Wealthy Canadians can expect their disposable income to decline significantly after retirement while lower-income retirees will notice less of a difference, according to a new study by Statistics Canada.
Using data from Statistics Canada’s Longitudinal Administrative Data base, the study— titled Income Security and Stability During Retirement in Canada—aimed to determine the extent to which Canadians were able to maintain their family income as they moved into their retirement years. Tracking workers from 1983 to 2004, the study found that at age 75 the average worker’s disposable income was 80% of their income at age 55, but those with higher salaries experienced a more significant drop in income after retirement.
The study calculated the “income replacement rate” which is the after-tax, after-transfer family income at age 75, compared with the after-tax, after-transfer family income of the same individual at age 55. The results showed that on average, the higher the disposable income at 55, the lower the portion of income that was replaced in retirement.
The report also found that among workers with average incomes at age 55, family disposable income fell after the age of 60, declined until 68, then stabilized at about 80% of the income level they had when they were 55.
Workers in the bottom 20% of the income distribution experienced little change in income as they moved from the age of 55 through their retirement years, owing largely to the public pension system. While these workers experienced high levels of income instability in their late 50s and early 60s, their incomes became more stable after retirement, with many of them maintaining 100% of their pre-retirement income level.
At 75, these workers displayed an average after-tax family income of about $30,000 for a family of two. About 60% of it came from the Canada/Quebec pension plans (C/QPP), Old Age Security (OAS) and the Guaranteed Income Supplement (GIS).
Middle income workers at age 55 had an average income replacement rate of 75% to 80%, while those in the top 20% of the income distribution at 55, replaced on average 70% of their income. These workers had an average family income of $90,000 after taxes for a family of two by time they reached 75. About 40% of this income came from private pensions or registered retirement savings plans, 28% from investment and capital gains, and about 18% from public pensions or the old-age security.
Aside from variations in income replacement rates between the pay scales, the study also found wide variations among cohorts of the same salary range. Approximately one-fifth of workers replaced less than 60% of their incomes by the time they reached 75. Two individuals from families with identical family incomes at 55 may have different levels of income by time they are 75, depending on sources of income available to them.
The study’s authors were able to identify the sources of pre-retirement income associated with high or low income replacement rates. This was achieved by concentrating on individuals in the middle-income range who had roughly the same income levels at 55. Replacement rates amongst these workers varied from more than 100% to less than 60%.
At age 65, access to earnings and income from investments and capital gains accounted for the discrepancies in replacement rates. These sources represent 90% of the difference in income at 65 between workers with low or high replacement rates. However, at age 75 the main factor determining replacement rates was access to a private pension. This source accounts for 45% of the difference in income levels between the two groups. Investment and capital gains income accounted for another 27% of the difference in income at 75.
Income instability refers to the year-over-year change in income levels for any particular family. To measure instability, the study looked at the deviation in income around the family’s average income over a five-year period. If the family’s income was the same in each of those five years, the deviation would be zero. But instability would be relatively high if its average income was, for example, $40,000 over the five years, and each year it fluctuated by 25% above or below this average.
The study found that instability is greatly reduced for both lower and higher income families as workers age.
In their late 50s, average family income for the 20% of workers in the bottom of the income distribution (the poorest families in the sample) fluctuated by about 25% because of instability in employment earnings. On the other hand, the richest 20% of families saw their incomes deviate by only about 18% during the same ages.
But as individuals aged, income instability tended to decrease, although it fell more for the lower than higher income families. By the time workers were in their early 70s, family income for both groups tended to deviate by only 10% around the average over five years.
This decline in instability was largely associated with the replacement of less stable employment earnings by more stable income from public pensions, OAS and GIS, or from private pensions.
To read the study on Statistics Canada’s website, click here.
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