When the country's finance ministers gathered at Meech Lake last week, one of the most troubling items on the agenda wasn't Ottawa's swollen $50-billion deficit – it was growing fears that many Canadians won't have sufficient savings to get them through retirement.
It's a problem – brought into sharper focus by the stock market meltdown – that some have called a defining issue for this generation.
It's estimated that roughly five million Canadians – one-third of the work force – are not building enough of a nest egg to avoid a significant drop in living standards when they retire.
If we don't address this now, it's going to be a rude awakening.— Ontario Finance Minister Dwight Duncan
While most public-sector employees have the security of taxpayer-backed pension plans, a staggering three-quarters of Canadians in the private sector have no plan at all. And many existing plans – especially defined benefit plans that guarantee a level of income – are facing shortfalls.
That leaves many Canadians more reliant on their registered savings plans that have taken a beating in the market meltdown and are expected to provide thin returns through a tepid global recovery.
“More and more people are going to start realizing they don't have enough savings,” Ontario Finance Minister Dwight Duncan predicted.
He and his provincial counterparts joined federal Finance Minister Jim Flaherty last week in launching a sweeping reappraisal of retirement savings – one that's set to spark a heated debate about whether to expand the Canada Pension Plan or create some other supplemental scheme.
Ontario Finance Minister Dwight Duncan
“If we don't address this now, it's going to be a rude awakening,” Mr. Duncan said.
Few except the wealthiest are insulated and the hardest hit will include the so-called “sandwich generation” – those raising children and saving for their educations while supporting aging parents.
Mr. Duncan said the costs of caring for his elderly parents, who died in 2008, included $4,000 in monthly medical bills not covered by the public health system. Fortunately, he said, his parents – like many of their generation – had planned adequately.
But he and many provincial counterparts worry Canadians today are not similarly prepared.
It's a problem that has increasingly vexed provinces such as Ontario, Alberta, British Columbia and Nova Scotia. All have been concerned about a steady decline in residents covered by workplace pension plans – schemes that are supposed to be part of a key pillar of retirement income in Canada.
For instance, private-sector workplace pension coverage fell from 30.5 per cent in Canada in 1991 to 23.7 per cent in 2006.
A string of provincial commissions aimed at preserving private-sector pension plans heard warnings that this erosion will likely continue. Relatively few new companies offer defined benefit plans and some existing firms are lightening their pension obligations. These provincial reviews all suggested governments should think seriously about stepping in to create supplemental plans to fill the gap. The alternative, the Ontario review predicted, is more cash-strapped elderly and a rising bill for society including “declining markets for goods and services purchased by seniors, declining tax revenues and increasing public welfare costs.”
CPP, another pillar of the retirement system, is not currently designed to offer anything but modest support. Funded by worker and employer contributions, it's set up to replace just 25 per cent of preretirement income.
People are probably going to be disappointed in the type of payout they will get. If you could do 5 or 6 per cent [returns] over the next decade, I think you would be doing extremely well. — Toronto-Dominion Bank chief economist Don Drummond
Finally, registered retirement savings plans, intended to supplement CPP, haven't yielded as big savings as their architects had hoped – “except for those who are quite wealthy,” Toronto-Dominion Bank chief economist Don Drummond said.
