Transcript Pension Wealth in the Canadian Context: Lessons for LWS
Pension Wealth in the Canadian Context: Lessons for LWS
Michel Palardy and Catherine Van Rompaey Statistics Canada Luxembourg Wealth Study Conference Banca d’Italia, Rome July 5-7, 2007
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Lessons for LWS
Harmonizing existing wealth survey data, to the extent possible, important first step Next step is defining ideal wealth concept and moving towards harmonized measurement International measures of pension wealth fraught with complexities and gaps Effective measurement key to understanding distributional effects/responses as institutional structures evolve and the population ages Critical to formulation of appropriate policy 2
Overview
• • • •
The Canadian pension system and public policy
Pension wealth in Canada Macro vs micro Concepts, measurement Impact of excluding pension wealth in Canada Canada vis-à-vis the United States: an illustrative example
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Canadian Pension System
“Three Pillars”
Government administered plans
Old age security/Guaranteed income supplement Canada and Quebec Pension Plans
Employer-sponsored plans
Registered pension plans (defined benefit or defined contribution) Group RRSPs (employer contributes to individual saving plan) Other (Deferred profit sharing, retirement compensation arrangements)
Individual savings plans
Registered retirement savings plans (RRSPs, LIRAs, RRIFs) 4
Policy environment
Health of the defined-benefit pension system under intense scrutiny in Canada
Coverage ratios declining for employer-sponsored plans Erosion of defined benefit system viewed as undesirable Sponsors concerned about growing difficulty maintaining funds; actuarial deficits in wake of stock market crash Provincial pension regulators flag “crisis” Bank of Canada concerned, risks to financial system Ontario Expert Commission on Pension Reform 5
Policy environment
Heightened demand for pension statistics
New regulatory data on actuarial liabilities (funded status) of pension plans and assumptions in valuation to come out this year Pension satellite account in Canadian SNA 6
Macro measures: Pension Satellite Account in Canadian SNA
Pension wealth accounted for in the National Balance Sheet Account (as asset and liability) New specialized “Pension Satellite Account” Employer sponsored plans, government plans, individual saving plans Wealth positions and associated flows Critical to decomposing macro saving rates SNA productive income concept includes accrued pension income, not benefits Top priority of federal finance department To be released experimentally this year, then implemented as a regular annual release 7
Pension Satellite Account in Canadian SNA
Indi vi dual saving plans Empl oyer sponsored pension pl ans Social security pl ans Opening wealth position Inflows : contri buti ons, investment income Outl ays: Withdrawals, administration cost Other changes: Capi tal gains/losses Closing wealth position
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Micro measures on the Survey of Financial Security
Wealth surveys conducted irregularly by Statistics Canada Long hiatus from 1984 Assets and Debts survey to 1999 SFS Wealth value of employer-sponsored pension plans introduced subsequent to 1999 release Extensive consultation, including federal policy departments and Canadian central bank Methodology developed with assistance of an actuary Part of featured net worth for 2005 SFS release 9
Pension wealth on the SFS
Pension assets
Do not include social security or government administered plans
CPP/QPP considered in 2005
Include employer-sponsored plans
Defined contribution and defined benefit (the largest share) Include tax-deferred individual savings plans (RRSPs, RRIFs)
Large portion of financial assets held in this form
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Pension wealth: SFS concepts and methodology
Present value of expected future benefits for employer pension plans Valuation on a “termination” basis “Going concern” valuation also produced (about 30% higher) Some questions asked of respondent, not terms and conditions of plan Calculation links to income tax data and Pension Plans in Canada database 11
Trends in pension coverage
Statistics Canada ’s Pension Plans in Canada Program Regulatory information from provincial supervisory authorities 15,336 Registered Pension Plans covering 5.7 million members as of 2005 39% of paid workers covered Membership rising, but coverage rates declining, faster for men than for women About 1/3 of families had no pension assets of any kind according to SFS 2005 Majority had lower income from employment 12
Pension wealth
Canadian pension assets by age group
Value
(,000) 300 250 200 150 100 50 0 Under 35 35 to 44 45 to 54
Age group
Median 2005 Median 1999 55 to 64 65 and older 13
Excluding pension wealth in Canada: considerations
LWS net worth only 42% of Canadian measure Country rankings and portfolio composition Employer pensions second largest asset : differential coverage across families Financial assets held in individual retirement savings plans (RRSPs), designated as pension assets Considering only “non-pension” financial assets is incomplete view of discretionary savings 2005 SFS collected investment distribution of registered retirement savings plans; not available in 1999 14
Excluding pension wealth in Canada: considerations
Wealth concentration Pension assets clearly have equalizing effect Proportion of net worth held by highest decile higher (58.2% vs 50.9%) Gini coefficients higher and show different trends (0.746 vs 0.688) Trends in net worth for specific groups quite different E.g., couples with children from 1999 to 2005 30.4% growth in median net worth including pension assets 45.2% growth when pension assets excluded Relevant to study net worth across age groups when savings for retirement excluded?
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Canada vis-à-vis United States
Canada often compared to our neighbours to the South Simple illustrative example to show coverage of different elements of pension system Consider implications for interpretation of wealth measures, both nationally and cross nationally Could be expanded to look at other countries with different retirement income systems 16
Canada vis-à-vis United States retirement income system
Similar elements: “three pillars” Have evolved in different directions at different rates Unlike U.S., defined benefit system remains important in Canada, pension reform emphasizes its protection Highlight elements missing in wealth surveys to study distributional effects Pension reform debate lacks key insights 17
Pension wealth in national sources, Canada and US
Means-tested social security programs State -administered employer-sponsored pension plans Privately administered employer-sponsored pension plans Tax-deferred individual savings plans Canada
Survey of Financial Security, 2005
Program/mechanism
Old Age Security/Guaranteed Income Supplement
Covered?
No Canada/Quebec Pension plans No
United States
Survey of Consumer Finances, 2004
Program/mechanism
Social Security
Covered?
No. Defined benefit plans Defined contribution (money purchase) plans, deferred profit sharing plans, RCAs, Group RRSPs Registered retirement savings plans (RRSPs, LIRAs, RRIFs, annuities) Yes Yes Yes Defined benefit plans 401(k) accounts, 403(b) accounts, Keogh accounts, thrift saving accounts Individual Retirement Accounts (IRAs) No Yes 18
Canada vis-à-vis United States Financial assets
Canada, 2005 $CAD % 1,632 74% United States, 2004 $US % 33,759 32% Private pension assets
RRSPs and other indiv plans OR Account type pensions/IRA/Keogh accounts Employer Pension Plans (DB+DC)
Other financial assets
Deposits in financial institutions M utual funds / investment funds / income trusts Stocks Bonds (saving and other) Other financial assets
Total financial assets
593 27% 1,039 47%
585
237
26%
11% 134 6% 103 35 5% 2% 76
2,216
3%
100%
33,759 N/A
71,719
17,796 23,915 18,540 6,137 5,332 32% N/A
68%
17% 23% 18% 6% 5%
105,478 100%
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Conclusions
Pension reform of heightened interest in Canada and elsewhere Can only increase in importance as population ages A cross-national database covering pension wealth would be an invaluable policy tool International standards for micro measures could provide support for jurisdictions to develop estimates Define ideal/expanded wealth concept in relation to essential practical concept Enable micro-micro comparisons: increase coherence and analytical scope 20