Rethinking pension systems: Different international models. President and Chief Executive Officer Power Financial Corporation

Transcription

1 Rethinking pension systems: Different international models R. Jeffrey Orr President and Chief Executive Officer Power Financial Corporation July

2 Most countries face a common set of retirement-related issues Shorter lives at work and longer lives in retirement Increasing dependency ratio ratio of population aged 65 or older as a percentage of the adult population Financially indebted governments Volatile markets and low rates of interest Insufficient savings rates Rising healthcare costs 2

3 Most countries also share a common set of questions What is an adequate level of income in retirement? Who is responsible for providing retirement income among governments, employers, and individuals? What level of retirement income should be mandated versus encouraged? To what extent should one generation rely on the next? How best to manage the risks to retirement income security? 3

4 Retirement income security is the fundamental objective and pensions are only part of the solution Retirement income security Pension 4

5 Canada s retirement system ranks among the world s best, providing high levels of income in retirement... Retirement income adequacy Income of the population over 65, percent of population incomes (OECD, 2011) France Germany Canada Netherlands Japan U.S. Italy OECD Average Sweden U.K. 94.5% 91.5% 90.8% 87.0% 86.6% 86.2% 83.4% 82.4% 82.0% 72.9% Australia 69.7% 5

6 ... and delivering comparatively low levels of poverty Poverty rate of people over 65 Population over 65 with income less than 50% of median household disposable income (OECD, 2011) Netherlands Canada Sweden Germany France U.K. Italy OECD Average 2.1% 5.9% 6.2% 8.4% 8.8% 10.3% 12.8% 13.5% Japan U.S. 22.0% 22.4% Australia 26.9% 6

7 One important reason is that the value of government-provided pension benefits Canadians receive is high Value of basic, government-provided minimum retirement benefits Value relative to average earnings economy-wide (OECD, 2011) Canada Netherlands Sweden U.K. OECD Average Australia France Germany Italy Japan 32.0% 29.2% 24.8% 24.5% 24.5% 23.7% 23.3% 20.3% 20.2% 19.4% U.S. 19.0% 7

8 Yet Canada s system is also among the most sustainable in the world Sustainability of old age benefits Fiscal sustainability sub-index (CSIS Global Aging Preparedness Index, 2010) Australia Japan Canada Sweden U.S Germany U.K Italy 16 France 10 Netherlands -4 8

9 A key strength of the Canadian system is balance, with government-provided Pillar I and II programs complemented by high levels of employer-based and individual savings PILLAR DEFINITION CANADIAN PROGRAMS IN PLACE I Government-funded basic guarantee¹ OAS, GIS TOTAL ASSETS, 2010 $ billion N/A II Mandatory public retirement plan² CPP, QPP 175 III A. Voluntary group retirement plan B. Voluntary individual retirement plan Group DB & DC Plans RRSPs, RRIFs, TFSAs 825 1,075 IV Non-registered financial assets Other financial assets 1,700 Total: ~$3.8 trillion 1 Unfunded ( Pay-as-you-go ). 2 Partially funded. 9

10 In addition, a portion of the $2.3 trillion in real estate and private business assets of Canadians is also available to support retirement income PILLAR DEFINITION CANADIAN PROGRAMS IN PLACE I Government-funded basic guarantee¹ OAS, GIS TOTAL ASSETS, 2010 $ billion N/A II Mandatory public retirement plan² CPP, QPP 175 III A. Voluntary group retirement plan B. Voluntary individual retirement plan Group DB & DC Plans RRSPs, RRIFs, TFSAs 825 1,075 IV Non-registered financial assets Other financial assets 1,700 OTHER ASSETS Home equity and non-financial assets Real estate, private businesses Total: ~$3.8 trillion 2,300 Total: ~$6.1 trillion 1 Unfunded ( Pay-as-you-go ). 2 Partially funded. 10

11 A granular understanding of working-age Canadian households was established from a comprehensive survey conducted by Ipsos Reid AVAILABLE DATA SETS ON CANADIAN HOUSEHOLD FINANCES 2010 Retirement Survey 2005 Statistics Canada SFS 2008 Statistics Canada SHS Ipsos Reid CFM Revenue Canada Data Respondents ~18,000 ~5,000 ~10,000 ~12,000 All Canadians Balance sheet Registered assets Unregistered assets Home equity Business equity Debt levels Flows Savings rate Pension plan type Pension plan flows Use of advice 11

12 McKinsey & Co. developed a household-level view of retirement readiness based upon consumption using data from the Ipsos Reid survey RETIREMENT CONSUMPTION Retirement income (Pillars I-IV) Taxes in retirement Disposable retirement income Age-specific expenses Retirement consumption Retirement Readiness PRE-RETIREMENT CONSUMPTION = Index (RRI) (100% = full replacement) Pre-retirement income Taxes in preretirement Disposable preretirement income Savings Work & mortgage expenses Pre-retirement consumption 12

13 Based upon historical data, McKinsey & Co. set a minimum threshold RRI of 80% for the lowest income quintile of the population and 65% for the others Household consumption of the population born between 1924 and 1938 by income quintile in Canada (100 = Consumption at age 50-55) Q1 Q2 Q3 Q4 Q Age of household head 13

14 Overall, Canadians appear well-prepared for retirement and are on-track to replace 109% of pre-retirement consumption Average RRI score for households, average RRI in Canada B.C. Alberta Manitoba & Saskatchewan Ontario Québec Atlantic 14

15 However, averages mask significant variability in the readiness of individual households Canadian Retirement Readiness Index, average RRI in Canada RRI score 15

16 23% of Canadian households are not on a trajectory to maintain above threshold consumption replacement Canadian Retirement Readiness Index, % below RRI threshold 77% above RRI threshold RRI score 16

17 Sources of retirement income differ by income levels, with government programs providing significant consumption replacement in lower and middle income populations RRI by source of retirement income Pillar IV Pillar III Pillar II Pillar I Q1 ($20k/yr) Q2 ($40k/yr) Q3 ($60k/yr) Q4 ($90k/yr) Q5 ($140k/yr) Income quintile (Avg 2010 household income) 17

18 Income quintile (Avg 2010 household income) A granular view of Canadian households reveals significant variation in retirement readiness by age and income POPULATION IN SEGMENT BELOW THRESHOLD REPLACEMENT Age group Q1 ($20k) 15% 9% 9% 4% Q2 ($40k) 24% 14% 13% 14% Q3 ($60k) 31% 19% 24% 23% Q4 ($90k) 29% 27% 30% 33% Q5 ($140k) 38% 29% 34% 41% Share of population 22% 28% 32% 18% 18

19 Income quintile (Avg 2010 household income) Observations: Lower income Canadian households are largely above threshold because Pillar I and II programs support high levels of consumption replacement POPULATION IN SEGMENT BELOW THRESHOLD REPLACEMENT Age group Q1 ($20k) 15% 9% 9% 4% Q2 ($40k) 24% 14% 13% 14% Q3 ($60k) 31% 19% 24% 23% Q4 ($90k) 29% 27% 30% 33% Q5 ($140k) 38% 29% 34% 41% Share of population 22% 28% 32% 18% 19

20 Income quintile (Avg 2010 household income) Observations: Consumption replacement for higher income Canadian households is far more dependent on workplace and individual savings, with a high percentage of households not on-track POPULATION IN SEGMENT BELOW THRESHOLD REPLACEMENT Age group Q1 ($20k) 15% 9% 9% 4% Q2 ($40k) 24% 14% 13% 14% Q3 ($60k) 31% 19% 24% 23% Q4 ($90k) 29% 27% 30% 33% Q5 ($140k) 38% 29% 34% 41% Share of population 22% 28% 32% 18% 20

21 Income quintile (Avg 2010 household income) Observations: Many middle and higher income younger Canadians are not on-track, but still have time to save POPULATION IN SEGMENT BELOW THRESHOLD REPLACEMENT Age group Q1 ($20k) 15% 9% 9% 4% Q2 ($40k) 24% 14% 13% 14% Q3 ($60k) 31% 19% 24% 23% Q4 ($90k) 29% 27% 30% 33% Q5 ($140k) 38% 29% 34% 41% Share of population 22% 28% 32% 18% 21

22 Income quintile (Avg 2010 household income) Observations: Canadians nearing retirement age and who are unprepared may not have enough time to save POPULATION IN SEGMENT BELOW THRESHOLD REPLACEMENT Age group Q1 ($20k) 15% 9% 9% 4% Q2 ($40k) 24% 14% 13% 14% Q3 ($60k) 31% 19% 24% 23% Q4 ($90k) 29% 27% 30% 33% Q5 ($140k) 38% 29% 34% 41% Share of population 22% 28% 32% 18% 22

23 Income quintile (Avg 2010 household income) Different policy responses can address the unique challenges of different cohorts: Example: The current indexing of Pillar I programs (OAS & GIS) to the Consumer Price Index rather than wage inflation is partly responsible for some lower-income, younger households not being on-track POPULATION IN SEGMENT BELOW THRESHOLD REPLACEMENT Age group Q1 ($20k) 15% 9% 9% 4% Q2 ($40k) 24% 14% 13% 14% Q3 ($60k) 31% 19% 24% 23% Q4 ($90k) 29% 27% 30% 33% Q5 ($140k) 38% 29% 34% 41% Share of population 22% 28% 32% 18% 23

24 Income quintile (Avg 2010 household income) Different policy responses can address the unique challenges of different cohorts: Example: For middle to higher income younger households, policies to encourage workplace and individual savings can be pursued POPULATION IN SEGMENT BELOW THRESHOLD REPLACEMENT Age group Q1 ($20k) 15% 9% 9% 4% Q2 ($40k) 24% 14% 13% 14% Q3 ($60k) 31% 19% 24% 23% Q4 ($90k) 29% 27% 30% 33% Q5 ($140k) 38% 29% 34% 41% Share of population 22% 28% 32% 18% 24

25 Income quintile (Avg 2010 household income) Different policy responses can address the unique challenges of different cohorts: Example: Consideration could be given to wedge increase in CPP/QPP to address the needs of middle income Canadians who are not on-track POPULATION IN SEGMENT BELOW THRESHOLD REPLACEMENT Age group Q1 ($20k) 15% 9% 9% 4% Q2 ($40k) 24% 14% 13% 14% Q3 ($60k) 31% 19% 24% 23% Q4 ($90k) 29% 27% 30% 33% Q5 ($140k) 38% 29% 34% 41% Share of population 22% 28% 32% 18% 25

26 Income quintile (Avg 2010 household income) Different policy responses can address the unique challenges of different cohorts: Example: Policies to facilitate work in retirement and to eliminate disincentives arising from benefit clawbacks could be considered for households who may not have enough time to save POPULATION IN SEGMENT BELOW THRESHOLD REPLACEMENT Age group Q1 ($20k) 15% 9% 9% 4% Q2 ($40k) 24% 14% 13% 14% Q3 ($60k) 31% 19% 24% 23% Q4 ($90k) 29% 27% 30% 33% Q5 ($140k) 38% 29% 34% 41% Share of population 22% 28% 32% 18% 26

27 There are no silver bullet solutions yet targeted policy responses are best able to address the specific problems facing different groups of Canadians Effective Effective only to some extent Ineffective LEVER Low-income younger cohort High-income younger cohort High-income older cohort Middleincome middle-age cohort All cohorts Increase workplace savings Increase individual savings Enabling and encouraging later retirement Broaden CPP/QPP coverage for middle-income 27

28 The survey and analysis showed that a number of other factors are also closely correlated with higher retirement readiness Population in segment below threshold replacement (Segment average) Low-income younger cohort High-income younger cohort High-income older cohort Middle-income middle-age cohort Employer No plan plan With plan Home Non-homeowners ownership Homeowners Financial Non-Advised advice Advised

29 Based on this work, CIRANO conducted a follow-up study of Canadian households and the impact of financial advice, controlling for numerous socio-economic factors Center for Interuniversity Research and Analysis on Organizations 29

30 CIRANO found robust econometric evidence confirming the substantial and positive impact of financial advice on wealth accumulation Ratio of current financial assets of Canadian households (advised to non-advised) 2.7x 1.0x 1.6x 2.0x no advice 4 to 6 years of advice 7 to 14 years of advice 15+ years of advice Source: Montmarquette, Claude and Nathalie Viennot-Briot. An econometric analysis of the value of advice in Canada. CIRANO, July

31 A combination of measures are likely to improve retirement readiness more effectively than any single measure alone Current 23% Households below threshold RRI SAMPLE MEASURE Single measure intervention Multiple measure intervention 1 2 Default contributions of all workers in an auto-enrollment plan (percent of salary) +11% +2.0% Increase household savings rate (percent of income) +8% +1.5% 3 Increase retirement age +20 years +3.5 years 4 Increase employer-employee CPP/QPP contributions (percent of salary) +11% +2.0% Target 11% Households below threshold RRI 31

32 Achieving retirement income security requires balancing many objectives Adequate income replacement Affordability and sustainability of system Inter-generational equity Efficiency and scale Individual responsibility and choice Appropriate sharing of risks 32

33 Every country faces a unique situation Demographics actual and projected dependency ratio Financial condition of the government and sustainability of retirement system Existing social contract Existing savings habits and country s financial infrastructure 33

34 The unique situation of countries is illustrated by the income mix of their populations over 65, which reflect differences in individual savings habits, pension systems and financial infrastructure Income sources of people over 65 (OECD, 2011) France Germany Italy Sweden U.K. Netherlands Japan Public transfers Work Capital Canada Australia U.S

35 Key messages Get data on a segmented basis averages lead to poor policy decisions Use targeted solutions Build on what is working do no harm Balance is a virtue 35

36 36