' savings, the report notes.
The share of the population over age the age of 65 is growing, from 11 per cent in 1990 to 22 per cent in 2030. Life expectancy has increased by more than three years in the past 30 years; the average age of people entering the work force has increased more than a year; and the average retirement age has decreased by more than two years. Add it all up, and the average ratio of years spent in retirement compared with years spent working has grown from 36 per cent in 1980 to 53 per cent today.
McKinsey surveyed more than 10,000 Canadian households and found that most Canadians are well-prepared for their golden years. "However, close to a quarter of households are not on track to generate a retirement income sufficient to maintain their standard of living when they move out of the work force," the report says.
"The share of households that are not on track varies from as little as 4 per cent for the lower income and higher-age cohort to as much as 41 per cent for the higher income and higher-age cohort," it says.
On average, it found that 23 per cent of Canadians will have to significantly adjust their standard of living or delay their retirement if they continue on the same savings path.
To be conservative, the authors did not include savings that Canadians hold in their homes or private companies, but said that adding in those additional forms of savings would not increase the portion of people who are well-prepared by much.
The results suggest that only 4 per cent of those in the oldest group with the lowest income are not on track, but that's because basic government benefits – Old Age Security and the Guaranteed Income Supplement, the so-called Pillar I of benefits – go further toward maintaining their standard of living.
In the middle-aged, middle-income group, 21 per cent of households were on track to maintain their standard of living, the report says. "The primary challenge facing these households is the clawback of Pillar I benefits," the report says. "For some households in this segment, Pillar I benefits are reduced by $0.50 for every $1 of retirement income they draw from non-public sources."