How much retirement income is enough?

How much income would most of us consider enough during our retirement? 


Canadian finance ministers will implicitly give us their answer when they define a “modest Canada Pension Plan expansion” at their next meeting in June.


Canadians might be surprised to learn that more than half of middle income Canadians in their mid-40s with before-tax incomes of $35,000 to $80,000 can expect a drop of at least 25 percent in their post-retirement consumable income, according to a recent study I conducted for the Institute for Research on Public Policy. 


Should this be a concern? How much do we really need for retirement?


In theory, economists have a ready answer: we generally try to arrange affairs so that our consumption stays level over our lifetime. Many practical realities come between textbook theory and the real world, but the idea of smoothing out consumption opportunities between working years and retirement years is widely accepted.


Avoiding poverty in old age is the main criterion for retirement income adequacy for those with low incomes during their working years. Canada has led the world with its Old Age Security and Guaranteed Income Supplement programs, consistently keeping seniors’ incomes just above Statistics Canada’s low income line for decades.


However, those who had middle and upper level incomes during their working years would face a major drop in their living standards when they retired if OAS and GIS were the only sources of income after retirement. This is where the second criterion for retirement income adequacy kicks in: “continuity of consumption.” 


CPP and the parallel Quebec Pension Plan were not designed to provide full continuity of consumption for everyone. Both were introduced simultaneously with the GIS, while the OAS and increasingly generous RRSP tax incentives already existed. As well, many employers already offered company pension plans, a substantial majority of Canadians reached age 65 owning their own homes, usually free of mortgage, and the wealthy were expected to look after themselves.


The trouble is we have known for decades that these programs and individual initiatives have not been working well for many middle-income Canadians.


The federal government’s green paper on pension reform in 1982 gave detailed estimates showing that 20 to 50 percent of Canadians would fail to achieve full continuity of consumption. The business community even arranged for a leading private sector actuary to audit the complex underlying analysis and found no flaws.


However, the CPP has not been enlarged and workplace pension plans have shrunk, even though RRSP contribution limits have been greatly expanded. However, the drop in consumption now projected after retirement is even greater.


There are many crucial judgments involved in determining whether a specific proposal for enlarging CPP, with its projected impacts on future retirement incomes, is modest or mere tokenism. 


For example, should Canadians be expected to sell their house to finance their retirement? Is it OK to face a 10 percent decline in consumption after retirement? What about a 40 percent drop?


The country’s finance ministers have not published their officials’ analyses, let alone follow the example of the 1982 green paper, in which a leading actuary was allowed to peer review the analysis. 


This lack of government transparency, which is a hallmark of our time, means Canadians are left in the dark, not only on the general outlines of the “modest CPP expansion” being discussed, but also, more fundamentally, the underlying judgments as to what an adequate retirement income means.


What has happened to open, accountable and evidence-based government?


Michael Wolfson is an adviser with EvidenceNetwork.ca and Canada Research Chair in population health modeling-populomics at the University of Ottawa. He is a former assistant chief statistician at Statistics Canada, and has a PhD in economics from the University of Cambridge. This column was distributed by Troy Media. It has been edited for length.


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