A report by the Institute for Research on Public Policy takes a darker view of the adequacy of post-retirement incomes than some other high-profile reports.
Middle-class Canadians are facing a sharper decline in their retirement incomes than experts have previously predicted, and current proposals to expand the Canada Pension Plan would do little to fix the problem.
A new study by the Montreal-based Institute for Research on Public Policy shows that about half of middle-income Canadians born between 1945 and 1970 are likely to face at least a 25-per-cent drop in their disposable incomes when they retire. Middle-income is defined as earning an average annual lifetime income of between $35,000 and $80,000.
The drop is highest for people who earn more in their working lives. For example, late baby boomers born between 1960 and 1965 who have average annual earnings of $80,000 are expected to have their disposable incomes drop by 35 per cent when they retire.
The results show "a sizable proportion of middle-income earners facing an important reduction in their living standard in retirement under the current system," the report says.
The findings will add fuel to the public debate about reforms to Canada's pension system. Federal and provincial finance ministers have been studying proposals to increase the Canada Pension Plan or build a new voluntary retirement savings program to help the growing proportion of workers without workplace pension plans.
Study author Michael Wolfson says his report takes a darker view of the adequacy of post-retirement incomes than some other high-profile reports in recent years, including a 2009 report by tax expert Jack Mintz that was commissioned by the federal government as part of a review of pension reforms.
The Mintz study concluded Canada's pension system is "performing well" and said 80 per cent of households are saving enough to replace 90 per cent of their working income in retirement.
"My results are not as sanguine; I show that a much larger proportion of Canada's future elderly is likely to face a substantial decline in living standards," Mr. Wolfson writes.
He said his analysis also found that several bold reform proposals that have been floated - including doubling the Canada Pension Plan and improving the Old Age Security system - would not significantly improve retirement incomes for baby boomers.
Under the various reform scenarios, middle-income earners would see their average after-retirement income compared to pre-retirement income improve between four to eight percentage points for people born from 1960 to 1965, for example.
"I was a little surprised when I looked at the numbers because the impact on the proportion of people was not as big as I expected it to be," Mr. Wolfson said in an interview.
The main reason is that proposals have suggested phasing in the full increases over 40 years, and because most people now over age 45 would not be able to qualify for a great deal of benefit at the higher levels before retirement.
While the federal government has suggested it may only be willing to make "modest" improvements to the CPP and favours studying ideas for a new voluntary savings scheme, the IRPP report concludes "more much ambitious reforms than the ones being considered will be required to improve the adequacy of retirement incomes."
Mr. Wolfson argues Canadians should be willing to open a debate about granting improved Canada Pension Plan benefits to baby boomers even if they haven't earned them, arguing there is plenty of historic precedent for speeding up eligibility. The Guaranteed Income Supplement, for example, was introduced in 1966 and immediately applied to low-income seniors, while the Canada and Quebec Pension Plans were launched at the same time with a very rapid phase-in.
The IRPP report differs from some past analyses because it focuses on net or disposable income after retirement rather than total or gross income. Many commentators have argued people need 60 per cent or 70 per cent of their gross income after they retire, but Mr. Wolfson said he believes disposable income should be closer to 100 per cent or else people will have to make significant lifestyle changes.
The study projected retirement incomes from pension plans, government social security programs and RRSP holdings, but does not include income from other sources, such as owning a business or holding other non-RRSP investments. Mr. Wolfson said only a small proportion of middle-income Canadians have significant other income sources, so it is unlikely the missing income will change retirement outcomes for a large proportion of that population.
Janet McFarland