Thank you, Mr. Chairman.
I'd like to address my comments to the issue of adequacy of retirement savings among Canadians.
How much Canadians should save for retirement depends on a number of factors. As a rough guide, it is often suggested that to maintain one's standard of living in retirement, pension income from all sources should be about 70% of pre-retirement earnings.
So, for example, a retiree who is earning $60,000 annually in the last year of his or her employment should be receiving pension income from all sources of approximately $42,000. If the retiree is receiving an average CPP and OAS of $12,000, he or she will need to have saved enough in a pension plan or RRSP to provide a pension of about $30,000 in order to achieve a target replacement ratio of 70% of final average earnings.
How much will this $30,000 pension cost? At today's annuity purchase rates, the cost of providing a dollar of pension that's indexed and provides spousal survivor benefits is about $21, if the pension starts at age 60, and $18.50 if the pension starts at age 65. This means that to have a pension of $30,000, this retiree earning $60,000 at retirement will need to have saved between $550,000 and $650,000, depending on the desired retirement age.
Of course, it must be acknowledged that a pension replacing 70% of final average earnings will not be the right target for everyone. Some retirees will need more, while others will need less, depending on the level of pre-retirement earnings, whether the retiree owns a home or rents, whether the retiree's spouse has pension income, whether there are any dependents, and the cost of living in the area where the retiree resides.
How much have Canadians saved for retirement? It's a difficult question to answer because the data available on private retirement saving in Canada do not provide a clear picture of how much Canadians have saved for retirement. Nevertheless, there is substantial reason to believe that Canadians working in the private sector are not saving enough for retirement and are not well prepared for retirement.
According to data collected by Statistics Canada for 2005, the median retirement savings for Canadian families in which the major income earner is close to or at retirement age are quite low: $55,000 for a family that has an RRSP only; $227,000 for a family that has a pension plan only; and $245,000 for a family that has a pension plan and an RRSP. Assuming retirement at age 60, these savings would deliver monthly pension incomes of $218, $900, and $972 for a family.
These numbers are obviously low, and it is important to remember two things about them. First, they reflect the retirement savings of families, not individuals. Second, they're based on savings data for public and private sector workers. Since public sector workers typically have much higher rates of retirement savings, this means that private sector retirement savings must be considerably lower than these median amounts suggest.
So how much have public sector workers saved? Let's take a federal public service worker as an example. In 2006-07 the average number of years of service at retirement was 30.5 and the average retirement age was 58. Assuming a career-ending salary of $70,000 per year, a public sector worker with 30 years of service retiring at the median retirement age will collect a pension worth about $850,000 at current annuity purchase rates.
For a two-income public service family, this translates into total family retirement savings of about $1.7 million. This excludes any additional RRSP savings that the family may have accumulated in addition to their pension savings.
The difference between public and private sector retirement saving raises a serious question as to whether the regulatory structure for retirement saving may be preventing private sector workers from accumulating adequate pensions.
In the public sector, 85% of workers participate in a pension plan that provides a very good pension, but in the private sector, 75% of workers have no pension at all. Why? The answer lies primarily in unduly restrictive federal tax rules that effectively prevent most private sector workers from joining a pension plan or saving for retirement in their RRSPs at the same rates that public sector and private sector workers with good pension plans do.
Tax rules that prevent private sector workers from accumulating good pensions include the following: you can't join a pension plan unless you have a job with an employer who sponsors one; you can't contribute income from self-employment to a pension plan; and if you lose money in your RRSP or DC pension plan due to a market downturn, you can't contribute more to catch up.
Quite routinely, the retirement savings of public sector workers are five to seven times as much as they are in the private sector. This is not to suggest that public sector workers don't earn their pensions or that public sector pensions should be reduced. Most public sector pension plans are well managed and operate cost-effectively due to their economies of scale.
Indeed, one solution to the problem of inadequate retirement saving in the private sector would be to deploy the successful public sector model in the private sector and make membership available to private sector workers who have no coverage. But under current tax rules, this is not possible.
It's my view that the focus of retirement saving needs to be the reform of tax rules that prevent adequate private sector retirement saving.
Thank you.