An update on our retirement crisis

A little over two years ago, Daniel Kahneman wrote a seminal book on human behaviour and perceptions titled Thinking, Fast and Slow. In the book, Kahneman makes the following observation, “A reliable way to make people believe in falsehoods is frequent repetition because familiarity is not easily distinguished from truth.”

I would submit that this phenomenon is the basis for the widespread belief that Canada is suffering a national retirement crisis. The frequent repetition in the media that Canadians are not preparing themselves adequately for retirement certainly has to colour our thinking on the matter.

The obvious rejoinder is that the retirement crisis is based on facts rather than perceptions. One of the key pieces of hard evidence to this end is the dismally low percentage of Canadians who contribute to RRSPs in a given year. Statistics Canada reported recently that just 24% of tax filers made an RRSP contribution in the 2012 tax year. That one statistic alone apparently settles the debate and suggests we redouble our efforts to find remedies.

But not so fast. What if 90% of Canadians rather than 24% were making substantial provision for retirement each year? Would we still be so certain that we have a pension coverage problem? Would the expansion of the Canada Pension Plan (CPP) be as high a priority, or would this new fact make us pause to reassess the urgency of the entire pension reform debate?

This question is not as hypothetical as it appears. While it’s true that just one-quarter of tax filers contribute to an RRSP in a given year, most tax filers have no reason to contribute. With a total population of 35 million including children, it may be surprising to learn that Canada has about 25 million tax filers. Included among tax filers are more than five million seniors who are past the RRSP accumulation phase. Also included are several million young Canadians who file a tax return because they had part-time or seasonal jobs. Also included are millions of low-income Canadians who would be well-advised to steer clear of RRSPs since the income from RRSPs in their retirement would reduce their Guaranteed Income Supplement. The number of tax filers who should be making contributions to RRSPs is a smallish fraction of the 25 million total.

So much for the denominator. What about the numerator (the number of tax filers who actually do contribute to RRSPs)? That number also needs to be modified. We should augment it by adding in people who contribute only to tax-free savings accounts (TFSAs) and also adding in employees who participate in pension plans but not in RRSPs or TFSAs.

When we do the math—and admittedly a number of approximations are needed in the absence of robust data—we find that the percentage of people who should be saving in an RRSP, pension plan or TFSA in a given year is over 80%, not 24%. And this still excludes the literally millions of baby boomers who will be bailed out (rightly or wrongly) by significant inheritances that will not show up in any pension coverage statistics.

By the way, the average RRSP contribution that was made in 2012 was almost exactly $6,000 ($5,999 according to Statistics Canada). Not bad, you might say, but not enough to provide real retirement security. Before coming to that conclusion, consider the following three facts.

First, of the nearly six million Canadians who contributed to an RRSP in 2012, more than two million also participated in a pension plan. Their RRSP contributions would have been lower, so the remaining RRSP contributors must have put in more than $6,000, on average.

Second, millions of RRSP contributors also put money into a TFSA. As of 2011, 8.2 million Canadians had a TFSA and based on the year-by-year growth in the number of accounts, there are probably more than 10 million people that now have TFSAs.

Finally, the average Canadian wage is just over $50,000, so setting aside $6,000 (or more) for retirement is quite a substantial sum.

Is all this to say we shouldn’t be expanding the CPP or creating pooled registered pension plans or taking other steps to improve the general state of preparation for retirement? Of course not. The retirement income system is a work in progress, and we need to continue improving it. It does suggest, however, that retirement coverage is not the burning platform it is made out to be. Hence, we would do well to dial down the rhetoric.

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