Wolfson on Pensions

Further to my earlier post on the IRPP pensions conference http://www.progressive-economics.ca/2010/05/12/still-more-on-the-pensions-debate/#comments an excellent (albeit highly complex) power point presentation by Michael Wolfson has recently been posted. It can be found in two parts on the IRPP web site  at http://www.irpp.org/indexe.htm

Wolfson, who now teaches at the University of Ottawa, recently retired from the position of Assistant Chief Statistician at Statistics Canada. He helped develop (was the main architect of) the Statistics Canada LifePaths model, a complex simulation model drawn from a wide range of surveys which builds the equivalent  of a longitudinal data base for Canadians capable of looking into what likely lies in store in the future for successive age cohorts.

Wolfson has made use of the model to look at prospective economic security in retirement, with a focus on younger and older baby boomers who are still in the work force. He thus gives some detail to the argument I have made on this blog earlier, namely that the relatively favourable income situation of today’s retirees may well not be a good guide to what lies in store for later age cohorts.

Wolfson looks not at gross income replacement rates but rather at prospective consumption in retirement  compared to time spent in the workforce. The desirable norm is that the ability to consume should not fall  in retirement, a concept which takes into account the fact that retirees do not have work-related costs, and can and will drawn down assets rather than save. His model adds income from housing to public and private pension incomes to estimate likely consumption replacement levels after age 70, when earnings becomes very modest to non existent on average.

His key finding is that about one half of baby boomers born between 1945 and 1970 and falling within the middle 50% of the earnings distribution (ie not in the bottom or top 25%) will likely experience a fall in consumption capability in retirement of at least 25%. This cannot be directly compared to the gross income replacement rates examined in the Mintz report, but is at least as stringent and even more stringent a test of adequacy than a gross income replacement rate of 60% (the measure used by Mintz.)

The proportion of middle income baby boomers who will likely experience consumption declines of at least 25% is found to be greater for the younger age groups among baby-boomers, and for those earning somewhat above average (since OAS/GIS replace a smaller share of pre retirement earnings.)

Last, Wolfson provides a simulation of the CLC proposal to double CPP benefits from 25% to 50% of pensionable earnings. He finds that – if this had been in place – the proportion of baby boomers experiencing a consumption decline of at least 25% at age 70 would fall from about 50% to about 30%.

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