Are We really Living the Dream?
“Our two-tiered retirement pension system”
Guest Article by Scott Devries wealthinnovations.ca
I can fondly recall graduating from university and nervously anticipating joining the work force. At that time, my only thoughts were of getting a reasonable job and a regular pay cheque. Because retirement planning never entered my head, any discussion on the long-term value of a pension plan – let alone a defined benefit fully indexed one – was completely foreign to me.
My father, like many other parents of the baby boomer generation, worked for the same company for 35 years and drew a lifetime pension. He was living the Canadian dream; he was debt free with home ownership, four university-educated children and a comfortable retirement.
Today, the dynamics of the work place have changed dramatically. Few Canadians work for a single company 35 years and have a pension plan. Of necessity, they have to personally plan for their retirement. Historically low interest rates and non-performing equity markets have compounded the problem, resulting in underperforming retirement savings across the country. For example, the Dow Jones, widely considered an indicator of the overall condition of the U.S. Stock Markets, has only averaged 0.52% before fees from 2000-2011. On an after fee basis, most investors have experienced negative returns.
Right now, 80% of the working population is employed in Canada’s private sector, where not one single employer offers a fully indexed defined benefit pension plan enjoyed by public sector employees. This reality makes the prospect of retiring in financial comfort daunting. In fact, the average private sector individual has a retirement savings shortfall of $430,000 according to a 2013 BMO study.
Canadians are also living longer. For those who are now 65 years old, one in four can expect to live beyond age 90. For a couple both ages 65, a 50% probability exists one of them will live past 90, necessitating a 25-30 year retirement plan to be in place to ensure financial comfort.
The Canadian Federation of Independent Businesses (CFIB) conducted a comparative case study of a public sector and private sector employee in 2013. The results were startling. Assuming both individuals started working at the same time, earned the exact same salary and made the same pension contributions over a 35 year period, the public sector worker would end up with a pension worth $1,381,000 while the private sector employee would only have $605,000 worth of savings from which to draw their pension; an incredible differential of $776,000!
The difference of $776,000 is largely derived from contributions made by the public sector employer, the government, as set up by a defined benefit formula that guarantees a set pension income regardless of the pension plan’s performance.
According to Dan Kelly, CFIB president, “As big as the gap may seem, we are comparing two workers who do have workplace pension arrangements.” Clearly as the study shows, a two-tiered pension system exists in Canada. Taking this a step further, makes one wonder what the gap is really like for millions of Canadians who are working in the private sector who do NOT HAVE ANY form of workplace pension plan in place.
These study results pinpoint the seriousness of the inequalities within Canada’s two-tiered pension system. Many Canadians will have to consider delaying retirement and / or / reducing lifestyle expectations unless they reconsider their entire retirement planning strategy.
Given today’s investment performance challenges, other alternative investment strategies have to be considered. For example, university endowment plans such as Harvard and Yale have averaged over 11% for the past 10 years, with Harvard’s 20-year average at over 12%. Conversely, the investor making traditional financial choices has averaged nowhere near these types of returns. By diversifying and identifying both traditional and alternative investments, superior results are definitely attainable.
These types of investments are something that all Canadians should consider for their portfolios. Though many of these investments were not accessible to the public in the past, they are now more readily available.
A second strategy to increase retirement wealth, considers the strategic reallocation of personal assets to maximize tax efficiencies and to make full use of available government resources. This plan can result in the creation of hundreds of thousands of dollars of additional retirement wealth.
Clearly, baby boomers have to seriously evaluate their existing financial situation when it comes to retirement planning. While this undertaking can be challenging given today’s economic reality, there is potential light at the end of the tunnel.
Scott Devries, B.A., CIM, FMA
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