The former governor of the Bank of Canada warns that Canadians need a reality check when it comes to saving for retirement.

In a report for the C.D. Howe Institute, The Piggy Bank Index: Matching Canadians’ Saving Rates to Their Retirement Dreams David Dodge—along with Alexandre Laurin and Colin Busby—challenge the laissez-faire attitude often displayed by Canadians toward retirement savings

“Are Canadians willing to give up enough current consumption during their working lives to enjoy the level of consumption after retirement that is provided by a 60 percent or 70 percent pension?” write the authors. “Their actions suggest they are not.”

Lost amid the discussion surrounding pension reform, tax and fiduciary rules, and expanding the CPP and QPP is a frank discussion on personal savings habits, explains the report. It explores the annual rates of retirement savings—beyond mandatory CPP/QPP premiums—that individuals of different incomes must save to enjoy a comfortable retirement.

The report’s authors suggest that workers who wish to retire at age 65 and replace 70% of their working incomes will need to save between 10% and 21% of their pretax incomes annually, beginning at age 30.

“This fraction is likely higher than many Canadians believe and higher than is set aside in most employer-based group RSPs or defined-contribution plans,” say the authors of the report. It is also higher than the effective contribution over time to many employer- sponsored defined benefits plans, and exceeds the annual limits placed on RRSP contributions for high-income earners.

Workers who elect to delay retirement from age 65 to 67—thereby increasing the number of saving years from 35 to 37—will reduce the fraction of earnings that must be saved, but the required saving rate still remains high. Those who put off saving until later in life will require “extraordinarily large fractions” of income of up to 20% during the last decade of working life.

As an example, people who earn $61,270 a year must save 14% of their annual pre-tax income from age 30 in order to have a 70% income replacement rate in retirement at 65.

Those earning $150,000 a year will need to save 21% of annual income to achieve the 70% replacement rate. While such savings levels are not currently permitted under RRSP rules, the report’s authors believe the threshold should be raised.

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