Executive summary

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Recently, concerns have been raised as to whether Canadians are prepared for retirement, as enrolment in pension plans has declined in the private sector and the recent financial crisis has placed greater financial strain on existing plans (Mintz 2009). This has led to the development of a broad research agenda that is meant to expand understanding of Canadian preparation for retirement (Mintz 2009).

This research considers not only the standard sources of income of working-age and retirement-age Canadians, such as employment and pension income, but also the more difficult to measure, implicit income derived from home equity. This is a potentially important source of income in retirement, given the substantial investment that Canadians make in their own homes. It is this accumulation of equity by many Canadians that helps to pay for the shelter (or housing services) consumed by homeowners. Therefore, the implicit returns from home ownership, while not a normal line-item in the family budget, pay for a necessary service that would have to be provided by other means.

The source of the unmeasured income derived from housing services on which this paper is focused is the equity that is built up in a home often by a lifetime of investment. Because the level of equity that is accumulated in homes may differ greatly between retirement-age and working-age Canadians, it is important to take this income into account—otherwise, the gap in the reported income across age groups that is derived from traditionally measured sources may be overstated.

The paper finds housing services make an important contribution to household income. When estimates of the services provided by the equity invested in housing are added to traditional estimates of income, the income of retirement-age households in 2006 is increased by 10% to 13% for those in the 60-to-69 age class and by 12% to 15% for those in the 70-plus age class.

This additional income reduces the difference in income between working-age and retirement-age households that own their own homes. According to the Survey of Household spending, net incomes decline by about 45% between the peak household earning years and the 70-plus retirement-age class. This figure is reduced to 42% when the contribution of housing services is taken into account. The Census provides a similar picture: the gap in incomes being 38% when net income alone is considered and 35% after accounting for housing services.

Taking household size into account further reduces the difference in income between working-age and retirement-age households. According to Census of Population data, incomes of retirement-age households are between 22% and 13% below those of working-age households when housing services are included.

It should be stressed that the estimate of implicit income generated by home equity that is calculated accounts for only part of the value that home ownership provides in retirement, that is, the equivalent of housing services provided to the retiree from the investment in a home. However, this investment also provides a valuable asset.

At its root, this analysis suggests that the housing services realized by homeowners are an important source of well-being for retirement-age households.