Proposals to expand public pension plans are based on the notion that household savings are inadequate to maintain living standards upon retirement, but a Montreal Economic Institute report says these expansion proposals have two major methodological weaknesses.
Its report, Do Public Pension Plans Need to Be Expanded?, notes that the weakness of the studies carried out to date is that they do not take into account assets like houses and family businesses, which are popular investment vehicles for middle- and upper-class households.
“Total non-financial assets represent around 40% of what households own, including over $1.8 trillion just in terms of the estimated value of houses,” states the report. “This amount is much greater than the financial assets invested in RRSPs and TSFAs.”
It notes that not including Canadians’ real estate investments considerably underestimates their total savings and therefore their standards of living in retirement.
While the report concedes that a house isn’t the equivalent of an RRSP, households can use a reverse mortgage or choose to sell and downsize to a smaller home or rent instead of owning.
“Furthermore, by continuing to live in a house that is completely paid for, a retired household enjoys the equivalent of a housing service whose value increases its disposable income by 10% or 15% on average,” states the report. “Such a contribution is liable to profoundly alter the picture of Canadians’ preparedness for retirement.”
The report says the second methodological weakness of the insufficient savings diagnosis is considering the age of retirement as fixed at 65 years.
“On average, people in Canada retire earlier than in many other industrialized countries,” it notes. “Since this choice is voluntary, we can conclude that most Canadians think that they have saved enough when they enter retirement.”
Twelve percent of Canadians 65 and older continue to work, which has increased over the last 10 years.
“In other words, not only is the diagnosis of insufficient savings not well-founded, its consequence is neither indigence nor a draconian reduction in living standards at retirement, but rather a delay of a few years before retiring,” the report states.
It notes that the advantages of public plans are too often overvalued, whereas private savings have advantages of their own that are too often ignored or undervalued.
“The goal of the public pension plans would no longer be to ensure a minimum for everyone, but rather to guarantee to all an income sufficient to maintain their living standards, including middle- and upper-class Canadian households,” the report concludes. “These proposals all have significant costs since they would lead to a reduction in the disposable incomes of Canadian families during their working lives.”
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