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Are Canadians Getting the Most From Their Retirement System?

09/17/2015 05:18 EDT | Updated 09/17/2016 05:12 EDT
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Depending on where you live and work, the answer to this question will vary. In addition to potentially having a workplace pension plan, Canadians have private options such as RRSPs and TFSAs, as well as several government products to navigate such as CPP, OAS and GIS. Depending on which province you are in, you may also benefit from a provincial pension plan. With so many products, it is no wonder that Canadians are struggling with determining how much they will need to retire.

Despite the number of potential income streams, does the current retirement system in Canada help retirees amass enough assets to live off of for 20 to 30 years of retirement, or are its requirements and constraints hindering people from saving and investing effectively?

As provincial and federal governments attempt to improve our retirement system, one has to ask whether Canada currently has an ideal system and what can be done to strengthen it. Determining the best way forward can be challenging, since retirement security spans government politics, employer practices, individual investor education and cultural differences.

I would like to highlight some suggestions from a recent report -- An Ideal Retirement System -- that CFA Institute commissioned from Mercer, a global retirement consulting leader, earlier this year. The report suggests 10 principles for an ideal retirement system.

A few of the principles are relevant for retail investors:

  • Contributions to retirement accounts at the required minimum level must have immediate vesting. These benefits should be accessible only under certain conditions, such as retirement, death, or permanent disability

Many employers require workers to be employed with them for several years before employer contributions to retirement accounts are officially transferred to employees. But given that the average worker changes jobs every 4.4 years, there is a chance that some workers could depart before their benefits vest, leaving money on the table that could be worth thousands in retirement savings someday.

  • A minimum level of funding should be put into a pension system for all workers, with contributions by employers, employees and the self-employed, as well as for those of working age who are receiving certain forms of income replacement

In effect, this means every worker will have a retirement account with an entitlement to future benefits.

  • There should be cost-effective and attractive default arrangements, both before and after retirement

This is for individuals who do not wish to make decisions or don't feel comfortable making them.

  • There should be taxation support from the government in an equitable and sustainable way, providing incentives for voluntary savings and compensating individuals for the lack of access to their pension savings

In Canada, both the RRSPs and TFSAs use taxation as means to incentivize savings.

  • Instead of annual contribution limits for retirement plans, there should be lifetime contribution limits to maximize contributions when possible. People do not reach the maximum amount of disposable income at the same time. For younger people, saving for a home or having children may affect their ability to contribute to their retirement account. For older people, health issues may siphon off money that could go to retirement accounts

So, does Canada have an ideal retirement system, and how does it stack up against retirement systems in the rest of the world? According to the most recent Melbourne Mercer Global Pension Index, Canada actually received a grade of B and was ranked seventh, well ahead of the United States and comparable to the United Kingdom and Sweden. A grade of B is quite admirable, but also shows that there are areas that could be improved. While Canada ranked high in adequacy and integrity, sustainability was the area requiring the most improvement.

Mercer suggests that the overall index value for the Canadian system could be increased by:

  • Increasing the coverage of employees in occupational pension schemes through the development of an attractive product for those without an employer-sponsored scheme

  • Increasing the level of household savings

  • Introducing a national minimum age for accessing pension benefits

  • Increasing the labour force participation rate at older ages

While the federal and provincial governments consider improvements, it should be noted that investors, plan sponsors and investment-management firms play just as important a role in improving the collective retirement security of Canadians. Ultimately, though, the person who plays the biggest role in having a secure retirement is you.

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