Why Better Pension Plans Could Save the Day

As fewer Canadians sufficiently save for retirement, senior poverty becomes an increasing threat.

There was a time when most working Canadians were covered by a pension plan at work. These plans – typically the defined-benefit (DB) type – were designed to ensure that, after a long career, employees had adequate income for their “golden years.”

The DB model was perfect for that task. Typically, members would receive a percentage of their earnings, multiplied by the number of years that they held membership in the plan. So, after 30 years, a member could look forward to a lifetime pension equalling 60 per cent of what he or she had earned at work (when government pensions are factored in).

But things have changed. As Moshe Milevsky and Alexandra Macqueen point out in their book Pensionize Your Nest Egg, Statistics Canada figures from 2008 suggest that only 17 per cent of private-sector employees are now covered by DB plans. A further 11 per cent are covered by non-DB pension plans, but a whopping 72 per cent have no pension plan at all.

It would seem, from this trend, that there’s now a belief that retirement planning is something that individuals should handle on their own. But are they handling it?

According to Statistics Canada, there was nearly $600 billion in unused Registered Retirement Savings Plan (RRSP) room at the end of 2009. More than 20 million Canadians have unused RRSP room, meaning that Canadians, left to their own devices, are not taking advantage of RRSPs: The average Canadian has only about $60,000 in RRSP savings at the time of retirement.

Given that you need $20 of savings for every dollar of retirement income that you wish to receive, $60,000 isn’t going to cut it. You would need $500,000 in RRSP savings to provide yourself with a post-retirement income of $25,000 per year.

Why aren’t Canadians saving enough for retirement? One obvious answer is personal debt. The Bank of Canada reported, in 2004, that total consumer debt in Canada is more than $752 billion – more than $25,000 for every man, woman, and child. Paying off interest-bearing debt understandably becomes a higher priority for most people than saving for retirement.

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Source: The Mark