Post on 31-Mar-2015
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LifePathsEvaluating Earnings Replacement After Retirement: The
Evolution of Retirement Income Adequacy in Canada
Kevin D. Moore Statistic Canada’s Modelling Division
Presentation to the Expert Group on National AccountsGeneva, Switzerland April 27, 2010
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Overview of presentation
Acknowledgements Project motivation What is LifePaths? Replacement rate concepts and methods Assumptions and context underlying these results
Results: • Historical and projected trends in average replacement rates
by retirement income source and in total
• Distribution of total replacement rates across individuals recent retirees historical and projected trends by pre-retirement earnings quintile
Next steps
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Acknowledgements
LifePaths has been under development for more than a decade, requiring the ongoing efforts of a small team of Statistics Canada researchers and programmers
Critical contributions to this replacement rate project have been made by Xiaofen Lin, Laurie Plager, Geoff Rowe and Steve Gribble of Statistics Canada’s Modelling Division
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Replacement rates project motivation
Preventing “significant declines” in individuals’ standard of living after retirement is one of the primary goals of retirement income policy, yet relatively little has been known about such outcomes
Replacement of pre-retirement earnings with other sources of income after retirement a key aspect of this
Current concerns about the “replacement adequacy” of the retirement income system for future retirees in particular - declining RPP coverage for current workers, perceived inadequate take-up of RRSP saving
Provincial task forces recommending new provincial public pensions Issue rising on the federal/provincial and federal policy agenda Recent financial market declines and turbulence
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What is LifePaths ?
LifePaths is a publicly-available microsimulation model of individuals and families, designed to aid in the analysis and development of government policies having a longitudinal dimension
LifePaths creates detailed individual life histories from birth to death, using behavioural equations estimated from a wide variety of micro-data sources
The resulting synthetic population is representative of Canada’s population and of its historical evolution, is consistent with available microdata and sums to aggregate statistics
LifePaths incorporates rich modeling of individual-level fertility, mortality, education, employment, earnings, marital status, residence, most taxes and transfers (including public pensions), saving in employer-sponsored registered pension plans (RPPs) and saving in RRSPs (individual retirement saving plans)
LifePaths was developed using Modgen, a general-purpose microsimulation model development language created at Statistics Canada
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Replacement rate methodology chosen for this analysis Replacement Rate = After-tax retirement income
Proxy for pre-retirement consumption
After-tax retirement income:• is full-year, age 70 after-tax income from public pensions, RPPs and RRSPs
Proxy for pre-retirement consumption:• Consumption proxy = gross earnings
subtract (payroll and income taxes) subtract (retirement saving in RPPs and RRSPs)
• Averaged over best 25 years from age 25 to 65, price-indexed• Implicit target for “full replacement” of consumption is 100%
(*rather than rough “rule of thumb” of about 70% of gross earnings)
Individual unit of analysis but family income – “single-adult equivalent” measures … family income (or consumption) is divided by the square root of family size
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Assumptions and Context for Results
The specific findings shown rely on one particular conception of replacement rates, and one illustrative projection scenario, which implements many specific assumptions about future socio-economic experience
The specific results are quite sensitive to both the specification of replacement rates, and to these assumptions about the future
A better sense of the robustness of these findings and their sensitivity to assumptions can only be obtained by comparing the results of different replacement rate specifications, and a broad range of projection scenarios
This analysis does not currently include some of the elements that could be considered of interest in implementing a comprehensive consumption-based approach to replacement rates. These include the flows of economic welfare associated with:
owner-occupied housing, including mortgages financial assets other than RPPs and RRSPs intra-family transfers, including inheritances other debts and real assets work-related expenses
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Past and projected future trends in average cohort replacement rates by source of retirement income
Results
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Since 1988, steady declines in average public pension replacement rates for retiring cohorts
Source: LifePaths (5.0.6), January 2010
Average public pension replacement rates by component and retirement cohort, 1966-2050
0%
10%
20%
30%
40%
50%
60%
70%
80%
1966
-197
0
1971
-197
5
1976
-198
0
1981
-198
5
1986
-199
0
1991
-199
5
1996
-200
0
2001
-200
5
2006
-201
0
2011
-201
5
2016
-202
0
2021
-202
5
2026
-203
0
2031
-203
5
2036
-204
0
2041
-204
5
2046
-205
0
(Year an individual turns 66)
Rep
lace
men
t ra
te (
%)
All public pensions
OAS
C/QPP
GIS/SPA
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Historical trend to increasing RPP replacement rates reverses; trend to higher RRSP replacement rates continues into projection period , but quite flat
Source: LifePaths (5.0.6), January 2010
Average RPP and RRSP replacement rates by component and retirement cohort, 1966-2050
0%
10%
20%
30%
40%
50%
1966
-197
0
1971
-197
5
1976
-198
0
1981
-198
5
1986
-199
0
1991
-199
5
1996
-200
0
2001
-200
5
2006
-201
0
2011
-201
5
2016
-202
0
2021
-202
5
2026
-203
0
2031
-203
5
2036
-204
0
2041
-204
5
2046
-205
0
(Year an individual turns 66)
Rep
lace
men
t ra
te (
%)
RPP + RRSP
RPP
RRSP
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Average total replacement rate increases across cohorts retiring from 1966 to 1990, reaching 100%; substantial declines for recently retired or future retirement cohorts
Source: LifePaths (5.0.6), January 2010
Stacked average cohort replacement rates by component and retirement cohort, 1966-2050
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
110%
1966
-1970
1971
-1975
1976
-1980
1981
-1985
1986
-1990
1991
-1995
1996
-2000
2001
-2005
2006
-2010
2011
-2015
2016
-2020
2021
-2025
2026
-2030
2031
-2035
2036
-2040
2041
-2045
2046
-2050
(Year an individual turns 66)
Rep
lace
men
t ra
te (
%)
RRSP
RPP
GIS/SPA
C/QPP
OAS
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Trends in replacement rate distributions
• number of individuals with total replacement rates below selected thresholds
Results
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Total replacement rates: Half of the recently retired appear to be maintaining their standard of living. But a significant minority may be experiencing a large drop
Source: LifePaths (5.0.6), January 2010
Distribution of total replacement rates by size (2006-2010 retirement cohort)
0%
5%
10%
15%
20%
25%
30%
20-30% 30-40% 40-50% 50-60% 60-70% 70-80% 80-90% 90-100% 100-125% 125-150% 150%+
(Replacement rate)
(Pro
po
rtio
n o
f p
op
ula
tio
n)
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Increasing numbers of individuals with “low” replacement rates in recently retired and future retirement cohorts
Source: LifePaths (5.0.6), January 2010
Proportion of individuals falling below different replacement rate thresholdsby retirement cohort
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1966
-197
0
1971
-197
5
1976
-198
0
1981
-198
5
1986
-199
0
1991
-199
5
1996
-200
0
2001
-200
5
2006
-201
0
2011
-201
5
2016
-202
0
2021
-202
5
2026
-203
0
2031
-203
5
2036
-204
0
2041
-204
5
2046
-205
0
(Year an individual turns 66)
(%)
less than 100% replacement
less than 75% replacement
less than 50% replacement
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Increasing numbers of individuals with “low” replacement rates across entire pre-retirement earnings distribution; the proportion rises sharply with earnings
Source: LifePaths (5.0.6), January 2010
Proportion of individuals with total replacement rates <75% by pre-retirement earnings quintile and retirement cohort
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
(Year an individual turns 66)
(%)
p0-p20
p20-p40
p40-p60
p60-p80
p80-100
All
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Next Steps
• Add module on owner-occupied housing/housing equity (in progress)
• Add additional saving flows and financial assets (RPPs and RRSPs are already modelled)
• Explore alternative replacement rate measures
• Conduct further sensitivity analysis
• Add levers to facilitate the simulation and analysis of various policy options
Expanded C/QPP (defined benefit) Supplementary defined-contribution public pension plan Other?
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Want more?
More information about LifePaths can be found at http://www.statcan.gc.ca/microsimulation/lifepaths/lifepaths-eng.htm
More information about this project can be obtained from the author at kevin.moore@statcan.gc.ca