Increasing Retirement Savings Yields Positive Economic Benefits
Improving retirement income security for Ontario workers is crucial to the future of the province, according to the Long-Term Report on the Economy.
More than 35 per cent of households are not saving enough to ensure a similar standard of living in retirement.
Middle-income earners, younger workers and those unable to access workplace pension plans are more likely to have inadequate retirement savings.
In 2012, 66 per cent of Ontario's workers did not belong to a workplace pension plan.
The report illuminates a number of economic and demographic factors that impact retirement savings in Ontario:
- Most people do not have a workplace pension;
- Contributions to voluntary savings are lacking and consistent investment returns are hard to achieve;
- Existing Canada Pension Plan (CPP) retirement benefits are inadequate; and
- People are living longer.
Workplace pension coverage
The absence of a workplace pension plan tends to leave those with middle incomes particularly vulnerable to insufficient retirement savings. Ontario Ministry of Finance analysis suggests that middle-income households with no workplace pension coverage are more likely than those with pensions to experience a decline in living standards when they retire.
Contributions to voluntary savings and investment returns
Years of low interest rates and capital market performance have contributed to lower savings and higher personal debt levels (especially mortgage debt).
In 2011, only about one third of workers (including the self-employed) with incomes between $25,000 and $50,000, and only about half of workers with incomes between $50,000 and $75,000, contributed to an RRSP. The average RRSP contribution of workers in both income groups has declined in recent years.
CPP Retirement Benefits
The CPP replaces only 25 per cent of career average pensionable earnings, and workers cannot contribute on earnings above $52,500 (2014). These limits mean that the current maximum CPP benefit is only about $12,500 per year.
The modest nature of the CPP has the biggest impact on middle-income earners, many of whom rely on the CPP to form the basis of their retirement income. Its low replacement rate and earnings ceiling curtail its ability to provide effectively for these workers once they retire.
Life expectancy
Life expectancy at age 65 has increased significantly. By 2035, it is projected that Ontario men at 65 will have on average 23 more years to live and Ontario women at 65 will have on average 25 more years to live. While these projections are averages, a significant portion of future retirees will live well beyond the average. Increasing life expectancy has put pressure on pension plans and personal savings to provide retirees with adequate income throughout retirement.
Given the federal government's reluctance on a CPP expansion, Ontario is leading the way to develop a made-in-Ontario pension solution, which will help people retire with better security.
With input from the Technical Advisory Group on Retirement Income, consisting of a group of experts with a range of perspectives, including participants from other provinces such as Manitoba and Prince Edward Island, Ontario is working on an alternative to CPP enhancement.
Adequate personal savings, efficient investments and better access to pension plans would help Ontarians be better prepared financially for their retirement future.
Higher retirement savings would mean less reliance on government transfers and services, a higher quality of life for future retirees and more capital available for investment in the economy.
In addition, more income in the hands of future retirees would help the Ontario economy better adapt to an aging population and slower labour force growth. Future incomes would be higher and economic growth would be stronger.
To help ensure a better and more secure future, the government is taking steps to strengthen the retirement income system for all Ontarians.
The Long-Term Report on the Economy provides a detailed summary and analysis of Ontario's challenges and opportunities over the next 20 years.