C.D. Howe’s Malcolm Hamilton — it’s an exaggeration to say we are saving too little for Retirement

By Jonathan Chevreau

Financial Independence Hub

Don’t believe various reports that Canadians are saving too little for retirement, says C.D. Howe senior fellow Malcolm Hamilton in a report issued Thursday. You can get the full 30-page report on PDF by clicking here.

As is typical of Hamilton, now a retired actuary, the report is insightful and entertaining. While there are exceptions, generally speaking, “Canadians are reasonably well prepared for retirement,” he writes.

Right under the report’s Headline (Do Canadians Save Too Little?) the answer is delivered in small Italic type on the title page: “Reports of undersaving by Canadians for retirement are exaggerated. They rely on faulty assumptions, questionable numbers and ignore the diversity of individual retirement goals.”

Among the various reports cited, one is the Ontario Government’s backgrounders that served as its rationale for launching its own Ontario Retirement Pension Plan, more on which below.

Here’s an excerpt highlighted in a C.D. Howe press release:

“Assumptions that Statistics Canada’s household saving rate is a reliable estimate of the amount that Canadian workers set aside for retirement, and that Canadians need to replace 70 per cent of their gross employment income in order to maintain their pre-retirement lifestyle are not correct.”

Hamilton takes a closer look at the factors that have contributed to the decline in household savings and explains how this decline has been misinterpreted. He also discusses the limitations of the 70 per cent replacement target, and asks how much Canadians really need to save for retirement.

The report finds that between 1990 and 2012, as the household saving rate headed sharply lower, the amounts contributed to retirement savings plans as a percentage of employment earnings headed sharply higher. “Contributions are not 4 per cent or 5 per cent of earnings – they are 14 per cent of earnings. They are not falling – they are rising,” he concludes.

Even if you believe the reduction in household saving rates is important, the reduction was not caused by the amounts Canadians set aside for retirement or by a reduction in the accumulated retirement savings of Canadians. It was caused by a number of other factors: a significant reduction in saving unrelated to retirement; higher withdrawals from pension plans and RRSPs; and a reduction in the rate of return on retirement savings.

Hamilton believes most Canadians can retire comfortably on less than the traditional 70 per cent replacement target. He has often said in speeches and been quoted by the media to the effect many can get by replacing just half of the incomes they earned in their working years.

“The greatest challenges come early in their adult lives when the burdens of acquiring a home and supporting young children strain the family budget. After that, things get easier.”

Ontario Retirement Pension Plan questioned

Hamilton’s report is particularly skeptical about the Province of Ontario’s justifications for its Ontario Retirement Pension Plan (ORPP). The undersaving problem, to the extent that there is one, is supposed to be for middle-to-high-income workers in the private sector who lack traditional Defined Benefit plans, he says.

But according to the province’s estimates, one-third of ORPP participants will make less than $15,000 per annum and almost half of these will be under the age of 25. “Why should workers save for retirement when they are young and poor? Wouldn’t it make more sense for them to save when they are older and better able to afford it?” In making the case for the ORP, Hamilton concludes the province has exaggerated the gap between what Canadians save and what they need to save “almost beyond recognition.”

He concludes that gross replacement targets are unreliable measures of retirement income adequacy, due to the diversity of individual goals and circumstances, even for workers with similar incomes. This means programs like the Canada and Quebec Pension Plans can go only so far in addressing retirement needs. “These programs can establish a lowest common denominator – a replacement target that all Canadians should strive to equal or exceed, but beyond that, we need better-targeted programs – programs that are better able to recognize and address our individual needs.”

Canadians’ behaviour in retirement

I found the following paragraph particularly insightful about how Canadians typically behave in retirement:

The behaviour of today’s seniors is equally difficult to reconcile with the province’s [Ontario] dire assessment. Most retire voluntarily before the age of 65. In retirement they spend less than they could — choosing not to access their largest asset, the equity in their homes. They do not annuitize their savings even though this would allow them to spend more with confidence. They do not maximize their RRSP/RRIF withdrawals. They do not like to encroach on capital. They continue to save, to donate to charity and to financially support children who need help.

There are several interesting charts in the full report, and a fascinating analysis of various saving strategies, ranging from no saving at all to replacing 70% of working incomes, replacing 100% of, drawing down on home equity and a few variations on the theme. There’s no charge for the report so I suggest printing out the PDF and reading at your leisure.

As per a tweet earlier this morning, Hamilton also wrote an op ed for the Financial Post, entitled False Savings Assumptions by Ontario pension planners.