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Journal ArticleDOI

Pension Coverage and Earnings Replacement Rates Among Canadian Couples

TL;DR: In this paper, the authors compared the outcomes experienced by couples in which one spouse or both spouses had registered pension plan (RPP) coverage and by couples without RPP coverage.
Abstract: Using data from the Longitudinal Administrative Database (LAD), this paper compares the earnings replacement rates achieved in retirement by a sample of married and common-law couples in which the husband was aged 55 to 57 in 1991. Emphasis is placed on the outcomes experienced by couples in which one spouse or both spouses had registered pension plan (RPP) coverage and by couples without RPP coverage. The earnings replacement rates achieved by couples without RPP coverage are more widely dispersed than those of couples with RPP coverage. When compared at the mid-points of the pre-retirement earnings distributions, the median earnings replacement rates of couples without RPP coverage are about three to six percentage points lower than those of couples with RPP coverage. In contrast, the average earnings replacement rates of couples without RPP coverage are generally six to twelve percentage points higher than those of couples with RPP coverage.

Summary (2 min read)

1 Introduction

  • The design of Canada‘s retirement income system and the extent to which working-age Canadians are saving adequately for old age continue to be important public policy issues.
  • Registered pension plans (RPPs)1 are an important consideration in this regard, both because they are a central component of Canada‘s retirement income system and because pension coverage and pension characteristics have undergone changes in recent years.
  • RPP non-members are more likely than RPP members to have earnings replacement rates below various thresholds.
  • The retirement and financial outcomes of couples are examined.
  • When earnings replacement rates are compared at the mid-points of the distributions, the authors find that the median earnings replacement rate of couples without pensions is about four to six percentage points lower than that of couples with pension coverage.

2 Data and methods

  • The data source and methods used for this study closely follow Ostrovsky and Schellenberg (2009).
  • Data are from the 20% version of the Longitudinal Administrative Database (LAD), which is derived from taxation data.
  • Couples with average annual earnings over $750,000 are excluded to reduce the effects of large values in the denominator of replacement rate calculations.
  • Positive Pension Adjustment values in 1991 and 1992 are coded to ―1‖ to flag RPP membership in each year, while values of ―0‖ are used to flag RPP nonmembership.
  • To simplify matters, couples are grouped into five categories: neither spouse had pension coverage in 1991 or 1992 only the husband had pension coverage in 1991 and 1992 only the wife had pension coverage in 1991 and 1992 both spouses had pension coverage in 1991 and 1992 all other combinations.

To calculate earnings replacement rates, a couple‘s total income received from all sources in

  • The use of earnings in the denominator (as opposed to total income) is based on the argument that maintaining one‘s standard of living in old age requires one to replace only those sources of income that cease at retirement (Horner 2007).
  • The couples in the sample resided in families that were, on average, comprised of 2.8 individuals in 1991 and 2.2 individuals in 2006.
  • This is done to reduce the size of the charts and tables and to make them clearer.
  • Analytical Studies Research Paper Series - 10 - Statistics Canada – Catalogue no. 11F0019M, no.

3 Earnings and pension coverage circa 1991

  • Comparing the financial outcomes of couples with and without pension coverage is facilitated by taking pre-retirement earnings into account.
  • Analytical Studies Research Paper Series - 11 - Statistics Canada – Catalogue no. 11F0019M, no.
  • The LAD does not contain information on work hours or hourly wages.
  • In the results presented below, couples in which only the wife has pension coverage are somewhat distinct.

4 Retirement transitions

  • Labour force participation is an important consideration in replacement rate calculations.
  • Wives in these couples had fairly modest earnings in 1989-1991; consequently, the couple‘s earnings likely fell below the 10% threshold once the husband left the workforce.
  • In contrast, couples in which only the wife has a pension are considerably less likely to be retired, with this the case for about 80% of such couples in 2006.
  • (The number of dualpension couples in Q1 and Q2 is very small, and hence they are not shown in the charts.).
  • Analytical Studies Research Paper Series - 13 - Statistics Canada – Catalogue no. 11F0019M, no.

5 Earnings replacement rates in retirement

  • Focusing solely on retired couples, the earnings replacement rates are now compared across pension characteristics.
  • Analytical Studies Research Paper Series - 14 - Statistics Canada – Catalogue no. 11F0019M, no.
  • Only husband has registered pension plan Both spouses have registered pension plan Among retired couples from Q4, there is a difference of four percentage points in the median replacement rates in 2003, but this disappears by 2006.
  • Overall, among retired couples in Q2 to Q4, the share of no-pension couples with earnings replacement rates below 50% is about four to fourteen percentage points larger than the share of husband-only pension couples, and the share of no-pension couples with earnings replacement rates below 60% is five to fourteen percentage points larger.

6 Conclusions

  • Overall, this analysis focuses on a sample of couples that were intact over a consecutive period of at least 18 years, including the period from 1989 to 2006.
  • Larger shares of retired couples without pensions than with pensions have earnings replacement rates below 0.60, with the magnitude of this difference ranging from about ten to fifteen percentage points in Q2 and Q3, and from five to eight percentage points in Q4.
  • The relative outcomes experienced by couples in which one spouse has pension coverage or both spouses have pension coverage, and couples without pension coverage, would not change if family size were taken into account, since the average decline was the same across pension categories.
  • 18 Third, the analysis does not take into account financial well-being derived from non-income generating assets, most notably home ownership.
  • If, and how, this might alter the financial outcomes observed cannot be said.

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Analytical Studies Branch Research Paper Series
by Yuri Ostrovsky and Grant Schellenberg
Social Analysis Division
24-I, R.H. Coats Building, 100 Tunney's Pasture Driveway
Ottawa, Ontario K1A 0T6
Telephone: 1-800-263-1136
Catalogue no. 11F0019M — No. 327
ISSN 1205-9153
ISBN 978-1-100-16323-9
Research Paper
Pension Coverage and Earnings Replacement
Rates Among Canadian Couples

Pension Coverage and Earnings Replacement
Rates Among Canadian Couples
by Yuri Ostrovsky and Grant Schellenberg
11F0019M No. 327
ISSN 1205-9153
ISBN 978-1-100-16323-9
Statistics Canada
Social Analysis Division
24-I, R.H. Coats Building,
100 Tunney‘s Pasture Driveway, Ottawa K1A 0T6
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July 2010
Published by authority of the Minister responsible for Statistics Canada
© Minister of Industry, 2010
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11F0019M au catalogue, n
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Analytical Studies
Research Paper Series
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basis, of research conducted by Branch staff, visiting Fellows and academic associates. The
Research Paper Series is intended to stimulate discussion on a variety of topics including labour,
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Analytical Studies Research Paper Series - 4 - Statistics Canada Catalogue no. 11F0019M, no. 327
Table of contents
Abstract...................................................................................................................................... 5
Executive summary .................................................................................................................... 6
1 Introduction ......................................................................................................................... 7
2 Data and methods ............................................................................................................... 8
3 Earnings and pension coverage circa 1991 ........................................................................10
4 Retirement transitions ........................................................................................................11
5 Earnings replacement rates in retirement ...........................................................................13
6 Conclusions .......................................................................................................................20
Appendix ...................................................................................................................................22
References ...............................................................................................................................30

Analytical Studies Research Paper Series - 5 - Statistics Canada Catalogue no. 11F0019M, no. 327
Abstract
Using data from the Longitudinal Administrative Database (LAD), this paper compares the
earnings replacement rates achieved in retirement by a sample of married and common-law
couples in which the husband was aged 55 to 57 in 1991. Emphasis is placed on the outcomes
experienced by couples in which one spouse or both spouses had registered pension plan
(RPP) coverage and by couples without RPP coverage. The earnings replacement rates
achieved by couples without RPP coverage are more widely dispersed than those of couples
with RPP coverage. When compared at the mid-points of the pre-retirement earnings
distributions, the median earnings replacement rates of couples without RPP coverage are
about three to six percentage points lower than those of couples with RPP coverage. In
contrast, the average earnings replacement rates of couples without RPP coverage are
generally six to twelve percentage points higher than those of couples with RPP coverage.
Key words: retirement, pensions, seniors, income

Citations
More filters
Journal ArticleDOI
TL;DR: This paper used LifePaths, a sophisticated simulation tool developed at Statistics Canada which integrates a large amount of data on the socio-economic experience of Canadians, to project consumption before and after retirement for Canadians who have not yet reached retirement age.
Abstract: A key question in Canada’s pensions debate is whether Canadians will be able to maintain their living standards in retirement, and if policy needs to respond to the risk that some will experience painful declines. To date, it has been very difficult to estimate how current trends might affect various members of the population in the long run. In this study, we used LifePaths – a sophisticated simulation tool developed at Statistics Canada which integrates a large amount of data on the socio-economic experience of Canadians – to project consumption before and after retirement for Canadians who have not yet reached retirement age. Consistent with other research, the study finds that Canada’s retirement system has supported post-retirement consumption relatively well, especially for lower-income individuals and those who reached retirement age in the last twenty years. If ongoing behavior and economic circumstances were to persist indefinitely, however, more Canadians may find maintaining their working-life consumption in retirement more difficult.

44 citations

Journal ArticleDOI
TL;DR: In this paper, the authors examine the underlying conceptual and measurement issues and provide guidance on building replacement rate measures and find that conventional gross replacement rate targets perform poorly in their traditional role as a tool for retirement planning or evaluating the retirement preparedness of a population.
Abstract: Replacement rates have historically been a tool to determine the adequacy of retirement income to maintain an individual’s standard of living. The concept of a replacement rate is intuitively appealing; numerous conceptual and methodological issues lie, however, beneath its simple exterior. By reviewing past literature and performing original analysis, this paper examines these underlying conceptual and measurement issues and provides guidance on building replacement rate measures.We find that conventional gross replacement rate targets perform poorly in their traditional role as a tool for retirement planning or evaluating the retirement preparedness of a population. We also find that empirical evidence strongly opposes the longstanding belief that people in general can maintain their standard of living in retirement with around 70-80% of their previous gross earnings.

12 citations


Cites background or methods from "Pension Coverage and Earnings Repla..."

  • ...For example, Palmer’s work (1988) (2008) relied on a single cross-sectional year of data with individuals between ages 50 and 64, whom he averaged across to produce the denominator....

    [...]

  • ...…judgments about target replacement rates (that is, what level of replacement rate is necessary for an individual to maintain his/her lifestyle in retirement) (Boskin and Shoven, 1987) (Smith, 2003) (Butrica et al., 2003) (LaRochelle-Cote, Myles and Picot, 2008) (Ostrovsky and Schellenberg, 2010)....

    [...]

  • ..., 2003) (LaRochelle-Cote, Myles and Picot, 2008) (Ostrovsky and Schellenberg, 2010)....

    [...]

Report SeriesDOI
TL;DR: In this article, the authors focus on women, youth and seniors face barriers to economic inclusion in Canada, with considerable scope to improve their labour market outcomes, focusing on skills development to arrest declining skills among youth and weak wage growth among young males.
Abstract: Women, youth and seniors face barriers to economic inclusion in Canada, with considerable scope to improve their labour market outcomes. There has been no progress in shrinking the gender employment gap since 2009, and women, particularly mothers, continue to earn significantly less than men, in part due to a large gap in unpaid childcare responsibilities. Outside the province of Quebec, low (but increasing) rates of government support for childcare should be expanded considerably, as should fathers’ low take-up of parental leave. Skills development should be prioritised to arrest declining skills among youth and weak wage growth among young males with low educational attainment. Fragmented labour market information needs to be consolidated to address wage penalties associated with the widespread prevalence of qualifications mismatch. Growth in old-age poverty should be tackled through further increases in basic pension payments over time. Linking changes in the age of eligibility for public pensions to life expectancy would boost growth by increasing employment of older Canadians still willing and able to work. For all three groups, well-targeted expansions of in-work tax benefits and active labour market spending have the potential to increase employment.

10 citations


Cites background from "Pension Coverage and Earnings Repla..."

  • ...Gross replacement rates for lower income earners are high, in many cases exceeding 100% compared with a common benchmark for retirement income adequacy of 70% (Baldwin and Shillington, 2017[146]; Ostrovsky and Schellenberg, 2010[147])....

    [...]

References
More filters
Journal ArticleDOI
TL;DR: This paper used LifePaths, a sophisticated simulation tool developed at Statistics Canada which integrates a large amount of data on the socio-economic experience of Canadians, to project consumption before and after retirement for Canadians who have not yet reached retirement age.
Abstract: A key question in Canada’s pensions debate is whether Canadians will be able to maintain their living standards in retirement, and if policy needs to respond to the risk that some will experience painful declines. To date, it has been very difficult to estimate how current trends might affect various members of the population in the long run. In this study, we used LifePaths – a sophisticated simulation tool developed at Statistics Canada which integrates a large amount of data on the socio-economic experience of Canadians – to project consumption before and after retirement for Canadians who have not yet reached retirement age. Consistent with other research, the study finds that Canada’s retirement system has supported post-retirement consumption relatively well, especially for lower-income individuals and those who reached retirement age in the last twenty years. If ongoing behavior and economic circumstances were to persist indefinitely, however, more Canadians may find maintaining their working-life consumption in retirement more difficult.

44 citations

Journal ArticleDOI
TL;DR: Among men in this cohort, the likelihood of being retired at age 70 to 72 was about 4 to 14 percentage points higher among pension plan members than non-members.
Abstract: Data from the Longitudinal Administrative Data (LAD) base are used to compare the retirement status and earnings replacement rates achieved by individuals who were, and individuals who were not, Registered Pension Plan members in 1991 and/or 1992, when they were in their mid-fifties. Among men in this cohort, the likelihood of being retired at age 70 to 72 was about 4 to 14 percentage points higher among pension plan members than non-members. Data used for the study do not provide information on why RPP non-members tend to retire later than do members. Among retired individuals, earnings replacement rates did not differ significantly between RPP members and non-members.

21 citations


"Pension Coverage and Earnings Repla..." refers background or methods in this paper

  • ...As discussed in Ostrovsky and Schellenberg (2009), there is merit in calculating replacement rates for seniors when they are in their seventies, rather than in their sixties, since there is greater likelihood of capturing income streams following mandatory conversion of RRSP assets....

    [...]

  • ...See Ostrovsky and Schellenberg (2009) for a more detailed discussion of data and sample selection....

    [...]

  • ...One exception is Ostrovsky and Schellenberg (2009)....

    [...]

  • ...The data source and methods used for this study closely follow Ostrovsky and Schellenberg (2009)....

    [...]

  • ...Ostrovsky and Schellenberg (2009) show that replacement rates are positively correlated with the recency of retirement, and the upward trend in replacement rates evident among all couples is at least partly attributable to the addition of more recent retirees to the sample....

    [...]

01 Jan 2008
TL;DR: Schellenberg et al. as discussed by the authors show that the process of retirement is changing, given phenomena such as post-retirement employment, phased retirement, and diverse pathways into retirement, including dual-earner couples.
Abstract: The authors are with the Business and Labour Market Analysis Division. Grant Schellenberg can be reached at 613-951-9580, Yuri Ostrovsky can be reached at 613-951-4299 or both at perspectives@statcan.ca. Retirement continues to change in many ways. This is certainly evident in terms of its timing, given the declining rate of labour force participation among older men between the 1970s and mid-1990s and its reversal in more recent years (Marshall and Ferrao 2007). Likewise, the process appears to be changing, given phenomena such as post-retirement employment (Schellenberg et al. 2006), phased retirement and diverse pathways into retirement (Nouroz and Stone 2006). Retirement is also changing in the extent to which it is being navigated by dual-earner couples.

6 citations


"Pension Coverage and Earnings Repla..." refers background in this paper

  • ...In a study of retirement transitions among dual-earner couples, Schellenberg and Ostrovsky (2008) show that the likelihood of a wife continuing to work after her husband‘s retirement is positively correlated with the share of the couple‘s income contributed by the wife, with the wife having pension…...

    [...]

Posted Content
TL;DR: The Canadian Financial Capability Survey (CFCS) as mentioned in this paper was designed to collect information about Canadians' knowledge, abilities, and behaviours concerning financial decision-making In addition to information on approaches to money management and financial planning, the CFCS collected information on issues relevant to current discussions about Canada's retirement income system.
Abstract: The Canadian Financial Capability Survey (CFCS), released by Statistics Canada in December 2009, was designed to collect information about Canadians' knowledge, abilities, and behaviours concerning financial decision-making In addition to information on approaches to money management and financial planning, the CFCS collected information on issues relevant to current discussions about Canada's retirement income system For example, retired respondents were asked about their financial standard of living in retirement and whether their retirement income is sufficient to comfortably cover their bills and financial commitments Working-age Canadians were asked about their financial preparations for retirement This research note provides highlights on retirement issues using the CFCS

5 citations


"Pension Coverage and Earnings Repla..." refers background in this paper

  • ...In a study of retirement transitions among dual-earner couples, Schellenberg and Ostrovsky (2008) show that the likelihood of a wife continuing to work after her husband‘s retirement is positively correlated with the share of the couple‘s income contributed by the wife, with the wife having pension coverage or not, and with the age difference between spouses....

    [...]

  • ...Schellenberg and Ostrovsky (2010) found that, even when one takes household income into account, retirees who own their home mortgage-free are more likely to have favourable assessments of their financial situation than retirees who do not....

    [...]

Frequently Asked Questions (1)
Q1. What are the contributions mentioned in the paper "Pension coverage and earnings replacement rates among canadian couples" ?

Ostrovsky and Schellenberg this paper examined the financial outcomes experienced by RPP members and non-members when in their mid-fifties in 1991.