The retirement security of millions of Canadians is at risk as people increasingly outlive their savings report says
Living longer should not mean living in poverty, but the reality is that millions of Canadians are at risk of outliving their savings.
While few could argue that increasing life expectancy is anything but positive, many retirees are entering their post-working years having planned for a shorter retirement.
A new report published by the National Institute on Ageing (NIA) and the Global Risk Institute (GRI) calls for new solutions to maintain retirement income security amid rising longevity.
The report states that most Canadians will choose a life annuity or move savings into RRIFs. The latter will generally mean lower pay-outs after a 95th birthday, despite a 1 in 5 probability of a 65 year old Canadian living beyond that age.
“Retiring Canadians are more worried than ever that their savings won’t sustain them in retirement, and these fears are legitimate,” explains Dr. Bonnie-Jeanne MacDonald, Director of Financial Security Research at the NIA and lead author of the report. “Financial markets, inflation and health expenses are just some of the big unknowns that retirees will need to face over 10, 20, 30 or even 40 years.”
Pooling risk
The report suggests that Dynamic Pension (DP) pools could be the solution to the fear of living longer than our money.
By enabling people to pool their longevity risk, DPs make protection from outliving savings more affordable and allows retirees to spend their savings more confidently while they are alive, says the report.
Retirees using a DP pool would not have a guaranteed pension amount as they stay invested in capital markets and will see fluctuation along with potential for higher returns.
“DP pools have a risk-reward profile that is fundamentally different from the current options and products that are available for older Canadians—like costly guaranteed annuities purchased through an insurance company, or individually managing and drawing down savings from a personal retirement savings account,” says Barbara Sanders, Associate Professor at Simon Fraser University and one of the authors of the report. “Retirees who are comfortable with some investment risk can stay invested in equity markets and reap the associated rewards, which is important in today’s low interest and high inflation environment.”
Regulation required
There are some countries that offer DP pools as a decumulation solution, but they are not widely available in Canada.
The report is urging policymakers to adopt a universal DP pool framework that is available to all Canadians regardless of their employment histories, accepts all types of individual registered retirement savings accounts and encourages a broad range of providers.
“Turning lifetime savings into lifetime income is more than just a challenge—it’s an impossible task that threatens the financial and emotional security of a growing portion of the Canadian population,” said Dr MacDonald. “DP pools are a proven and viable solution with the potential to improve retirement financial security for millions of retiring Canadians.
The authors say that DP pools can not only benefit the individual but also ease the pressure on public funds by reducing reliance on income-tested federal and provincial senior social programs.
However, supportive legislation and regulation will be needed.
