What will be the biggest financial issue of the next 10 years? It may be a market apocalypse or a new financial crisis or another blowup in the Middle East.
More likely, though, it will be a quieter and more insidious problem – the slow-motion collision between retirement hopes and financial reality.
The gradual unravelling of the advanced world’s retirement dream is already stirring deep passions and even violence in some countries. Witness the strikes now roiling France over President Emmanuel Macron’s plans to reform the country’s pension system. Or the mass protests in Chile in November, prompted in part by the dismal failure of that country’s pension system to deliver on its promises of a decent retirement for workers.
To be sure, all that strife and drama seems very far away from the Canadian experience. For now, our pensioners are more likely to be boarding flights to Florida than rioting in the streets. But don’t assume it will always be this way.
A couple of decades ago, Chile’s privatized pension system was held up as an example for the rest of the world to follow. It has fallen from grace with a spectacular thud. Similar pratfalls can happen anywhere.
Canada’s retirement system is no exception. It is now only slightly better than Chile’s in terms of overall design, according to an annual survey of retirement systems in 37 countries, conducted by human-resource consultants Mercer and academics at Monash University in Melbourne.
On the positive side of the ledger, our system handily beats the Chilean model based on how much it pays out to retirees. However, the Canadian system is also significantly less sustainable than the Chilean model, according to the 2019 Melbourne Mercer Global Pension Index.
Depending on your assumptions, the Canadian retirement shortfall can be painful to contemplate. Mercer Canada estimates the gap between existing retirement savings and future retirement needs in Canada amounts to US$2.5-trillion – more than a year of this country’s entire economic output.
Consultants’ long-term economic projections should always be taken with a hefty grain of salt, but the sheer size of the estimated shortfall begs for attention. It reflects a cluster of factors. Among the challenges noted by Mercer and others are:
- Shrinking access to corporate pension plans. Fewer and fewer private-sector employers now offer the deal that was once considered standard – a defined-benefit plan that pays retirees a set amount for life.
- Rock-bottom interest rates. Savers can now earn little or no risk-free return on their savings. This reduces the amount people can expect to accumulate for retirement, unless they are willing to venture into riskier areas – a shift that creates its own hazards.
- An aging population. All over the industrialized world, the number of retirees is growing in relation to the number of people still working. This reduces the relative size of the tax base that can be tapped to help support growing numbers of elderly people.
- Longer life spans. Many people now live into their nineties, but most still want to retire in their early sixties or even earlier. This means their savings and pensions have to support them for more years, but without any increase in contributions.
Canadians aren’t alone in facing these challenges. In fact, we’re doing better than many of our international peers. The Melbourne Mercer index ranks our retirement system ninth over all among the 37 countries surveyed. The problem is that nearly all countries are facing retirement stresses of some magnitude.
The gulf between expected lifetime financial security benefits and what existing systems in 21 major countries can likely provide by 2050 is around US$15.8-trillion in present dollar terms, according to a report published in November by the Group of 30, an international think tank based in Washington. The group’s members include past and present policy makers such as Bank of England Governor Mark Carney and former U.S. Treasury secretaries Larry Summers and Timothy Geithner.
Unfortunately, these deep thinkers have no magic solutions to the global retirement challenge. The report, overseen by former U.K. Financial Services Authority chairman Adair Turner, advocates pretty much what one would expect – raising official retirement ages by four to six years, encouraging people to work longer, promoting (or forcing) higher savings and accepting that retirement incomes may have to be substantially lower than they are now.
For middle-income retirees, a more sustainable system may mean living on 60 per cent of what they earned pre-retirement, rather than 75 per cent. It may also mean working a few years longer. All of this is far from constituting a humanitarian disaster. But it is political dynamite, as governments from France to Chile are now discovering.
Don’t be surprised if Canada faces its own political explosions in the years ahead. The huge gap between pension benefits in the private and public sectors is one obvious battleground. So is the lack of official support for re-engineering traditional defined-benefit plans in more sustainable ways. Especially if home prices weaken, expect the nature of our retirement system to suddenly become a topic of passionate interest for many Canadians.