Thursday, June 14, 2007

Canadians not saving enough to retire:

Report By Ottawa Business Journal Staff
Thu, Jun 14, 2007 12:00 PM EST

Younger baby boomers are not saving enough money to cover even their basic household expenses in retirement, according to a study released Thursday.

A study by the University of Waterloo's Department of Statistics and Actuarial Science found that only one in three Canadians expecting to retire around 2030 are saving enough to meet basic household expenses in retirement. They are left with the option of retiring in poverty or working past the age of 65 unless they significantly increase their retirement savings.

The study, titled "Planning For Retirement: Are Canadians Saving Enough?", was carried out in April and focused on baby boomers born in the early to mid-1960s. two different income levels were examined: households earning the Average Industrial Wage ($40,000 in 2005) and those earning twice that amount. The study was sponsored by the Canadian Institute of Actuaries. "The message for most Canadians in their early to mid-40s is they will need to save more if they expect to enjoy an independent retirement," said institute president Normand Gendron.

"Governments need to provide Canadians with more education about the role that different savings vehicles can play in generating retirement income, and provide tools and incentives that encourage more households to save."

The study found that diversity is the key to saving enough. The one-third of households that is saving enough is doing so through a combination of home equity, company-sponsored pension plans, registered retirement savings plans and personal savings, the study found. These sources of income would supplement the modest monthly cheques from Old Age Security and the Canada/Quebec pension plans. Households that depend on only one type of savings vehicle for retirement consistently fall short of what they will need.

The study found that home equity is an important element for many Canadians, so much so that it suggests the government should make interest paid on a residential mortgage tax deductible. "We found that home equity can make a significant contribution to narrowing the gap, provided your home is paid for when you retire," said Steve Bonnar, one of three actuaries who directed the University of Waterloo project team. "Yet while home equity is important, on its own it is not enough to close the gap."

The study suggests many Canadians fail to appreciate how much money they will need to retire comfortably, since its results contradict a poll the institute also commissioned in April. The poll, conducted by Pollara Inc., found that "55 per cent of Canadians aged 40 or older feel some level of confidence that they will have the financial resources to retire comfortably."

Mohican's blunt evaluation is that it is very true that the average Canadian DOES NOT save enough to even meet basic expenses in retirement and I don't know where they expect the money to come from - the magic money fountain in the sky I guess.

As far as making mortgage interest tax deductible, that idea is bunk! bunk! bunk! If the government wants to encourage saving for retirement they should make it more lucrative for companies to have pension plans, encourage group retirement savings plans, and give bigger deductions for RRSP contributions. Encouraging people to buy a bigger house through mortgage interest deductability is not a good way to encourage savings.


dingus said...

tax prepaid savings program would be nice too. ie like RESPs without the grant. Savings can grow tax free.

As it is, there's no incentive to save as opposed to gambling it all on the biggest house you can find. The windfall on home appreciation is tax free and leveraged. Squirreling money away is actually negative savings after taxes and inflation. What's the incentive?

Also, allowing more borrowing from RRSPs (like LLP and HBP) may help. Personally I'm leery of tying up my savings in an RRSP. If I could access it without the tax hit (on the premise that I'd put it back) then I'd likely save more, and that savings would grow tax free.

But I agree, making mortgage payments tax deductible only stimulates demand and encourages speculating on that particular asset. Do we actually need to encourage homeownership? Wouldn't it be better if home prices were lower and people had more discretionary income to save?

mohican said...

In the US they have the Roth IRA account which grows tax deferred and is free from tax when withdrawn but no tax deduction when the contribution is made either. I think a program like this in Canada would be great.

dingus said - "Squirreling money away is actually negative savings after taxes and inflation. What's the incentive?"

I think this is true for the average 'GIC' investor but is not at all true for a well managed mutual fund portfolio or professionally managed money. Most people do much better than inflation / taxes if they seek help and take a little more risk than a GIC. The risk/return profile for value investing is actually very good.

freako said...

In some ways it is a bit of a zero sum game. If we save more we consume less.

The one thing that is not zero sum is employment income. The harder, smarter and longer you work, the more wealth you create.

I'd say lower income taxes and raise consumption taxes. As suggested by others, reward savings by deferment schemes or similar if necessary.

Mohican is absolutely correct about mortage deductability being bunk. That will just add to home prices which and make previous owners feel richer. That is an illusion and a misallocation of resources. We can't create retirement savings by having everybody piling into homes anymore than we can create wealth by printing and handing out money.

Warren said...

I'd say lower income taxes and raise consumption taxes. As suggested by others, reward savings by deferment schemes or similar if necessary.

Agreed. I remember an article discussing Conservative plan to cut the GST by 1%, and it was roundly denounced by all economists. The general agreement is that consumption taxes are the best kind, and income taxes are the worst. Encourage people to work and save, not over spend, and that's what you'll get.

Jim said...

If mortgage interest were to become deductable its not a stretch that we would lose capital gains exemption on our principle residence.
As for saving for retirement, I work with people in their 60's that are still living check to check and have no savings(and rent). Working in your 60's really, really sucks if its not work you are passionate about. Unless you are savvy, lucky, or government employed its likely your standard of living will decline.

Patiently Waiting said...

If young boomers are bad, I can only wonder what will happen with my generation. Gen-X doesn't know the word "save".

Also, it seems like many people my age have way too much hope for real estate appreciation over the next few decades. What do think will happen to RE when the boomers are all dead or drooling oatmeal?

mohican said...

patiently waiting - i don't know if you caught the post I did on that exact topic but here it is.

Demographic effects on our economy are bound to felt in a variety of ways - one of them being the demand for and price of real estate.

beta said...

I expect that boomers will simply not be able to retire in the numbers expected, for reasons listed above.

People are going to learn that, despite what they read in The Secret, desire alone is not sufficient.