Canadians are saving enough for retirement, says C.D. Howe study

Canadians are "reasonably well-prepared for retirement" and should ignore the pressure to save more to avoid having to eat cat food in their senior years, according to a report from the C.D. Howe Institute.

Author Malcolm Hamilton, a pension expert and former actuary, dismisses the standard advice that people need 70 per cent of their working income in retirement.

And he says the idea that savings rates are too low is based on a misreading of the Statistics Canada numbers on household savings.

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"Canadians frequently read that they borrow too much, spend too much, save too little, retire too early and live too long," he said in his study.

But Hamilton says he cannot remember a time when Canadians were thought to be saving enough.

Any assessment of the lives of senior citizens finds that the poverty rate of seniors is only half that of working age Canadians, Hamilton said.  

The average income of people over age 65 is 91 per cent of the income of working-age Canadians and most are not also trying to raise children, pay for a home and save for retirement, he points out. Very few even have to sell the family home to retire comfortably.

Ignore the warnings

The drumbeat from the financial industry and from public policy makers arguing that Canadians are heavily indebted and heading for trouble in their senior years should largely be ignored, he said.

Sure, young Canadians are heavily indebted, usually because they are paying off the mortgage and trying to raise children as well as saving for the future, Hamilton said.

But they'll reach a stage later in life when their income has risen, their children have left home and they can save quite a lot toward retirement.

Statistics Canada says the Canadian household savings rate is about five per cent of income, down from 20 per cent in the 1980s.

But Hamilton says the savings rate is closer to 14 per cent, because that number does not take into account an increase in withdrawals from pension plans and RRSPs, and a reduction in the rate of return on retirement savings.

We save more than we think

"Between 1990 and 2012, as the household savings rate headed sharply lower, the amounts contributed to retirement savings plans as a percentage of employment earnings headed sharply higher," he wrote. "Contributions are not four per cent or five per cent of earnings – they are 14 per cent of earnings. They are not falling – they are rising."

Similarly, he says the rule that people need 70 per cent of their pre-retirement income ignores how much of the equation depends on individual circumstances.  What is their marital status, are there children still at home, what are their retirement plans?

Chances are most people's income is at its highest just before they retire, but once the need to save for retirement ends, they may be able to live on much less than 70 per cent of that income, Hamilton said. He concludes there is no ideal target that fits everyone.

"I think we're better off than we thought because too many Canadians think they have to get to 70 per cent and probably most of them will be just fine with 50 or 55," Hamilton said in an interview with CBC's The Exchange with Amanda Lang.

He agreed lifespans are getting longer, but for the average person that means they might live a year longer than expected.