More than 80 per cent of Canadians aged 25 to 64 are prepared for retirement and the vast majority have a high probability of being prepared, according to a new report by business school HEC Montréal’s Retirement and Savings Institute with funding from the Global Risk Institute.
The report, which analyzed the results of a survey conducted among 17,528 Canadian households in 2018, also found average preparedness is especially high among households with earnings below the median and those covered by pension plans. On the other hand, it noted prospects are worrying for an important sub-group of upper-middle earners without retirement savings — although it suggested the recent Canada Pension Plan and Quebec Pension Plan reform will help that sub-group more than others.
The survey targeted three segments of the Canadian population: non-retired households earning less than $250,000 per year; retired households earning less than $250,000 per year; and individuals earning more than $250,000 per year. The sample for this report consisted of the 10,789 households in the first segment — respondents who are under age 65, aren’t retired and earn less than $250,000 per year. After applying various filters, 6,601 households were included in the final sample.
The report also introduced a new stochastic retirement income calculator, which the institute intends to make available to the general public in the near future. “The calculator contains several innovations with respect to what has been done in the past,” it said. “To name a few, it includes a detailed modelling of the evolution of private savings, accounting for individual and aggregate risk; taxation of savings, including capital gains; employer pensions; a realistic stochastic modelling of work income; the value of housing; and debt dynamics.”
Using the results of the survey, the researchers plotted the distribution of the retirement readiness index from 25 simulations per individual. For the sake of comparison with other studies, the report defined the retirement readiness index as the ratio of equivalent consumption in retirement to equivalent consumption before retirement, multiplied by 100. So an index of 100 means a household is projected to be able to consume the same amount in retirement as just before retirement.
Taking the average value for each individual, the researchers obtained a median average of 104.6. “This means that, on average, if they retire at the age they intend to, maintain their saving and debt payment strategies and convert all of their financial wealth into income, Canadians have net income in retirement which is higher than their pre-retirement income,” said the report.
“The share of Canadians with a [retirement readiness index] above the thresholds discussed earlier in this report is 83.8 per cent, meaning slightly more than 15 per cent of Canadians are not prepared for retirement.”
It also found that few households are in the middle of the distribution, with fewer than 6.7 per cent of households having a readiness probability between 35 per cent and 65 per cent. “One interpretation of this result is that the Canadian retirement income system protects households well against shocks, either in the labour or in the financial markets,” noted the report.
Canadians who are projected to be prepared for retirement have higher third-pillar savings, according to the report, which defined these savings as defined benefit or defined contribution pensions, as well as registered retirement savings plans and tax-free savings accounts. Unsurprisingly, they’re much more likely to be covered by a DB plan in their current job.
“The importance of third-pillar savings can be emphasized by looking at the preparedness distribution according to household income and to various third-pillar asset holdings,” said the report. “We see that low-income individuals are well covered by the public system even if they have no savings or [registered pension plan] coverage, while the group that is least prepared is that of higher-income households with no [registered pension plan] coverage or savings. In this group, only 47.5 per cent of households are on track to be ready for retirement.”
The report noted that the average retirement readiness probability is 80 per cent without the recent CPP/QPP enhancement and 83.5 per cent with it. “The readiness probability increases because of the reform from 39.4 per cent to 47.5 per cent for those earning an above-median income but who have no [registered pension plan] coverage and no savings — an eight percentage point increase. There is also a smaller increase in readiness across the board for other groups.”
As a result, the report projected that retirement preparedness will increase, in particular in the targeted group, as a result of the CPP/QPP enhancement that’s currently being implemented.
In conclusion, the report found that, probabilistically, the vast majority of Canadian households are almost certain to be prepared for retirement. A very small minority face dire prospects, while about seven per cent of households face a 35 per cent to 65 per cent probability of being prepared for retirement. Only 18 per cent of households have less than an 80 per cent chance of being prepared.