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Canada’s Solid Retirement System May Be Why We’re So Willing To Get Into Debt

A new ranking says Canada has one of the best retirement plans around, but there may be a debt-related downside.
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MONTREAL ― Canada has one of the best retirement pension plans in the world, but the security that comes with it could be why consumers here have one of the highest debt burdens in the world, a new study suggests.

This year’s edition of the annual pension survey from Monash University in Melbourne, Australia, and human resources consultancy Mercer ranked Canada ninth in the world. Top spot went to the Netherlands, followed by Denmark.

The study looked at 37 retirement pension schemes around the world, covering two-thirds of the world’s population. It assessed pensions according to three broad categories: Adequacy, sustainability and integrity.

Mercer/HuffPost Canada

But the researchers found a perhaps unexpected correlation: Countries with the strongest retirement schemes also have the highest consumer debt levels. Those things may be related, according to David Knox, a senior partner with Mercer in Australia and author of the study.

Households in Denmark ― which has the second-strongest retirement pension system in the ranking ― also have the highest debt burden among developed and developing countries, according to data from the Organisation for Economic Co-operation and Development.

The Netherlands, with the strongest pension plan, has the second-most indebted consumers. Canada, which ranks ninth for its pension scheme, also ranks ninth for consumer debt levels among the 34 free-market countries of the OECD.

OECD/HuffPost Canada

Knox suggests this correlation is because of the “wealth effect” ― people tend to spend more if they feel wealthier or more financially stable, even if they don’t necessarily have more cash on hand.

“As the wealth of an individual grows, whether it be in home ownership, investment portfolios or their retirement savings, so does their comfort with amassing debt,” he said in a statement.

“The evidence suggests on a global basis, for every extra dollar a person has in pension assets, their net household debt rises by just under 50 cents.”

Watch: A spending ‘stress test’ might be the solution to millennials’ debt woes. Story continues below.

The wealth effect can also work the other way. For instance, economists say the slowdown in Vancouver’s real estate market has led to a drop in retail sales. So a decline in the fortunes of the Canada Pension Plan ― such as a stock market nosedive ― could also prompt Canadians to pull back on spending (and, with it, borrowing).

The study notes that retirement pension schemes around the world are under pressure due to an aging global population and declining birth rates. The lowest scores in the study ― including for Canada ― were in the “sustainability” category, which measures how long a pension plan can reliably keep providing benefits.

“Systems around the world are facing unprecedented life expectancy and rising pressure on public resources to support the health and welfare of older citizens,” Knox said.

“It’s imperative that policy makers reflect on the strengths and weaknesses of their systems to ensure stronger long-term outcomes for the retirees of the future.”

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