Yesterday, Deloitte Canada released a report on workers in Canada who are nearing retirement, and things aren’t looking that great for most of them.
Deloitte is a multinational professional services network based out of the United Kingdom. The Canadian operations provide audit and assurance, consulting, financial advisory, risk advisory, tax and related services.
In their report, Deloitte conducted a study of nearly 4,000 Canadian households of retirees and near-retirees (those between 55 and 64 years old). The study found that more than half of near-retiree households (55%) will need to compromise their current lifestyle if they don’t want to outlive their retirement savings.
This amounts to over 2.5 million people. Here’s how it breaks down by how ready each group of near-retirees is.
| Retirement ready | 429,600 | 14% |
| Confident but cautious | 540,000 | 18% |
| At risk | 1,110,100 | 37% |
| Primarily publicly-supported | 924,000 | 31% |
Those who are retirement ready can retire with confidence. They have over $900,000 in assets, typically own their own residence, and can probably absorb any unexpected costs.
The confident but cautious group will probably be able to retire, but only if they change their current lifestyles. They have between $400,000 and $900,000 in financial assets, and many of them own their own homes.
The third group, those who are at risk of not being able to financially sustain their retirement have some savings but not enough to sustain an average life expectancy, let alone into their 90s. Either that, or they have a lot of assets but very little in cash: their wealth is probably tied up in real estate.
Finally, the near-retirees in the primarily public-system supported group will need to rely on public retirement income streams, such as the Canadian Pension Plan, to sustain their retirement. They likely have few financial assets, if any at all. They will be particularly vulnerable to unexpected costs.
In total, 86% of all near retiree households won’t be able to absorb the costs of some sort of senior care or other unexpected costs without becoming financially vulnerable.
According to the report, 72% of near-retiree households feel that they’re not saving enough for retirement.
So what gives? Why are so many people not ready for retirement?
Well, the report blames, in part, the undermining by employers of worker pension plans.
In 2000, for example, 40.8% of all workers in Canada participated in a pensions plan. That number has dropped slightly to 39.7% in 2020. The drop is more pronounced among private sector workers, who fell from 28.2% in 2000 to 24.1% twenty years later.
To put it another way, 75.9% of private sector workers have no pension plan provided by their employer.
But it’s not just how many workers have a pension plan: it’s also the type of plan.
Among private sector workers, 21.3% participated in defined benefit plans in 2000, but that number has plummeted to just 9.6% in 2020.
In a defined benefit pension plan, the employer promises to pay workers a regular income after they retire. Both the worker and the employer typically contribute to the plan.
Those contributions are then pooled into a fund, which the employer or a pension plan administrator then invests and manages. When the worker retires, the fund basically cuts them a cheque every month until they day.
Some of that loss can be attributed to employers wanting to move to defined contribution plans. Unlike defined benefit plans, which guarantee how much a retiree gets each month in retirement, defined contribution plans only guarantee how much you will pay into it.
How much you get back from a defined contribution plan will depend on how much you pay into it, how it was managed, and what returns are like for the ways it was invested. As such, it’s difficult to plan for retirement with so little information.
Defined contribution plans have increased over the last 20 years, from 6.2% of all workers in the private sector to 8.3%. The number of workers in hybrid plans has also increased.
Unions were a strong reason that workers were more likely to be covered by a defined benefit plan, as they would often negotiate those into contracts. It should come as no surprise then that defined benefit plan participation declined during the same period that union coverage also declined.
In December 2000, union coverage among private sector workers was 20.05%. By December 2020, that number had dropped to 15.93%.
On top of that, Canadians are contributing less to their RRSPs. In 2000, 6.3 million made a median contribution of $2,700 to their RRSP. Adjusted for inflation, the median contribution fell to $2,298 in 2019.
Part of this drop in RRSP contributions is cost of living increases. In fact, over 80% of near-retiree households attributed rising everyday costs as a reason for their anxiety over retirement savings. Plus, many also have additional financial obligations, such as taking care of their children’s needs and supporting their own parents.
Things are so expensive that 40% of retirees have purchases no health insurance, nearly half of which claim they can’t afford the monthly premiums.
To deal with the rising cost of living, more seniors are taking on debt. In 2019, for example, the percentage of Canadian households that were 55–64 of age and were debt free was 28%. In 1999, that number was nearly 40%.
To make matters worse, Deloitte found that nearly half (44%) of workers are dipping into retirement savings to pay for non-retirement-related expenses (more than a third were to cover daily expenses or household debt), which will leave less available for when retirement comes.
More debt and less retirement savings is not an optimistic combination.
