Obsolete Retirement Systems Threaten Financial Stability for Many, According to Investment Management Groups

Canada’s Retirement Income System Faces Urgent reform, Industry Group Warns

Published: November 21, 2024 | Updated: November 21, 2024

A leading financial sector association is pushing for notable changes to Canada’s retirement framework, citing a growing reliance on personal savings and systemic gaps that threaten the financial security of future retirees. The call for action comes as data reveals a dramatic shift in how Canadians fund their post-work lives.

The Rise of Private Retirement Savings

The securities and Investment Management Association (SIMA) released a report Wednesday highlighting the increasing importance of private savings in funding retirement. In 2023, these savings accounted for nearly 50% of retirement income, a substantial increase from 36% in 2005. This trend underscores a critical shift away from the conventional three-pillar system – government programs, workplace pensions, and individual savings – as workplace pensions diminish and longevity increases.

Currently, over 60% of Canadian workers lack access to traditional defined benefit workplace pension plans, placing a greater burden on individuals to manage their own retirement funds. Simultaneously, fixed income from government programs like the Canada Pension Plan (CPP) and Old Age Security (OAS) may not be sufficient for a cozy lifestyle in many regions. As of 2025,maximum monthly CPP payments at age 65 are approximately $1,433,while OAS offers around $735 – often inadequate to cover essential expenses.

Policy Recommendations for a Secure Future

SIMA is advocating for several key policy adjustments.These include raising the age at which Canadians are required to convert Registered Retirement Savings Plans (RRSPs) to Registered Retirement Income Funds (RRIFs) from 71 to 73, allowing for extended tax-deferred growth. Another suggestion is to exempt smaller RRIF accounts – those under $200,000 – from mandatory withdrawal rules, offering greater flexibility.

The association also proposes eliminating Goods and Services Tax/Harmonized Sales Tax (GST/HST) on investment fund management fees to reduce costs for savers. Moreover, SIMA champions expanded access to financial advice through hybrid digital-human models and automatic enrollment in workplace Registered Retirement Savings Plans (RRSPs) to encourage participation.

according to Andy Mitchell, President and CEO of SIMA, current policies have not kept pace with the evolving needs of Canadians.”Life has changed quite a bit for Canadians in the last two decades, and policy hasn’t been updated to reflect that,” he stated.

Economic Impact of increased Private savings

SIMA’s report contends that bolstering private savings isn’t just beneficial for individuals; it’s a boon for the national economy. In 2023, private savings contributed an estimated $150 billion to Canada’s Gross Domestic Product (GDP), generated $27 billion in tax revenue, and reduced government expenditures on income supplements by $16.5 billion.

The organization highlights that these recommendations stem directly from the concerns of its members, representing over 80% of Canadian mutual fund and Exchange Traded Fund (ETF) assets under management. While acknowledging that these changes would benefit the financial industry through increased assets, Mitchell emphasizes the mutually beneficial nature of the proposals.

Retirement Income Source	2005 (%)	2023 (%)
Private Savings	36	49
Workplace Pensions	40	32
Government Programs (CPP/OAS)	24	19

Disclaimer: This article provides general information and should not be construed as financial advice. Consult with a qualified financial advisor for personalized recommendations tailored to your specific circumstances.

Understanding the canadian Retirement Landscape

Canada’s retirement system is a multi-layered framework designed to provide income security during post-working life. Recognizing the components of this system is crucial for effective planning. Here’s a breakdown:

• Canada Pension Plan (CPP): A contributory, earnings-related pension plan funded by contributions from workers and employers.
• Old Age security (OAS): A universal pension available to most Canadians aged 65 and older,nonetheless of employment history.
• Guaranteed Income Supplement (GIS): A non-taxable monthly benefit paid to OAS recipients with low incomes.
• Registered Retirement Savings Plan (RRSP): A tax-advantaged savings plan that allows contributions to be deducted from taxable income.
• Tax-Free Savings Account (TFSA): A savings account where investment income and withdrawals are tax-free.
• Registered Retirement Income Fund (RRIF): A plan that allows individuals to convert their RRSP funds into a series of income payments during retirement.

The increasing importance of private savings indicates a need for canadians to proactively manage their financial futures. Exploring various investment options and seeking professional advice are critical steps towards achieving a secure retirement.

Frequently Asked Questions

1. What is driving the increase in private retirement savings? The decline in traditional workplace pensions and increasing life expectancy are key factors.
2. What are RRIFs and why is changing the conversion age important? RRIFs are income funds derived from RRSPs. Delaying the conversion age allows for more tax-deferred growth.
3. How would removing GST/HST on investment fees help canadians? it would lower the overall cost of investing, perhaps increasing returns.
4. What is automatic enrollment in workplace RRSPs? Automatically enrolling employees in RRSPs, with an opt-out option, can boost participation rates.
5. Is the financial industry the only beneficiary of these changes? While the industry would benefit, the proposals are also intended to improve retirement security for all Canadians and stimulate economic growth.

What steps are you taking to prepare for your retirement? Do you believe the current system adequately supports Canadians nearing retirement age? Share your thoughts in the comments below!

How are shifting demographics contributing to the obsolescence of conventional retirement systems?

The Looming retirement Crisis: A System Under Strain

Investment management groups are increasingly vocal about a critical flaw in current retirement planning: our existing systems are becoming obsolete. Factors like increased longevity, shifting demographics, and persistently low interest rates are creating a perfect storm, jeopardizing the financial security of millions heading into their golden years. This isn’t just a future problem; the effects are being felt now,impacting current retirees and those nearing retirement age. The core issue? Traditional retirement models weren’t designed for a world where people live longer and rely on decades of post-work income.

Why Traditional Retirement plans Are Failing

For generations, the “three-legged stool” of retirement – social Security, pensions, and personal savings – provided a relatively stable foundation. Today, that stool is wobbling, and in many cases, missing a leg. Here’s a breakdown of the key challenges:

Decline of Defined Benefit Pensions: Traditional pensions, guaranteeing a fixed income for life, are largely a thing of the past.Most companies have shifted to defined contribution plans like 401(k)s, placing the investment risk squarely on the employee.

Social Security Concerns: While still a vital safety net, Social Security faces long-term funding challenges. Potential benefit cuts or increased taxes are frequently debated, creating uncertainty for future retirees.

Insufficient Savings: Many individuals haven’t saved enough to cover their retirement expenses.Contributing to 401(k)s isn’t always prioritized, and even when it is, contribution rates often fall short of what’s needed.

Longevity Risk: People are living longer than ever before. A retirement that was planned for 20-25 years now needs to possibly cover 30+ years,requiring substantially larger savings.

Inflation & Market Volatility: Unexpected inflation and unpredictable market fluctuations can erode the purchasing power of retirement savings, especially for those heavily invested in equities.

The Impact of Rising Retirement Ages

The OECD projects the average effective retirement age will increase by two years by the mid-2060s https://www.weforum.org/stories/2023/10/retirement-age-trends-around-globe/. This shift, while potentially easing some strain on retirement systems, isn’t a panacea.

Delayed Retirement & Workforce Dynamics: Keeping people in the workforce longer can impact job opportunities for younger generations and potentially suppress wage growth.

Health & Productivity: Older workers may face health challenges that impact their productivity and ability to remain employed.

Financial Strain During Extended Working Years: individuals may need to continue contributing to healthcare costs and other expenses for a longer period, delaying their ability to fully enjoy retirement.

Investment Strategies for a New Retirement Landscape

Given the challenges, what can individuals and financial advisors do? A proactive, diversified approach is crucial.

Diversified Investment Portfolios: don’t put all your eggs in one basket. A mix of stocks,bonds,real estate,and choice investments can help mitigate risk. Consider target-date funds that automatically adjust asset allocation as you approach retirement.

Maximize Retirement Contributions: Take full advantage of employer matching programs and contribute the maximum amount allowed to 401(k)s and IRAs.

Consider Annuities: While often debated, annuities can provide a guaranteed stream of income in retirement, mitigating longevity risk. Explore different annuity options to find one that suits your needs.

Healthcare Planning: Healthcare costs are a major expense in retirement. Plan for Medicare premiums, supplemental insurance, and potential long-term care needs.

Downsizing & Lifestyle Adjustments: Consider downsizing your home or making other lifestyle adjustments to reduce expenses in retirement.

Explore Part-Time Work: continuing to work part-time can provide additional income and keep you engaged.

The Role of Financial Advisors & Retirement Planning Services

Navigating this complex landscape requires expert guidance. A qualified financial advisor can help you:

develop a Personalized Retirement Plan: Tailored to your specific goals, risk tolerance, and financial situation.

Optimize Investment Strategies: Based on current market conditions and your long-term objectives.

Manage Risk: Diversifying your portfolio and implementing strategies to protect your savings.

stay on Track: Regularly reviewing your plan and making adjustments as needed.

Case Study: The California Public Employees’ Retirement System (CalPERS)

CalPERS, one of the largest public pension funds in the US, has faced meaningful challenges in recent years due to underfunding and investment losses. While CalPERS has implemented reforms, including increased contributions and benefit adjustments, it serves as a cautionary tale about the importance of sustainable retirement funding models. The fund’s struggles highlight the need for proactive management and realistic assumptions about investment returns and longevity.

Understanding Key Retirement terms

Defined Benefit Plan: A traditional pension plan that guarantees a specific benefit amount in retirement.

Defined Contribution Plan: A retirement plan, such as a 401(k), where contributions are made by the