The pension disconnect: does Canada really have a problem?

The Canadian Institute of Actuaries (CIA) published a paper in October 2009 that starts out, “For some time, it has been apparent that the Canadian pension system is facing dire circumstances.” It goes on to describe a litany of troubles including funding deficiencies, retirement savings that have “melted away” during the financial crisis, and low pension coverage.

The CIA is not alone. The Canadian Association of Retirement Persons (CARP) claims, “Unless workers save more than they currently do through the Canada Pension Plan (including the Quebec Pension Plan), unacceptable levels of poverty among older Canadians will continue.” The 2008 report of the Alberta/B.C. joint expert panel concluded, “The pension system in Alberta and British Columbia is not working well for the majority of Albertans and British Columbians,” and also noted, “The challenges facing the system extend beyond our borders.” The Conference Board of Canada declares, “Many pension leaders acknowledge that radical action is necessary to put things right for the long term.”

But is our pension situation as dire as it has been painted? The statistical evidence tells a different story.

The numbers
We will start with the Organization for Economic Co-operation and Development (OECD). In its 2009 report, the OECD states that the proportion of retirement income coming from private pensions and other financial assets in Canada is one of the highest among OECD countries. Income safety nets for seniors are among the highest in the OECD, helping Canada enjoy one of the lowest retiree poverty levels relative to average earnings.

In October 2009, the Melbourne Centre for Financial Services reported that Canada’s retirement system ranks fourth on a global pension index at 73.2, just barely behind the Netherlands (76.1), Australia (74), and Sweden (73.5). Highly developed countries such as Germany and Japan ranked much lower than Canada.

This sounds quite positive, but could it be that we’re in the midst of a decline that is not captured by these indexes? Surely Canadians cannot be as well prepared for retirement now as they were 20 years ago, after the last wave of pension reform? This leads us to a second indicator.

A newly released Statistics Canada study shows that at the end of 2008, pension assets in Canada (including social security, occupational plans and RRSPs) totaled $1.8 trillion. Even though this tally was captured near the bottom of the market collapse, it still represents 3.6 times the assets we had in 1990. Even if we adjust for inflation and population change, the 2008 value is still more than double what it was in 1990.

Clearly, we are doing something right in terms of accumulating pension assets. What is better, elderly Canadians are getting their share of the pie. The statistics on this may be surprising but before we get to them, we need to define poverty in a Canadian context.

There is little absolute poverty in Canada in the sense of living in a state of absolute deprivation. Poverty is usually defined in relative terms: that is, having income below a certain level. The most commonly cited measure is Statistics Canada’s Low Income Cut Off, (LICO) which is a hybrid of absolute and relative measures of poverty.

The proportion of older Canadians who would be classified as poor under the LICO test turns out to be quite small. Only 4.8% of persons over 65 have income that is below the LICO on an after-tax basis. A recent study by McMaster University economics professor Michael Veall found that no country has experienced as sharp a decline in elderly poverty since the 1970s as Canada. In fact, only four countries (all European) had poverty rates among the elderly that were lower. If there is a poverty problem, it is younger Canadians who bear the brunt of it. The 2007 figures from Statistics Canada show that 9.9% of persons between ages 18 and 64 are below the LICO—more than twice the percentage of the elderly!

To summarize, we find that:
(a) Canada has nearly eradicated poverty amongst its seniors,
(b) we have made more progress in this regard in recent years than any other developed country, and
(c) our seniors are appreciably better off than our younger citizens.

Wants vs. needs
With this backdrop, how do we reconcile the impression that Canada is facing a pension crisis? In a nutshell, we have accumulated sufficient retirement assets to generate the income in retirement to meet our basic needs but not necessarily all of our wants. Some pension observers may be missing this fine distinction. Others may be aware of it but feel philosophically that all of our wants should be satisfied by “the pension system”. Either way, we have collectively come to the conclusion that we must be facing a pension crisis.

The conclusion that better fits the facts is that we have underestimated the resourcefulness of Canadians. We have found ways to fill a good portion of the income gap at retirement through a variety of means, including RRSPs, occupational pensions, inheritances, small business ownership, and downsized homes. Very seldom do Canada’s seniors ask for a handout to make ends meet. The irony is that those seeking government bailouts tend to be the stakeholders of multi-billion dollar pension funds that already provide pensions in excess of what the average Canadian enjoys.

There are indeed fixes that we should consider to the pension system—such as a Canada-wide supplementary pension plan or a more accommodative regime for occupational plans—but we should first start by acknowledging that Canada is already more retirement-ready than virtually any other country in the world.

This article is an excerpt from a Vision newsletter being published by Morneau Sobeco in January.

Fred Vettese is Chief Actuary, Morneau Sobeco
fvettese@morneausobeco.com