Planning for Retirement with Reasonable Targets FCAC-OECD Conference on Financial Literacy

Transcription

1 Planning for Retirement with Reasonable Targets FCAC-OECD Conference on Financial Literacy Jack M. Mintz Palmer Chair of Public Policy School of Public Policy The University of Calgary

2 What is the Problem? Canadian net wealth has almost returned to the 2007 peak. Canada has one of the lowest poverty rates for seniors in the world. Retirement is supported by government transfers, CPP, pensions and RRSPs (TFSAs): $1.9 trillion home equity: $1.9 trillion other net financial assets: $2.2 trillion. Current Canadians do not have much debt at retirement. On average Canadians in most income classes have done reasonably well so far with a set back in 2008/9 especially hurting people with DC arrangements. Income replacement needed is lower than 70 percent for most households. Most important concern with the 20% or so minority of $30-50k Canadians having adequate retirement income below 60% replacement of working income. Is it an under-saving or lifetime income problem? No one really knows. 2

3 Long-Run Factors May Change Affecting Retirement Income Costs Real returns could be higher or lower after this decade. One never knows. Potential changes to retirement age people work longer since they expect to live longer but some might want to retire earlier if incomes grow. Importance of worker productivity increases as capital grows relative to labour. Canada s recent increase in incomes per capita has improved from 1990s (about 2% of GDP) but this is due to better employment and income gains from terms of trade improvements rather than worker productivity gains (still 1 percent of GDP). Changes in family structure more single individuals who will have different lifetime requirement for income and savings. 3

4 Real Returns on Bonds/Stocks Marketable Bonds (1-3yr. Avg) TSE Index (Yearly % change) 4

5 DC Pension (% of Final Pay) Defined Contribution Plans leave a lot risk to the individuals income replacement ratios can vary widely. Source: Morneau Shepell 50% 45% 50/50 asset mix over 30 yrs, 50% indexing of annuity 40% 35% 30% 25% 20% 15% 10% Year of Retirement 5

6 Millions of dollards ($M) Risk hurts defined benefit plans too. Changes in the financial situation of pension plans (since December 31th, 2005) Source: Morneau Shepell Asset ($M) Solvency liability ($M) 6

7 Equities, per cent of total portfolio Ireland United States United Kingdom 75 Australia Canada Netherlands Iceland Hungary Japan Poland Portugal Denmark, Sweden Austria Norway Spain Slovak R Germany Switzerland Czech R Mexico Real investment return in 2008 (%)

8 Risk and The Cost of Pensions To avoid risk, one could hold fewer less risky assets as in some countries. Invest in less risky assets (such as Government of Canada Bonds) but with lower returns. Make higher contributions and/or accept lower promised benefits. For example, Normal cost for a DB Plan with reasonable inflation protection would increase by 50% to 70% (cost would be about 30% of payroll for public sector plans). Liability increases by around 50% depending on maturity of plan (more for active members and less for retirees). Pensions to achieve targetted replacement incomes simply won t be as cheap with less risky investments. But maybe that is okay replacement income at 70% of final working year income is perhaps beyond what is necessary for many. 8

9 What Governments Will Worry About People having adequate retirement income: Currently low-income taken care of but some with modest incomes are a concern (10 percent of middle income group once accounting for all net assets held by households). Pressures to fund health care costs for aging population. Potential loss of risk-pooling across and within generations with disappearance of defined benefit programs. Oncoming labour shortages effect of pension costs on top of rising wage costs. Need for flexible labour markets. Productivity future fiscal gaps from public spending related to age and declining tax/gdp ratio with more retired workers. Competitiveness of Canadian businesses needs capital and skilled labour impact of taxes on labour costs. 9

10 Reforms: DC +DB Approaches Regulatory Multi-employer pooled RPP with expanded definition of issue of employer monitoring and contracting arrangements. Equal tax treatment of Group RRSPs and DC plans. Others not recommended pension guarantee funds, public insurance schemes, government-sponsored DC plans. CPP as a defined benefit plan: CPP increase replacement ratio or maximum earnings. Fully funded approach to avoid intergenerational transfers (benefits match contributions made by employees and employers). Payroll taxes would first rise. 10