Public Values

Younger Canadian workers face decline in living standards when retired

Study concludes living standards will decline unless changes are made.

Public sector pension plans could see the value of pensions declineWhen federal and provincial finance ministers met in Whitehorse last month, two starkly differing reports were presented regarding Canada's future retirement income system.

A report commissioned by the federal department of finance – authored by University of Calgary professor Jack Mintz – concluded that $Canadians are doing relatively well in ensuring they have adequate savings for their retirement."

Mintz argued, to the surprise of many, that the retirement income system is performing well – "providing Canadians with an adequate standard of living upon retirement."

A key problem with Mintz report is that it does not focus on the retirement prospects of today's younger workers but instead focuses attention on the well-being of the current elderly and on overall savings rates based on a snapshot of research on recent retirement savings prior to the economic crisis.

However, a paper commissioned by the Ontario government comes up with a much different conclusion suggesting that a substantial number of younger Canadians face a decline in living standards in retirement unless changes are made. This paper was prepared by Bob Baldwin, a recognized expert on pension policy and a member of the Ontario Expert Commission on Pensions. He is also the former Canadian Labour Congress (CLC) research director.

Baldwin identifies a number of trends that will make it harder for young workers to maintain their standard of living in retirement as effectively as those already in retirement:

• The percentage of pre-retirement income covered by the Canada Pension Plan (CPP) and Old Age Security (OAS) pensions will likely fall as a result of the wages of younger workers rising faster than Canada Pension Plan (CPP) and Old-Age Security (OAS) benefits.

• Contributions required to support traditional defined-benefit pension plans will likely rise as life spans get longer and as the active workforce continues to age.

• Public sector pension plans could see the value of pensions decline as more plans make inflation protection contingent on investment returns that may not be achieved.

• Workforce participation among women is unlikely to increase more than the level that has already occurred, thus limiting opportunities to increase the retirement income of baby-boomer couples.

• As the demand for a higher education workforce increases, later entry into the workforce and later child rearing will cut into families' ability to accumulate wealth.

• The projected rise in immigration will increase the percentage of workers who can look forward to partial OAS pensions, and increase the numbers who have to save more and worker later in life.

• More workers will experience unpredictable levels of income in retirement as employers attempt to move away from defined-benefit to defined-contribution plans, or leave employees to save on their own.

Baldwin also points out that earlier research on the retirement savings of Canadians used data collected before the last two stock market crashes and ignored several of these pending changes in Canada's economic, financial and demographic environment.

Baldwin's report notes that the majority of people who are currently elderly in Canada have achieved a reasonable level of income in retirement compared to their pre-retirement incomes. "However, for a significant minority of elderly who had moderate to high earnings before retirement, retirement may have resulted in a noticeable decline in living standards," the report concludes.

Links and sources
  Bob Baldwin report
  Analysis of Mintz report

Posted: January 15, 2010

  Front lines

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