Despite all the talk of a “retirement savings crisis” in Canada, 83% of Canadians are on track for retirement, Fabrice Morin, a partner at consulting firm McKinsey & Company told a Conference Board of Canada pension conference in Toronto in April. And it’s personal savings, not necessarily employer-based pension plans, that makes the difference.“Has the retirement crisis become worse for Canadians? Our conclusion was that some are exposed, but a significant number of Canadians [have done well],” Morin said.
Morin discussed McKinsey’s Retirement Readiness Index, a survey of 18,000 Canadians conducted last year and released in February. In the study, McKinsey talked to both retired and working age Canadian households, looked at their savings starting points and projected their situation at retirement based on their current savings behaviour. Real estate was not included in the calculations because Morin said it is difficult to monetize and analyse this.
Conventional wisdom states that Canadians need about 70% of what they make during their working lives to live comfortably in retirement. But Morin said that number “is relatively arbitrary. It’s been used by many pension plans in the past. It seems reasonable, but there is no real data underpinning the 70%.” He said the reality is that most Canadians adjust their consumption levels down 25%-30% as they head into retirement.
And while many may think lower-income Canadians will not fare well in retirement, Morin said their ability to replace income is quite high, mostly because of federal programs like the Guaranteed Income Supplement (GIS) and Old Age Security (OAS).
About 77% of those in the mid-to-high income levels are on track for their retirement readiness, he said, with a significant difference between those who have an employer pension plan and those who don’t.
Morin said 84% of households in which the primary income earner has an employer plan are on track, while 63% of households that don’t have an employer plan fall into that category. Those with a defined benefit (DB) pension are doing better than those with a defined contribution (DC) plan – but only marginally, he said.
Of the households that don’t have an employer plan, the key driver is personal savings. “Those with no employer plan but have good personal savings behaviour – and there are plenty of Canadians that have that – they are going to be more than ready for retirement.”
Even though home equity is not considered a retirement asset in the McKinsey analysis, Morin said one of the most salient points he found is that savings are highly correlated with home equity – because homeowners that can manage to build up home equity have a savings discipline.
But Morin received some opposition on his state of the future retirement readiness from Jim Keohane, president and chief executive officer of the Healthcare of Ontario Pension Plan (HOOP).
“Fabrice has just painted a fairly rosy picture of retirement readiness in Canada. But there are some pretty troubling trends taking place which are likely to alter that picture quite negatively going forward.”
Keohane pointed to a number of factors, including extremely low interest rates, which makes it difficult for all savers, including pension plans. As well, more people are retiring, creating significant stress on OAS and GIS.“This is already one of the largest items in the federal budget and is about to grow rapidly.”On top of that, said Keohane, more people are living longer.
But he said one of the most problematic trends is the shift away from DB plans, in which employees receive a guaranteed payout at retirement, into DC plans, in which the payout at retirement is not guaranteed.
Disaster in the making
“This,” said Keone, “is a disaster in the making. It’s like watching a slow moving train wreck.”
He suggested that DB plans be part of the solution rather than the problem.
Those who are waiting for the economy to pick up to help things along may have some time to wait.
Glen Hodgson, senior vice president and chief economist at the Conference Board of Canada, said Canadian growth continues to hover around 2%, with much of the negative impact coming from lower oil prices. For many other sectors, export recovery is expected this year, but labour markets are expected to limit growth and business investment growth remains weak.