Statement made on 16 June 2009 by Senator Grant Mitchell
Hon. Grant Mitchell:
Honourable senators, I wish to speak briefly in support of the motion. I believe very strongly that it addresses an issue of immediate importance, one that will become increasingly significant as the demographics of Canadians and of Canada change. Therefore, I urge my colleagues in the Senate to support this motion and refer this study to the National Finance Committee.
I should like to emphasize a couple of points that have been made by Senator Eggleton. The first one is with respect to defined benefit pensions, which are the gold standard of pensions. In Ottawa, in this environment, it is easy to become complacent to believe that everyone's retirement will be taken care of because most of the people we know and work with have defined benefit pensions. They are extremely valuable pensions, and I actually believe that people take them for granted.
If a person retires with a $100,000 pension, consider for a minute how much of their own money they would have to have invested at today's interest rates in order to pay themselves $100,000 a year in income if they did not have that pension. At 3 per cent interest, they would have to have in the order of $3 million in the bank to pay themselves a $100,000 pension. As interest rates increase, that $3 million of course goes down, but who knows how significantly and how quickly interest rates will increase.
My point is that a defined benefit pension plan is very valuable and can be taken for granted by people like us who live and work in this environment. It also has implications for all those Canadians who do not have defined benefit pensions.
Many Canadians are limited and are left to fend for themselves, and they generally do that with RRSPs. Consider that $1 million seems like a lot of money to have in your RRSP. Again, if you invested that $1 million at 3 per cent or 4 per cent at today's Government of Canada interest rates to protect your principal, as a defined pension essentially does, with that $1 million, you would receive an annual income of $30,000 a year. Yes, you could buy an annuity or you could cut into the capital, but once you begin to cut into that capital, it does not go much further or longer or pay you much more for much longer than you might think.
The fact is that if you were to bump that $30,000 to $40,000 or $50,000 on $1 million and you were taking $10,000 or $20,000 a year out of the principal, you would run out of money in 15 or 20 years. You would likely run out of money in your retirement before you died.
Pensions generally become increasingly problematic as the population ages. Fewer people are funding the pensions that are now supporting more elderly retirees. That in and of itself is an issue that needs to be significantly addressed. It is not an issue that has just become relevant because of this downturn; it is a longer-term issue. It has become heightened, and our focus has been brought to bear because of the economic downturn and the problems in the stock market. In fact, it is a longer-term issue that transcends that particular problem.
The even greater issue, in my mind, is this belief amongst many Canadians who do not have pensions and who think that their $500,000, $400,000 or $1 million of savings will be sufficient for them to retire on. At today's interest rates, with the kind of security that people want in their retirement — that is to say, using Government of Canada or provincial government bonds — it will not be enough to retire upon.
Perhaps there is no easy solution to this, and perhaps this study will not find an easy solution to that problem, but it will begin the process of a much broader communication to Canadians that they need to understand that the mathematics of their RRSPs may not be as compelling as they think it is.
I will provide a couple of statistics to underline this point. For the 2007 tax year, 24 million or 25 million people filed taxes. About 25 per cent of those people made an RRSP contribution, and the average contribution was $2,700. If you were to make a $2,700-contribution to your RRSP for 30 years, that amounts to less than $100,000. Those people are not on track to a very comfortable retirement.
A study recently done by RBC showed that 68 per cent of Canadians over the age of 18 actually have RRSPs. In 2007 only one third of those people made a contribution, so they are not contributing to RRSPs every year. As well, the average RRSP contribution to the RRSP fund of that 68 per cent of Canadians is about $72,000. That is a long way from $500,000, and $500,000 is a long way from a comfortable retirement.
The Finance Committee could make a tremendously valuable contribution in identifying the problem and identifying some solutions, as well as in communicating to Canadians that there is a real urgency for those who will depend on their RRSPs and savings as their only funding for retirement.