Pension Crisis in Canada

Advocis-The Financial Advisors Association of Canada-recently conducted a study which examines existing barriers to establishing and maintaining pension plans and incentives to encourage small and medium-sized employers to participate in pension plans. Throughout their investigation, Advocis confirms that the number of Canadian employers offering any form of employer-sponsored pension plan has been declining, and only one-third of Canadian employees have an employer-sponsored pension plan.

As a result, Advocis states that there is a pension crisis in Canada and that only one-third of Canadians will have adequate income at retirement.

It would seem that the majority of Canadians are depending on the government to help fund the lion’s share of their retirement. While Canada has a public pension system considered one of the world’s most financially stable in the world, it also pays among the least generous benefits.

The maximum annual Canada Pension Plan (CPP), Old Age Security (OAS), and Guaranteed Income Supplement (GIS, a supplement for low-income individuals aged 65 or older), is $10,905, $6,203, and $5,170, respectively, for a total annual income of $22,278 (all amounts are indexed to inflation). And even these amounts are not guaranteed. The proportion of seniors in Canada’s population will balloon to as much as a quarter of the population by 2030, from 14 percent now. In addition, even without raising benefit levels, these programs will cost $80.5 billion by 2014, accounting for 17.4 percent of all program spending.  Therefore, the government will be faced with a large strain on their funding of these programs, threatening the amounts quoted above. Despite this combined small amount of potential income from CPP, OAS, and the GIS, less than a third of Canadians contribute to an RRSP to help supplement their income in retirement.

Without a workplace pension or personal savings to fall back on, many Canadians face a deep and sudden decline in their standard of living once they enter retirement. In addition, with CPP, OAS, and GIS as their only source of income, an unexpected financial emergency may plunge these seniors deep into poverty and they may be unable to get back out. Therefore, with such a grim picture for their retirement, Canadians are faced with a decision: save more or be forced to hold down a job well past 65.

But individuals who do have an employer-sponsored pension plan are not entirely out of the woods:  if we experience another downturn in the market comparable to the one we have just seen in 2008 then your employer, and hence pension, may not survive. Thus, we believe that everyone should supplement their retirement income by contributing early and often to their RRSPs. We also recommend that individuals utilize the new Tax-Free Savings Account (TFSA) if they max out their yearly RRSP contribution. In fact, saving for your retirement should be treated as any other bill; set up a monthly plan and have the money automatically withdrawn from your bank account so that you do not have the temptation to spend it.

The amount of income you actually need in retirement depends on your financial situation as well as your long term goals. Contact us and we can help ensure that you do not under-save, and that you can live your retirement in peace and comfort knowing that your financial plan is sound and your portfolio is well structured.

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