Sean Speer is a senior fellow at the Macdonald-Laurier Institute and co-author of the recent MLI paper From a Mandate for Change to a Plan to Govern: Helping Canadians Achieve a Secure Retirement.
Finance Minister Bill Morneau recently launched consultations with Canadians on the upcoming budget. He isn’t facing a shortage of advice – stakeholders, bureaucrats, political advisers, think tanks, scholars and the public are keen to offer ideas.
As he sets priorities, there is one adviser whose expertise he shouldn’t discount, particularly when it comes to retirement savings: himself. Mr. Morneau has written extensively about Canada’s retirement income system and has shown that concerns about its inadequacy are overblown.
The new government came to power committed to expanding the Canada Pension Plan, based on the perception that Canadians are saving inadequately for retirement and only more mandatory savings can solve the problem. Mr. Morneau is now responsible for leading this work. Ensuring that Canadians have adequate retirement savings is a critical issue and the government is right to focus on it. But demands for an expanded CPP are based on a misreading of the problem, and thus overreach on the solution. As Mr. Morneau and co-author Fred Vettese showed in their 2013 book The Real Retirement, concerns about a retirement income “crisis” are the result of three common misperceptions.
The first is that a large percentage of Canadian seniors find themselves in serious financial need. The reality is that we have one of the lowest rates of poverty among seniors in the industrialized world. So, as Mr. Morneau and his co-author wrote, “the idea that poverty among the elderly is a significant problem in 21st-century Canada should be laid to rest once and for all.”
The second wrong assumption is a tendency to calculate how much we need in retirement based on replacing our preretirement income, rather than how much we need to to pay for our consumption. It’s an important distinction. We need less income in retirement because consumption patterns change as we get older. We are no longer saving for retirement, raising children or making mortgage payments, and our tax bills decline as we stop paying payroll taxes and take advantage of tax preferences for seniors. Trying to achieve an income replacement rate of 100 per cent makes little sense. The target rate for consumption replacement generally depends on circumstances or preferences, but Mr. Morneau’s research finds the range between 40 per cent and 60 per cent.
The third misperception is that the only resources available to Canadians for retirement come from Old Age Security/Guaranteed Income Supplement (GIS), CPP and other pension plans. This ignores other forms of savings or assets, such as real estate or business equity. But these assets (often called “Pillar 4 assets”) can be a major source of income as retirees downsize their family home, collect investment property income, sell their businesses or earn dividend income from equities, and shouldn’t be overlooked. As Mr. Morneau rightly notes: “Pillar 4 assets in Canada are greater than all the assets that we have in the first three pillars combined.”
What’s the upshot? In the minister’s own words: “Canadians are actually doing better than they think in their retirement planning – and are better off than many of the experts are telling us.”
This cogent evaluation doesn’t mean that there aren’t some targeted reforms that could be considered to improve the system. A top-up to the GIS for single seniors would help a vulnerable group. And there’s a case for following Quebec’s lead to improve the federal rules for Pooled Registered Pension Plans with the goal of better targeting Canadians without employer-based pensions. But as to whether we face a retirement income “crisis” that requires a broad-based response such as a CPP expansion, the minister should ignore the cacophony of advice and act on what he knows.Report Typo/Error
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