Is It Our Fault That We Are Not Saving Enough For Retirement?

A recent study by the Broadbent Institute concludes Canadians are not saving enough for retirement and that will be a driving factor in poverty rates among seniors in the future.

The study found the median value of retirement assets for Canadians aged 55 to 64 with no accrued employer pension benefits to be just over $3,000. By anyone's measure that's clearly not enough to fund a retirement.

This study ignores the impact of real estate investment because, they say, it is not a liquid asset and cannot provide retirement benefits unless sold. The study assumes most will want to continue to own a home so cannot 'live' on the value of this asset. That may be logical, but if I own a paid for house I will have a much different retirement than if I don't have that asset at my disposal.

While the study ignores one big asset (real estate), it also doesn't mention a huge problem for many seniors: debt. Senior debtors now account for 10 per cent of all insolvency filings, up from eight per cent four years ago. They owed over $69,000 at the time of their bankruptcy or consumer proposal filing, the largest amount of unsecured debt of any age group. Compared to all other age groups, seniors have the highest credit card debt, tax debt, and even payday loan debt.

I believe that as a society we should ask a more basic question: what are the barriers to savings?

So, while I think the Broadbent study has some shortcomings, I do agree with its basic conclusion: many of us are not prepared for retirement.

The Broadbent Institute recommends an increase to the Guaranteed Income Supplement (GIS) to help lower income seniors pay for their living expenses.

Is that the solution? I'm not a pension expert, so I can't offer a detailed analysis of their proposal. I do, however, have some thoughts.

While it is a worthy goal to maximize your savings prior to retirement, it is even more important that you retire debt free. If you retire and are still making payments on car loans, mortgages, or high interest rate debts like credit cards and payday loans you require a much higher income in retirement to survive. Being debt free is the first step.

Second, I believe that as a society we should ask a more basic question: what are the barriers to savings? I can think of a few.

In 1960 the average life expectancy in Canada was 70 years. Today it's over 81 years. We are living longer, so we need more resources to fund a longer retirement. Is it reasonable for us to continue to expect that retirement should begin at aged 60 or 65? Perhaps reality will prove that we need a combination of increased pension benefits for low income earners with a delay in the age at which we can all begin to collect.

Interest rates are also much lower today than they were in the past. Historically over the last few decades "real" interest rates, after deducting inflation, have averaged around three per cent, so you could put savings in a guaranteed investment certificate or savings bond and earn a three per cent rate of return. Today, a standard savings account pays zero interest, and real interest rates are practically zero if not negative. Even if I want to save for retirement, how can I do it if there is no way to earn a positive return?

That's why pre-retirement Canadians are "investing" in real estate and the stock market, which is great when they are going up, but can be a disaster when they crash (just ask real estate investors in Calgary this year). And it's also why many are seeing their debt levels rise. Low interest rates combined with a reliance on government support are counter-intuitive to pursing stable, secure, retirement savings.

Perhaps instead of governments around the world working to lower interest rates, which encourage high debt levels and discourage savings, a return to more normal interest rates would be a better long term policy.