Downsized dreams

Like most young men growing up in Thunder Bay, Ont., in the 1970s, or anywhere on the planet for that matter, Alex Cryderman was too focused on the next weekend to give much thought to his golden years. So, at 21, when he followed his father and brother into a job at the Abitibi paper mill, and learned that part of his paycheque would be held back to fund his pension, he was more annoyed than anything. That feeling changed over time, of course. And as the months turned into years and the years to decades, Cryderman, now 50, came to rely heavily on his pension savings for the retirement plan taking shape in his head. “I was going to be out of here in five years with a pretty good pension,” he says. “I was going to spend time on my boat, fish, travel with my wife, really live the good life like they say in the ads.”

Then one morning earlier this year, Cryderman awoke to frightening news—Abitibi-Bowater had filed for bankruptcy protection. Suddenly, his pension, along with those of 8,000 other employees at the company, was at serious risk. With the stock market collapse and the company no longer paying into the pension fund, the plan has become dangerously underfunded. Now Cryderman can only wait, and regret—wait to learn how much of his retirement savings he’ll be able to salvage, and regret not putting more money away on the side over the years. “If you’d have known what was coming down the pipe, you’d have lived your life differently,” he says. “We never thought this day would ever come.”

It’s become an all-too-familiar refrain across the country. Employees in industries as diverse as technology, media, forestry and manufacturing are all seeing their pensions evaporate before their eyes as companies falter and creditors put them under the knife. But it’s not just those workers lucky enough to have a pension who’ve been side-swiped. After all, more than 60 per cent of Canadians have no such safety net at all. For the unfortunate majority, market turmoil has pummelled what little savings they’d managed to tuck away. In 2007, according to a poll by RBC, the average Canadian with an RRSP had managed to save just $72,481, but since then the market has fallen a stunning 23 per cent. And for those younger workers who still have years left to save, there’s the prospect of about 10 million baby boomers retiring over the next 15 years—a huge demographic shift with the potential to cripple the country’s finances and drive up taxes if it’s not handled smartly. “Suddenly everybody has woken up to the fact that two-thirds of retirees are going to be underfunded,” says Glen Hodgson, chief economist with the Conference Board of Canada. “There’s a huge danger right now that we’re under-saved as a nation.”

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Put it all together, and Canadian workers of all ages are now coming to terms with a daunting realization—unless you’re lucky enough to have an ironclad, taxpayer-backed government pension, or rich relatives, your dreams of retirement are now truly out of reach. We aren’t about to go back to the early 19th century when many workers toiled seven days a week until the day they died. But the cherished notion that at some fixed date in the future workers can put down their wrenches or log off for good is coming to an end.

The idea of taking time off at the end of your working life to kick back and enjoy your final years is a relatively modern invention. In 1889 German chancellor Otto von Bismarck crafted the world’s first government-supported pension for workers once they hit age 70 (it later became 65). That wasn’t much of a concession, though. The average life expectancy at the time in the country was just 40. “He was a brilliant general and a very clever actuary,” says Moshe Milevsky, a professor of finance at York University’s Schulich School of Business. “He knew few people got to that age so it wasn’t expensive. Since then retirement has morphed into a very long vacation that’s simply not sustainable.”

Happily, today most of us see 40 come and go with little more than a few cheesy mid-life birthday cards and maybe a new sports car. But the idea that 65 would be the point at which we punch out from work for the last time has stuck. And this is the root of many of the problems governments, companies and workers now face. In the 1950s, just a decade before the Canada Pension Plan (CPP) was created and set 65 as retirement age, life expectancy was just one year past that. Today, the average life expectancy is 80 (more for women, less for men), and some time in the coming decades, thanks to medical advances, it may well hit triple digits.

Yet rather than working longer, many of us have been choosing to leave our jobs earlier. Since 1976 the average age of retirement in Canada has fallen from nearly 65 to 61, while many workers in the public sector now leave their jobs before they even turn 60. What this means is workers are spending less time in their earning years, yet expect to spend even more time living off their depleted nest eggs. It doesn’t take a math teacher to explain the flaw there, though it does help to use one to illustrate the point. The average teacher in Ontario retires at 57 yet has a life expectancy of 90, says Robert Brown, an actuarial scientist at the University of Waterloo who has dug into the data. In other words, that math teacher will potentially spend more time in retirement than working in the classroom.

For government employees with defined benefit (DB) pension plans, like teachers, garbage collectors, police officers and postal workers, this isn’t a terrible concern. DB plans are by far the most luxurious form of retirement savings out there, because they guarantee retirees a fixed payout that often rises along with inflation. About 80 per cent of public sector workers enjoy DB plans, versus just 23 per cent in the private sector. But if teachers don’t have to worry about their pensions, taxpayers sure do. These comfy plans are a huge public liability. Should a public sector pension fund come up short, taxpayers will be on the hook to bail out retirees.

The prospects are far worse for those in the private sector. DB plans are rare and growing rarer. Instead, those private sector workers fortunate enough to have a pension at all are mostly enrolled in defined contribution (DC) plans. In that type of plan, payouts to retirees depend entirely on how much money is put in, as well as how well it is managed. With the plunge in stock markets last year, and the recession, many DC pension plans have been devastated. But the same goes for many private sector DB plans, which face huge shortfalls. In the case of AbitibiBowater, an audit is being carried out on the pension fund, but it’s expected to be underfunded by between 20 and 25 per cent. Meanwhile, retirees at Nortel, which filed for bankruptcy earlier this year, could see their pensions cut by more than 30 per cent, forcing some retirees to return to work to make ends meet. So even as workers are possibly looking at decades in retirement, their pensions are proving wholly unreliable.

Making things worse, fewer and fewer companies are offering their employees a pension plan of any type, leaving workers completely on their own when it comes to retirement saving. Over the last 20 years the financial service industry has honed its message to this ever expanding group, with a barrage of commercials every RRSP season. The message: put a little away each year, and you too can enjoy freedom at 55 to stroll windswept beaches and spend summers at the cottage with the grandkids. It all sounds nice, but there’s little to suggest that coming generations will be able to realize that dreamy version of retirement.

When the Dow Jones Industrial Average passed through the 10,000 mark last week, loud cheers went up, heralding it as a return to stability. But like some bad horror movie where the heroes are lost in the woods and walking in circles, we’ve criss-crossed through 10,000 at least a dozen times since 1999.

Is it really any wonder then that younger Canadians—those most likely to be without a pension plan—are shunning the markets? According to a survey released by TD Canada Trust last month, workers between the ages of 18 and 34 said they are saving as little as 10 per cent of their income. That’s down considerably from the 29 per cent that Canadians over 55 recalled saving when they were between those ages. There’s probably some historical revisionism on the part of older Canadians in the survey, but it fits with many other studies conducted in recent years. That will only exacerbate the problem as those younger workers approach a retirement that could stretch into four decades. “Gen-Yers face the worst of it, but I don’t think they’re aware of it at all,” says Milevsky.

But there’s an even bigger problem looming in the future. Just as Canadians are living longer, there are fewer of us being born. Canada’s fertility rate of 1.66 children per woman, while up slightly in recent years, is still near record lows and creating serious unbalance. The declining ratio of workers to retirees threatens to create a huge burden on future generations. Today there are about five workers for every retiree over the age of 65, but by 2031 there will be just two people working for every one in retirement, according to Statistics Canada. “The ratio of workers to retirees is dropping and it will continue to fall for another 20 years before it levels out,” says Malcolm Hamilton, an actuary with human resources firm Mercer. “Nobody is really sure what the implications are, other than they could be profound.”

One very real possibility is that health care and Old Age Security costs are likely to surge, forcing governments to hike taxes on the shrinking workforce. There’s no real threat of the country going bust, says Jonathan Kesselman, a public policy professor at Simon Fraser University, but it will become a huge political issue. “How much will the working population in the year 2030 be willing to see their taxes go to support old folks, versus supporting the things they want, like better highways, schools and health care for themselves?”

If you want to see where we could be headed in all of this, look across the pond to Europe. Last week, a report submitted to the European Union warned that the mass of retiring workers is a time bomb waiting to go off, and could do far more damage to countries’ finances than the recent bouts of deficit spending. “Though the debt and deficit increases are by themselves quite impressive, the projected impact on public finances of aging populations is anticipated to dwarf the effect of the crisis many times over,” the report stated. The only real answer, the EU was told, is for workers to curb their retirement expectations and stay on the job longer.

In some ways, Canada is better off than many other countries. Reforms in the 1990s closed the funding gap for the CPP, and this country’s relatively low debt as a share of GDP should leave more fiscal room to manoeuvre if the demographic crunch becomes serious. Last week, a report by Mercer ranked Canada’s public and private pension system fourth out of 11 countries. And there are other things that can still be done to try to repair the retirement system. Unions would like to see CPP payouts expanded. They have also called on government to protect workers’ pensions in the event of corporate bankruptcies. This December provincial finance ministers will meet in the Yukon to discuss the pension crisis.

But whatever solutions they propose, many experts say there’s no getting around the fact the 30-year retirement has become unsustainable. We’ve already seen governments in Canada take some steps to keep workers in the labour force longer. Provinces like B.C. and Ontario have abolished mandatory retirement legislation. Earlier this year Ottawa proposed changes to the CPP, set to take effect in 2011, that reward workers who stick around until they’re 70. More is needed, according to a study released by the C.D. Howe Institute in July. In addition to encouraging Canadians to have more babies, and hence more workers, the report said Canada has little choice but to push back the age of retirement. “Advances in longevity and shifts toward later workforce entry and less physically demanding occupations mean that the equivalent of working until age 65 in 1970 is now working until at least age 70,” the report said. At the very least, says the University of Waterloo’s Brown, workers should be encouraged to give up the idea of early retirement and stay on the job until 65.

So perhaps it’s a good sign that more workers plan to keep working in some fashion after they retire. Last year, in another RRSP-season survey, RBC Financial found that more than half of workers under the age of 55 plan to work as long as possible, even if they have the money needed to retire.

Besides, maybe working longer isn’t such a bad idea after all. Just last week researchers at the University of Maryland found that retirees who take on temporary or part-time jobs related to their fields suffer from fewer diseases and mental health problems than those who opt for full-time retirement. For workers like Cryderman, who toil in mills, mines and factories, that’s not an option. But it’s a message other workers might pay attention to. After all, they probably won’t have a choice anyway.