Chapter 18 New vulnerable groups and living standards in the retirement years

As the leading edge of the baby boom generation reaches its late fifties, it is perhaps not surprising that retirement has become a major preoccupation. But uncertainty about retirement also seems to be increasing. Statistics Canada's General Social Survey, conducted in 2002, looked at "near-retirees" - people aged 45 to 59 - and found almost one-third of individuals in this age group felt they had not made adequate financial preparations to maintain their standard of living after they leave their jobs. Although no definition of "adequate" was provided to respondents, these findings were very similar to those of an earlier Statistics Canada survey that concluded about one-third of near-retirees may not be saving enough for retirement, because their post-retirement income would not be enough to replace 70% of their preretirement earnings, or to generate an income that is likely to be above the low-income cut-off.

In the early years of the new century, volatile stock markets pushed pension plans into deficit position and undermined the value of individual retirement savings. Increasingly, employers who sponsored defined benefit pensions plans, guaranteeing a pension related to earnings and length of service, have converted their programs to defined contribution plans or group RRSPs where the eventual pension depends on stock market returns and interest rates prevailing when the employee retires.

Amid growing uncertainty about their future financial security, many people are no longer sure about when they will be able to withdraw from paid employment. Individuals who took early retirement are going back to work - some for financial reasons, others because they prefer to keep active. Almost one-fifth of those surveyed in the 2002 General Social Survey said they did not intend to retire at all. Many of these people had lower household incomes, they did not own their own homes and they had lower levels of education. Saying they have no intention of retiring probably reflected their concern about their financial ability to leave the labour force.

Whether or not financial preparations for retirement were considered adequate was strongly associated with demographic characteristics and labour market experiences. For instance, women surveyed in 2002 were slightly more likely than men to say they expect their retirement income to be inadequate or barely adequate to maintain their standard of living. Recent immigrants were also more likely than persons born in Canada to believe they would not have enough to live on. In fact, other studies have found that declining earnings among recent immigrants will make it much more difficult for them to make ends meet and make them much more vulnerable to setbacks such as job loss or unexpected expenditures.

Individuals in poor health were almost twice as likely to view their retirement preparations as inadequate as were those who said their health was excellent. And people who were widowed, separated or divorced were far more likely to feel financial preparations were inadequate compared with those who were married or living in a common law relationship. In fact, unattached individuals - and particularly women - in the older age groups may be particularly vulnerable as they approach the retirement transition.

Developments in labour markets, particularly the growing incidence of non-standard work arrangements, have helped create groups who will become vulnerable to inadequate levels of living in their older years. Women and immigrants are particularly at risk. Even workers who have full-time permanent employment may become vulnerable as defined benefit pension plans face funding problems and employers try to renege on their pension promises. Sixty per cent of all paid workers do not have an occupational pension plan at work. Public pension programs such as the Canada/Quebec Pension Plan and Old Age Security are designed to provide only a basic income, leaving many individuals to provide for their own retirement security through personal saving. Financial insecurity may have a profound impact on retirement transitions. In the fourth section of this book, we will examine some of those issues more closely.

It is important to note that the nature of paid employment for many of today's workers is now very different from that of previous generations. A full-time permanent job, once considered "standard" is no longer the norm. Increasing numbers of workers now find themselves in other kinds of work arrangements. Some are short-term, temporary jobs; others are contract work, part-time and casual jobs. Many workers hold multiple jobs as a way of making ends meet. Others have become self-employed, working for their own account without employees. These "non-standard" work arrangements now account for more than one-third of all jobs in Canada.

Although there are exceptions, non-standard work arrangements generally tend to be poorly paid. Working conditions are often uncertain and there may be little or no job security. Workers may be expected to work at home or to be on call when an employer needs them. Employment standards legislation may not apply and workers in these jobs are generally not eligible for pensions and other benefits. For obvious reasons, researchers now describe these jobs as "precarious employment."

In the first chapter of this section, Monica Townson looks at the characteristics of precarious employment in Canada and considers the implications for the future financial security of those employed in this type of work when they reach retirement age.

In terms of preparing for financial security in retirement, these workers are clearly among the most vulnerable in the labour market. Because they generally do not have an ongoing relationship with a particular employer, they are not covered by workplace pension plans. But financial security in retirement depends on more than simply belonging to a workplace pension plan. Many workers in "standard employment" are not covered by these plans either. However, workers in precarious jobs face additional challenges. Their uncertain and fluctuating earnings may make it difficult for them to save for their own retirement. Although they are covered by the Canada/Quebec Pension Plan, these plans provide only a basic pension in relation to the contributor's earnings, and high contribution levels may be burdensome for workers with low or intermittent earnings.

Women are more likely than men to be employed in non-standard work arrangements. That will have an important bearing on their plans for retirement, their ability to save, the likelihood of their belonging to a workplace pension plan, and their financial security as they grow old. In 2004, for example, when women accounted for 47% of total employment of people aged 15 to 64 in Canada, they were 55% of total non-standard employment. Forty percent of women's compared with about 29% of men's jobs in 2004 were considered "non-standard."

Some researchers have suggested that low earnings of workers in non-standard work arrangements may not indicate financial vulnerability, since many of these workers may be in family situations where a higher-earning spouse or partner is able to support them. However, there is no guarantee that a higher-earning spouse will provide for the retirement income of the lower-earning spouse. In addition, given the increasing instability of spousal relationships, the higher-earning spouse or partner may not even be present to support the lower-earning spouse in old age. Since is it most often women who are employed in lower-paying non-standard work arrangements, such arguments undermine women's equality and the push towards economic autonomy for women. They imply women must continue to depend on a spouse or partner for financial support in retirement.

The duration of non-standard working arrangements is an important element in assessing the vulnerability of these workers as they enter their retirement transition. Where such work arrangements continue for long periods of time, the vulnerability of the individual in old age is likely to be increased. Townson emphasizes that for some workers, a non-standard work arrangement may represent a short-term situation. For example, students may work part-time while completing their education; older workers may ease into retirement by accepting casual work or becoming own-account self-employed; women may work part-time while their children are young.

Longitudinal data that would shed some light on this aspect of precarious employment are unfortunately limited. However, one recent study indicates that for some groups, non-standard work arrangements persist for significant periods of time. In fact, according to the authors of this study, "some individuals find themselves involuntarily working in some form of non-standard employment for years."

Pension coverage is particularly problematic for contingent workers. Participation in a workplace pension plan is generally restricted to paid workers having an employer-employee relationship. By definition, most contingent workers are therefore excluded. Temporary or contract workers, for example, do not have the opportunity to join the employer's pension plan. Setting up a workplace pension plan is not an option for self-employed workers who work for their own account.

Part-time workers who have an ongoing relationship with a particular employer have a better chance of coverage under a workplace pension plan and pension standards legislation in all Canadian jurisdictions now requires an employer having a workplace pension plan for full-time workers to give part-time employees the option of joining the plan. But low earnings mean many part-time workers, given the choice, choose not to join. Others may opt for cash in lieu of benefits, using the additional income to finance day-to-day expenses rather than setting it aside for retirement. In addition, the majority of employers do not offer workplace pension plans to their employees and the legislative requirement to include part-time workers in the pension plan only applies where the employer has a pension plan for full-time employees.

Registered Retirement Savings Plans (RRSPs) were specifically designed to allow those without occupational pensions to set aside their own funds for retirement, deferring tax until the funds are withdrawn. But low wages and uncertain working conditions may make it very difficult for workers in precarious jobs to provide for their financial security in retirement in this way. In effect, contingent workers who may have no occupational pension plan through their employment are often unable to compensate for the fact by setting aside their own savings for retirement. While some may manage to set aside funds in an RRSP, contingent workers may use RRSPs as a way of providing a financial cushion to tide them over when they are between jobs. Savings in an RRSP may be cashed in at any time and used for any purpose as long as the amount withdrawn is declared as income in the year of the withdrawal. While the amount would then be subject to tax, a contingent worker with low earnings in a particular year may find her tax liability for the RRSP withdrawal will be minimal. In fact, many people do withdraw funds from RRSPs prior to retirement, particularly in years of poor economic conditions.

Given the lack of coverage of workplace pension plans and the difficulty of accumulating private savings for retirement, Townson notes that public pension programs are particularly important for those who spend periods of their paid employment in non-standard work arrangements. Virtually all contingent workers will eventually receive benefits from the earnings-related Canada Pension Plan (or Quebec Pension Plan in Quebec). But the monthly benefit they eventually receive may reflect periods of low earnings experienced during their years of paid employment. While Old Age Security (OAS) and the Guaranteed Income Supplement (GIS) provide a basic guaranteed income for seniors and are important for those whose paid employment included long periods in precarious jobs, OAS and GIS combined provide only a poverty-level income.

Townson concludes there still is little information about the impact of periods of precarious employment on financial security in retirement. To a large extent, the key questions can only be answered by longitudinal data, which unfortunately is still relatively limited.

Whether the elderly have and will continue to have adequate incomes receives minimal consideration in current public policy discourse, in the view of Bob Baldwin. To date, the decision to create a pension system that relies heavily on the third pillar as a source of income appears to have worked reasonably well, he suggests. Tax-assisted private retirement savings, including workplace pension plans and Registered Retirement Savings Plans (RRSPs), that constitute the third pillar of the retirement income system, have contributed to an improvement in living standards for elderly households.

Workplace pension plans include both defined benefit (DB) plans where a pension relating to earnings and years of service is guaranteed and defined contribution (DC) plans where no particular pension is guaranteed but contributions, generally expressed as a percentage of salary, are accumulated in a fund and used to buy an annuity when the individual retires. An RRSP effectively has the same characteristics as a DC plan, with the notable exception that RRSPs - and group RRSPs that an employer may establish for employees - are not regulated by pension regulatory authorities.

As the purchasing power of older people has increased, there has been a tendency to assume that income adequacy was a problem that has now been solved. But Baldwin's chapter, A shaky third pillar: The vulnerability of retirement incomes asks whether there might be a broader issue of vulnerability to inadequate incomes than is suggested in mainstream policy discourse.

While much of the commentary on the improved income situation of Canadians aged 65 and over attributes the improvement to the strength of the Canadian retirement income system, what is often overlooked is the way in which the third pillar has interacted with a very specific set of economic circumstances to produce both the positive absolute and relative situation of the elderly. High rates of return on financial assets during the 1980s and 1990s benefited all parts of the third pillar. Investment returns of defined benefit plans easily exceeded the rate assumed by plan actuaries when calculating plan liabilities. Pension surpluses became common and were used in some cases to finance benefit improvements for plan members or to make ad hoc adjustments to pensions in pay, as well as to facilitate special early retirement packages in downsizing situations.

Higher investment returns also made a direct contribution to individual savings arrangements, such as RRSPs. What is clear, says Baldwin, is that the circumstances of the 1980s and 1990s made it easier to achieve retirement income objectives through the third pillar. But rates of return on financial assets declined precipitously from mid-year 2000 to the early part of 2003. The particular features of the economic environment - low inflation, low real wage growth and high returns on financial assets - gave a strong boost to the absolute and relative incomes of older Canadians in the latter part of the twentieth century. But the same institutional arrangements cannot be expected to produce the same results in different circumstances.

Workplace pension plans now face financing difficulties - a situation that has at least sparked a thorough debate on the issue. But far less attention has focused on the reality that the change in financial markets that produced the defined benefit crisis was affecting defined contribution plans as well. The difference, however, is that individual plan members rather than employers have borne the brunt of the impact on DC plans. While poor performance here may result in lower monthly benefits for plan members, the impact could also be manifested in delayed retirement.

Along with these developments, there has also been a shift in coverage from DB to DC plans and to group RRSPs. As a result, a larger share of the future elderly will have their workplace pension incomes more directly exposed to investment risks at or around the date of retirement.

Given the role that workplace pensions play in the retirement income system, their overall contraction is less likely to manifest itself in more older Canadians with incomes below low income measures than in fewer people stating that their standard of living is as good as it was during their employment. It will also be reflected in fewer people being able to retire comfortably before age 65.

Baldwin concludes that the third pillar has clearly been weakened and there is a more broadly based vulnerability of retirement income in Canada than one would assume from policy discourse.

Today's older Canadians have a much wider range of income sources than previous generations. Long Mo, Jacques Légaré and Leroy Stone say that the composition of income of the elderly has changed considerably since the 1980s. They point out that the OECD considers diversifying the income sources of retirees will present a major challenge in dealing with the pressures of aging populations. Individuals with the least number of sources of income in retirement are also likely to be those with the lowest incomes. In fact, progress in reducing poverty among the elderly may be attributed to the diversification of income sources. To the extent that public pension programs come under pressure as a result of population aging, it will be important to emphasize other sources of retirement income to protect the financial security of the elderly, these authors say. Diversification of income sources of the elderly provides greater financial security in retirement.

Past studies of diversification have often been limited to theoretical or qualitative research. In their chapter on the diversification and privatization of the sources of retirement income in Canada, these authors develop an index of diversification of retirement income in Canada to serve as the basis for a quantitative analysis of the years between 1980 and 2002. They present an examination of recent trends in the sources of income, with particular emphasis on unattached older women and older immigrants, both groups which are known to have unusually high vulnerability to inadequate standard of living in retirement.

Older Canadians have five possible sources of income, according to these authors: (1) net government transfers, consisting of benefits from Old Age Security (OAS) and the Guaranteed Income Supplement (GIS). (2) Benefits from the CPP/QPP. (3) Income from private pension plans, including both registered pension plans and RRSPs. (4) Returns on investment, including dividends, interest and rents. (5) Employment income. Since the 1980s, the composition of income sources of the elderly has changed considerably. Dependence on government transfers has declined, while income from the CPP/QPP has increased considerably as an important income source.

Over the years, work, family, the state and the market have all played a role in retirement security. But the relative importance of the contribution of these various elements has changed. Older women living alone, for example, used to depend mainly on government transfers and investment income, now they depend more on pension income, according to these authors. This group within the population benefited from the maturation of both the public and private pension systems during the period under review. But while diversification of the income sources of older women living alone has improved, it is still much lower than that of the general population of elderly Canadians.

Among older immigrants, on the other hand, the diversification of income sources is close to that of the general population of older people. Income from employment was the major source of income for older immigrants throughout the period from 1980 to 2002. This group has not benefited as much from the maturation of public and private pension systems.

These authors also argue that, as well as being more diversified, the income sources of seniors have become more privatized. In fact, they find that increased privatization is a remarkable feature of the way in which the composition of elderly incomes changed during the period from 1980 to 2002. But it is important to note that they consider income from the Canada and Quebec Pension Plans to be a "private" source of income. In relation to the two groups on which their study focuses, the authors find that income sources of older women living alone became more privatized than those of older immigrants during the period under review.

Changes in the balance between the different elements of retirement income sources could expose some groups of the elderly population to risk. Reforms that concentrate on reducing the role of the state in retirement income risk increasing the vulnerability of certain groups within the population, the authors say. But the possibility of creating new categories of vulnerable people is not the only problem. Among the elderly population, some groups are always in a precarious situation. For example, very old people - particularly women living alone - remain vulnerable, these authors say. The number of persons aged 80 and over will increase significantly over the next few decades and the percentage of women who have never married or who will live out their old age as divorcees will also increase considerably, they note. These trends may exacerbate the difficulties faced.

It will be essential to ensure that any effort to reform the retirement income system takes a long-term perspective to reduce the risk of putting in place policies that will be unsustainable financially or politically insupportable.