Macroeconomic trends such as longer lives, a lack of access to pensions and retirement supports, a low-growth environment, and persistent lack of financial literacy and trust in financial markets are creating a significant retirement savings gap between what people require in retirement and what they’ve actually saved.
This is a global issue. But in Canada alone, this deficit has already reached $2.5 trillion, according to a report published by Mercer in July. By 2050, it’s expected to reach $13.4 trillion.
These issues are compounded by local trends. In Canada, that includes an increase in self-employment, leaving more workers without access to employer-sponsored savings plans. By 2025, predictions suggest approximately 40 per cent of the Canadian workforce will be temporary or contingent.
This is a thorny problem. It can only be resolved through bold, co-ordinated action and partnership between the public and private sector. Here are four ideas that could go a long way towards meeting these challenges:
- Spur a revolution in financial fitness:
Like exercise, saving money is an exercise in delayed gratification and can be painful in the short term. But that pain can be mitigated. Similar to the way in which devices like the Fitbit have made fitness into a more engaging and rewarding experience in the short term, the financial services industry and employers can provide engaging and useful tools to track financial progress in real time.
- Help people know what good looks like:
The responsibility for financial outcomes is increasingly being shifted to individuals, with employers scaling back defined benefit commitments. But individuals are ill-equipped to make these decisions on their own. Employers and governments, by contrast, are ideally placed to help people understand what constitutes good savings products and wise financial decisions. This isn’t limited simply to educational programs: individuals must also have the tools they need to properly assess financial products and achieve financial success.
- Design smart systems to help ensure adequate saving:
Individual financial decisions are influenced by multiple factors. For example, immediate short-term concerns may pre-empt longer-term financial concerns, leaving them unaddressed. But there are ways for both employers and governments to encourage sound financial behaviours. For example, the best global pension systems make contribution compulsory. In addition, systems can be designed to prohibit immediate withdrawal of all pension money, instead requiring pensioners to take it as lifetime annual income.
Governments and employers must ask if they’re encouraging individuals to save enough and in the right ways. In Canada, we took one positive step forward by enhancing the Canada Pension Plan in 2016. But the CPP is only one leg of the three-legged stool of Canadian retirement savings. The other two legs — employer-sponsored arrangements and personal savings — must be strengthened as well.
Employers should follow the federal government’s lead and proactively examine how their benefits systems are equipped to help their workforce become financially prepared for retirement.
- Redefine work and retirement:
People are living longer than ever and, coupled with increasing flexibility in work options, that means work and retirement don’t mean what they did in the era following the Second World War.
How people choose to work over time and in different stages of their lives is evolving. For example, possibilities later in life include working with a reduced schedule or in a different capacity. But younger workers, with longer earning horizons, will also see their options open up. They may choose to take time off to care for children or family knowing that they have many years to offset those choices.
The challenges that demographic pressures pose to 21st-century societies are immense but they can be overcome. Whether an organization is large or small, it owes it to its employees to take a hard look at how its retirement benefits packages are structured. By doing so, organizations will ensure their workforce is financially fit for the future.
Louis Gagnon is chief executive officer of Mercer Canada.