Canadians not saving enough for retirement, pensions becoming thing of the past

November 12, 2011

Vancouver Sun, The Province,, Star Phoenix, Leader Post, Calgary Herald, Ottawa Citizen, Montreal Gazette

October 11-17

Al Breitman spent his career self-employed mostly in a land-development business, so when he retired recently he had no company pension to rely on. His wife, Karen, is still working as a medical physicist and associate professor at the University of Calgary and does, however, have a pension when she eventually retires.

Most Canadians don’t have a pension to rely on — only 25 per cent of private-sector workers have one, while 31 per cent of public-sector workers have a pension plan – so like the typical Canadian, Breitman had to take his retirement savings strategy into his own hands, despite knowing his wife would someday have that pension money to contribute to their financial picture.

“Hopefully I won’t have to rely entirely on the pension when she retires,” Breitman says. “What I’ve done is maxed out the RRSPs . . . and we have some other assets in addition to that.”

Canadians aren’t saving enough for retirement and pensions are quickly becoming a thing of the past, which is putting the spotlight on how employees and self-employed individuals are going to have enough money to retire. The average Canadian today at age 65 has only $60,000 in their RRSP, according to WB Benefit Solutions, and they’re often choosing to work longer to fund semi-retired lifestyles.

It’s causing governments, financial institutions, companies and workers to ask some serious questions about the health of the retirement system in Canada.

Pension plans are becoming extinct, says Bill Tufts, an employee benefits consultant with WB Benefit Solutions. “A lot of Canadians are at risk of being in poverty in their senior years, especially if Canada can’t sustain the funding of that pension tsunami — that demographic hurricane that’s sweeping across Canada.”

Public-sector pensions are generating a lot of controversy about their sustainability.

The Canadian Federation of Independent Business is worried about the overall health of the pension system in Canada. It launched a campaign recently and received thousands of signed petitions from small business owners. The group and its members are calling on governments to address “gold-plated political pensions” in the public sector and to ensure workers contribute at least 50 per cent of their pension costs, as well as reforming public-sector pensions to put new employees on “more affordable” retirement savings plans like workers in the private sector.

It has received criticism from public-sector unions by highlighting the disparity between private-and public-sector plans.

No matter what type of pension you may have — if you have one at all — it’s clear that efforts are proceeding to address the slow disappearance of pensions in the workforce.

Tufts is also critical of the “public sector-private sector” pension gap. “All governments across Canada have realized the risk that (the gap) entails for Canadians,” he says. He is releasing a book called Pension Ponzi that addresses the issue.

While Breitman and his wife did everything correctly — they accumulated enough savings and investments in addition to the security of her pension — they are unfortunately not the typical example.

With 365,000 Canadians reaching 65 every year from now until 2029, says Tufts, it’s also creating a huge vacuum on the government’s ability to fund mainstays such as Old Age Security (OAS), the Canada Pension Plan (CPP) and Guaranteed Income Supplement. “Even more worrisome is that 20 years from now, those Canadians will be turning age 85 (and) there’s going to be a health tsunami the same as the pension tsunami.”

Aileen Rycroft, a manager of financial planning for RBC Royal Bank in Calgary, says the cornerstone of a retirement planning should be the pension plan. “It gives them a vast advantage over other clients who don’t have any company benefit plans.”

The fact that most employees don’t stay with one employer for the majority of their careers also complicates retirement planning, according to Tina Divito, head of the BMO Retirement Institute.

Many plans can take 12 to 24 months to vest — the amount of time before you can take out the contributions an employer makes — so that is another consideration. The company often cashes out the employee’s contribution in a defined-contribution plan or calculates how much to pay out in a defined-benefit plan, which puts the onus on the individual to decide what to do with the funds.

Either way, Divito advises workers get into a plan as soon as it is available. “Even if you’re not there long enough to vest — which means owning your contributions as well as your employers’ contributions — at least if you leave before you vest, you can still take back your own contribution.”

Breitman is banking on the performance of his RRSPs for much of his retirement funds, since he doesn’t have a pension. Still, the security of his wife’s pension helps reassure him.

“The RRSPs in the present economic situation don’t give you an awful lot of return,” Breitman says.

“In fact, there’s a negative return if you’ve left it in mutual funds, which we have done. In two years it might be entirely different.”

The federal government is working with provincial governments to launch a new pension savings vehicle called a Pooled Retirement Pension Plan, essentially a more regulated RRSP through an employer.

Whatever retirement or pension vehicle you use, experts say the most important thing is to use it.

“It’s a scary thought, but many employees don’t even join their pension plan when they’re eligible to do so,” Divito says. “They forget or they delay and they don’t take advantage of it. This is an area of financial literacy where it’s important for individuals to know the kind of plan they’re in.”

Pensions and retirement facts

People who retire without any savings and rely on Old Age Security, Canada Pension Plan and Guaranteed Income Supplement, will typically receive $18,000 a year in retirement.

There is a large gap between public-and private-sector pension plans: Public-sector workers represent 16 per cent of the adult working population and have accumulated $800 billion in assets; private-sector pensions measured for the same 16 per cent size of workforce have accumulated $350 billion in pensions.

The other 68 per cent of Canadians who are relying on RRSPs have accumulated $750 billion.

Every day this year, 1,000 Canadians turn age 65 (365,000 per year) and that trend is projected to continue until 2029.

— From ages 50 to 65, if the client saves the maximum annual TFSA allocation of $192 bi-weekly into a TFSA, their effort will pay off with $121,000 of additional savings by age 65.

Sources: WB Benefit Solutions, BMO Retirement Institute and Royal Mutual Funds Inc.

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