1

The Wealth and Income Position of the Retirement and Pre-Retirement

Population

René Morissette and Garnett PicotStatistics Canada

2

I. Wealth holdings of retirees and near-retirees, 1984-2005

Data:Assets and Debts Survey of 1984 : no info on RPPsSurveys of Financial Security of 1999 and 2005: include RPPs

II. Income security & stability during retirement, 1983-2004

3

… Between 1984 and the late 1990s, the percentage of individuals with an RPP changed little among 35-54

RPP / POPULATION, 1984-1998

1984 1998

25-34 32% 27%

35-44 37% 36%45-54 32% 35%

4

The wealth of Canadians has grown substantially over the last two decades

Median and average wealth, 1984-2005

Excluding RPPs Including RPPs

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

medians averages

1984

1999

2005

+26%

+70%

2005 $

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

medians averages

1999

2005

2005 $

5

Median wealth grew sharply among 55+ but not so among 25-54

Median wealth by age of major income recipientExcluding RPPs Including RPPs

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

25-34 35-44 45-54 55-64 65+

1984 1999 2005

2005 $

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

25-34 35-44 45-54 55-64 65+

1999 2005

2005 $

6

Among 65+, median wealth grew in the middle and the top of the wealth distribution and stagnated at the bottom

Median wealth (excluding RPPs) by quintile, 65+,1984-2005

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

Bottom Middle Top

1984

1999

2005

2005 $

7

Among the 65+, much of the wealth growth in the middle quintile was driven by increases in housing wealth

Median wealth (excluding RPPs) by quintile, 65+,1984-2005

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

Q1 Q1 Q1 Q3 Q3 Q3 Q5 Q5 Q5

84 99 05 84 99 05 84 99 05

Wealth Excluding hw and be

2005 $

8

The age-RPP coverage profile of young men shifted downwards

% of men 25-29 contributing to RPPs, by cohort [1986-2004]

0.15

0.20

0.25

0.30

0.35

0.40

25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43age

cohort aged 25-29 in 1986

25-29 in 1990

25-29 in 1996

25-29 in 2000

9

While young women also experienced a downward shift in their age-coverage profile, the coverage of cohorts entering the labour market in 1996 or 2000 converged to that of the 1986 cohort within a decade

% of women 25-29 contributing to RPPs, by cohort [1986-2004]

0.15

0.20

0.25

0.30

0.35

0.40

25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43age

cohort aged 25-29 in 1986

25-29 in 1990

25-29 in 1996

25-29 in 2000

10

SUMMARY

1. Cohorts of retirees have generally seen their wealth holdings increase since the mid-1980s…… except those in the bottom quintile

2. Among younger age groups, a) wealth holdings have not grown as much +b) pension coverage shifted downwards

== might be cause for concern

11

Income Security and Stability During Retirement

by

S. LaRochelle-Côté

J. Myles

G. Picot

Business and Labour Market Analysis Division

Statistics Canada

- Preliminary Results -

12

Introduction Generally speaking, pension system effective re: poverty prevention, (Myles,

2000; Baldwin, 2006). Less known re: maintenance of pre-retirement lifestyles

Longitudinal analysis of post-retirement outcomes scarce… data issues

Focus on replacement rates– Income during post-retirement years relative to that at age 55

U.S. research (Smith 2003)– Replacement rates change over retirement years– They vary across the income distribution– Pension system produced high replacement rates for poor individuals

13

For Canada,– Focus on economic well-being, hence use adult equivalent

adjusted family income of each individual

We ask:– To what extent are income levels and replacement rates

maintained as individuals age? Do replacement rates vary across the income distribution?

– Are recent retirement cohorts better or worse off than previous ones?

– Does income stability vary over retirement years?

14

Data

Longitudinal administrative data set (LAD)

20% sample of T1 tax filers

Linked across year, 1982 to 2005 (max. 23 years)

Prior to 1992, some issues with income reporting among low-income families… hence restrict cohorts to those earning >$10,000 at age 55

Focus on individuals with significant labour market attainment at age “55”

15

Incomes fall for individuals in top quintile (at age 55), but remains stable for individuals in the bottom. Income inequality falls within cohorts through retirement years

At 55, income at top was 3.8 times that at bottom; by age 75, 2.9 times

Family income for cohort age 55 in 1983, adult equivalent adjusted

0

20,000

40,000

60,000

80,000

100,000

120,000

55 57 59 61 63 65 67 69 71 73 75Age

Top quintile

Bottom quintile

Average

AE

A in

com

e af

ter

taxe

s

16

Replacement rates fall at top of distribution but remain around 1.0 at bottom

0.6

0.7

0.8

0.9

1

1.1

1.2

1.3

55 57 59 61 63 65 67 69 71 73 75Age

Bottom quintile

Top quintile

Rep

lace

men

t rat

es

Replacement rates for cohort age 55 in 1983

Median

17

Shares of total income, by income source- 1983 cohort -

At age 65 75

Bottom quintile Family earnings 34% 12% Private pensions 15% 18% Investment and capital gains 3% 9% OAS/GIS/CPP 32% 60%

Top quintile Family earnings 32% 14% Private pensions 24% 40% Investment and capital gains 33% 28% OAS/GIS/CPP 11% 18%

18

Significant distribution of replacement rates within quintiles, 1983 cohort

At age 55 65 75

Bottom quintileReplacement rate <0.6 7% 2% 0.6 to 0.8 16% 18% 0.8 to 1.0 100% 22% 29% 1 to 1.5 33% 35% >1.5 22% 16%

Middle quintileReplacement rate <0.6 18 % 25% 0.6 to 0.8 32% 37% 0.8 to 1.0 100% 22% 22% >1.0 29% 17%

19

What differentiates low from high replacement rates- Given same income at age 55 -

Family income- Middle quintile –

1983 cohort

Low = Replacement rate <0.6 (approx. 25% of individuals)High = Replacement rate >1.0 (approx. 17% of individuals)

% Share of income difference between low and high

Private Investment Age Earnings pensions and capital gains65 57% 14% 33%

70 40% 34% 27%

75 29% 45% 27%

20

More recent retirement cohorts have higher income levels, largely because of higher (family) earnings and private pensions, but replacement rates have changed little

Median replacement rates

0.6

0.7

0.8

0.9

1

1.1

1.2

1.3

55 57 59 61 63 65 67 69 71 73 75Age

Rep

lace

men

t rat

e

1983

1989

1995

1998

Family income after taxes(constant dollars, AEA adjusted)

202530354045505560

55 57 59 61 63 65 67 69 71 73 75Age

19981995

1992

1983Tot

al in

com

e

$000

21

Family income instability falls over retirement years, and “instability gap” between rich and poor disappears

Mean absolute deviation in family income during 5 year intervals, 1983 cohort

0%

5%

10%

15%

20%

25%

30%

55-59 60-64 65-69 70-74 75-79 80-84

Me

an

ab

solu

te d

evi

atio

n

Bottom tertile

Middle tertile

Top tertile

Age Higher instability in market earnings among bottom tertile during

50s and early 60s

As more stable pension sources become larger share of income, instability declines, particularly among poorer families

22

Summary Replacement rates vary across the income distribution

– Median replacement rate around 0.75 to 0.8– Replacement rate of around 1.0 at bottom of distribution (public pensions)– Replacement rates at top much lower– Income inequality falls as cohorts age

But in middle quintile, one quarter have replacement rates below 0.6, in bottom quintile, 20% below 0.8

More recent retirement cohorts have higher income levels than their predecessors, but similar replacement rates

– But private pension coverage has been falling among younger workers

Poorer individuals have higher levels of income instability than richer early in retirement– As cohorts age, stable public pensions lead to more stability at bottom, and rich-poor gap in

income in stability disappears