Pensions: How much is enough?

THE ATTENTION pension reform is getting in the media these days has me wondering: How many seniors are out there scrimping and saving because they’re uncertain about how much money they’ll need to survive in the future?

My own late father, who was fairly savvy when it came to financial matters, was very cautious about spending his meagre pension income because he had an ongoing concern that he’d outlive his nest egg or, even worse, he’d become sick and his savings would be wiped out.

As it turns out, he didn’t have to worry about outliving his savings or suffering from an extended illness, but I still recall his frustration that there wasn’t a definitive answer to the question, “How much is enough?”

Frankly, nobody knows for sure. The best anyone can do is make an educated guess based on lifestyle, health and various factors including where you choose to live in retirement.

Susan Eng, vice-president of advocacy with the Canadian Association of Retired Persons, says the collective wisdom suggests that one’s retirement income should be 60 per cent to 70 per cent of your pre-retirement income.

“Subject to the qualification that if you are asset rich, you’ve invested well or you have a great inheritance, you may not need 60 per cent or 70 per cent of your pre-retirement income because you have other sources.”

Of the Canadian population, 85 per cent of civil servants achieve that benchmark, says Eng, and generally speaking, only about 25 per cent of private sector workers have pensions of 60 to 70 per cent of pre-retirement income.

If changes are to be made to pension rules in Canada, she says, it might be an idea to put in place a minimum rule, which could stipulate that pension income must be at least 60 per cent of the average working wage and/or 60 per cent of pre-retirement income. It might even allow for a percentage of the average working wage in combination with 60 per cent of the pensioner’s pre-retirement income.

Another problem is inflation, which could eat away the purchasing power of anyone on a fixed income, such as pensioners. She says all the government employee pension plans have inflation protection built in. But in the private pension plans, some have inflation protection and some do not. Union-negotiated plans tend to have inflation protection, she says.

“Right now, inflation is at less than two per cent . . . so it is not meaningful. It is the gross amount that is important and the most important part is the contribution from employers. That really does start to magnify your potential savings.”

She says about three-quarters of Canadians in the private sector don’t have access to workplace pensions and therefore a new retirement savings vehicle, which would be widely accessible and affordable, should be put in place to provide a predictable and adequate pension income.

Left to their own devices, most Canadians are not saving enough for their retirement and the existing Canada Pension Plan will soon become inadequate, she says. Canada needs a new pension plan that will be affordable and self-sufficient for the future.