In late June, federal Finance Minister Bill Morneau announced that he and his provincial counterparts had reached an agreement in principle to enhance the Canada Pension Plan (CPP), a significant element of Canada’s public pension system. The phased-in design changes to the CPP include increasing the upper earnings limit to $82,700 by 2025 (currently $54,900), with the income replacement level increasing to one third of income (currently one-quarter). To finance these objectives, employer and employee plan contributions will be subject to a series of increases over a seven year period beginning January 1, 2019.
As plans are underway to strengthen the public portion of Canadians’ retirement resources, Statistics Canada recently issued a new report that looks at how well Canadians are preparing for retirement along with perspectives on the relationship between financial literacy and retirement planning. The 2014 survey captured data from individuals, ages 25 to 65, within Canada’s labour force – employed and unemployed. The report, released in March of this year, provides some interesting statistics based on four age bands: 25 to 34, 35 to 44, 45 to 54, and 55 to 64.
Seventy-eight per cent of those surveyed indicated they were preparing financially for retirement, although only 45 per cent indicated they knew how much they needed to save. Of particular interest is the group of individuals ages 55 to 64. Within this group there was a significant decline, from 56.8 per cent in 2009 to only 47.4 per cent in 2014, when asked if they knew how much to save to fund their retirement. Two of the other three age categories, 35 to 44 and 45 to 54, experienced slight increases, 2.8 and 1.9 per cent respectively, when asked if they knew how much to save, while ages 25 to 35 dropped slightly.
Looking at the youngest generation in the study, more than one-third of people ages 25 to 34 indicated they know how much to save but the number who are actually saving for retirement declined from 75 per cent in 2009 to 66.3 per cent in 2014.
The survey also analyzed the results based on household income divided into five categories (quintiles). As would be expected, those with the highest household income were the most financially prepared for retirement and 62.5 per cent of the group indicated they knew how much to save. These numbers were quite consistent between the 2009 and 2014 surveys.
In general terms, there seems to be a slight drop across all households, except the top quintile, as to who is preparing financially for retirement. Household incomes in the third and fourth quintiles indicated less knowledge about how much to save when comparing the 2009 and 2014 results. No explanation for these variations is offered by the study, but theories could include a shift away from employment pension plans in general and, more specifically, the shift away from defined benefit pension plans that provide a predetermined amount of retirement income.
As is evident from the report, older, higher household income individuals are more likely to be preparing for retirement and are confident with their knowledge of how much to save. However, there appears to be a growing sense of uncertainty by the older, middle household income group with respect to how much is enough. This might be attributable to the fact that higher-income individuals are generally less reliant on public retirement programs, whereas the middle income have a greater reliance and sense of uncertainty with respect to the reliability of public programs in the future.
The survey asked respondents what sources of income they were including in their retirement income planning:
- Over 90 per cent included government pensions (CPP, QPP, OAS) and RRSPs.
- Almost 70 per cent included workplace pensions.
- About 50 per cent indicated their plan included earnings from part-time work during retirement.
- About 30 per cent said they would have to sell something.
- Only about 20 per cent reported that they were including inheritance in their planning.
(Reprinted with permission from The Institute Comment, edition 298)