30-Year forecast of retirement incomes in Québec

An ever-growing number of people will retire in the coming years. What kind of financial future can they expect? Some experts have looked at that question and made a 30-year forecast of retirement incomes in Québec.

The recent history of pension plans

To begin with, we must distinguish between public plans and private retirement schemes. In the former group, we find the federal Old Age Security (OAS) pension and the Guaranteed Income Supplement (GIS), as well as the Québec Pension Plan (QPP). In the latter group, we find, for example, supplemental pension plans (SPPs) and registered retirement savings plans (RRSPs).

The last 30 years have been marked by a large increase in the number of beneficiaries of the QPP and private pension schemes. A consequence of this situation is that the number of people who depend on the GIS has declined during this period.

Among retirees aged 65 and over, the portion of their incomes coming from private pension schemes increased markedly from 1995 to 2005. However, there was a large decline in investment income during that period.

There is a cloud on the horizon. During the 6 years that preceded our experts' study, the average rate of return on RRSPs was below the inflation rate. This situation is worrisome since retirement income depends largely on good returns on investments.

Relative proportion of each income source for taxpayers aged 65

Retirement incomes between now and 2035

The crux of the study is a 30-year forecast of retirement incomes. In this context, employment income and investment income are excluded.

There is good news for future retirees. Their purchasing power will be increasing because, on average, the increase in their incomes will be 0,6% more than inflation. However, the average pay of workers is expected to increase more than the average income of persons aged 65 and over, which will be a reversal of the trend observed in the past 2 decades.

Average retirement income in 2005 constant dollars for people aged 65 and over, between 2000 and 2035

It is expected that the relative importance of the various income sources will follow past trends. The OAS and the GIS will account for a smaller share of retirement incomes whereas the QPP will remain more or less stable. Substantial increases will be observed in the private pension sector. Pensions in that sector are expected to account for 44% of retirement incomes in 2035.

The risks faced by the Québec retirement system

The study calls attention to some risks that could weaken retirement incomes, including for example:

• a movement in the participation of workers away from defined benefit plans to capital accumulation plans;
• low rates of return on investments, like those observed for RRSPs during the 6 years that preceded the study;
• the existence of a minority of private plans that offer protection against inflation, unlike the public plans, which are adjusted on the basis of increases in the cost of living;
• depletion of capital before death, which can occur in individual plans, including RRSPs.

Moreover, the study shows that the level of retirement income can be greatly affected by the economic cycles that will be faced by future cohorts of retirees.

Conclusion

The study shows that the average income of retirees will increase more rapidly than inflation. That trend will however run its course near the end of the reference period, resulting in a diminishing level of income replacement among the younger cohorts. Furthermore, participation in private retirement schemes, although necessary, will involve risks related to rates of return on invested sums and longevity.