Saving for retirement is becoming less common, and it is also becoming something only wealthier Canadians are doing.
Colin Dodds is a professor of finance at Saint Mary's University and believes that Canada’s current retirement funds are inadequate.
"The government has got to start looking at this because the Canadian Pension Plan (CPP) is not going to do it," Dodds said.
The CPP is an optional method of retirement savings in which employees give a percentage of their income for retirement.
But for wealthier Canadians, the Registered Retirement Savings Plan (RRSP) is a preferred method of retirement savings. An RRSP is a savings account in which the money can be invested in holdings that can grow over time, such as stocks and bonds. RRSP’s are extremely tax efficient due to the fact that you can claim RRSP contributions on your taxes to reduce your tax bill.
But over the past two decades, the percentage of Canadians with RRSPs has declined by almost a third. Over that same period, the median income of Canadians stayed stagnant, but the median income of those with RRSP's almost doubled.
Mark Grant, a financial analyst for Toronto-Dominion (TD), blames the decline of RRSPs and RPPs on increasing income inequality.
"If the median income hasn't grown, but inflation is, then half the population is relatively getting poor. So if you have less income, more of your money is going to be spent on housing, food, everything else, all your necessities," Grant said.
Dodds also believes income inequality is to blame.
"I think it is income inequality. I'd say the nature of the job and how permanent that income is," Dodds said. "Today, you don't necessarily have any permanent position, you don't have any permanence on your income, your income could go up could go down," Dodds said.
Dodds is referring to what's called the "gig economy." Which means an economy where workers often have part-time jobs with short-term commitments. In a gig economy, RPP's are not going to be as common as they are for a unionized workers who stays with the same company for their whole life.
In Canada, the vast majority who make over six-figure salaries tend to have a Registered Pension Plan (RPP) or a RRSP. But less than 10 per cent of those who make less than the median income, $37,000, have one.
Dodds also notes a conflict of interest in the public sector maintaining better retirement plans from their jobs than those in the private sector.
"When you think of the public sector, a lot of those have defined benefit plans… there's less public sector jobs around now in many instances," he said. "The pension issue is so biased because the public sector looks after itself," Dodds said.
In Canada, only 21 per cent of employed people work in the public sector, but the public sector holds 53 per cent of the RPPs.
Although Dodds and Grant both place the blame of the decline of RRSPs on income inequality, they also both believe that our schools should contain better education on financial literacy.
“You’ve gotta get it in the schools,” Dodds said.
“If it's in terms of education, it would be within schooling,” Grant said, when asked what we can do to help encourage the use of RRSP’s.
On the bright side, efforts have already been made by some organizations to increase financial literacy in schools.
Anabella Bergmame-Smith is the co-president of Enactus Dalhousie, an organization that helps young entrepreneurship. Enactus has worked on financial literacy in the past. Their aim was elementary school students.
"We had a financial literacy app that was helping. It was for elementary school students. And it was a way that they could collect money through this app, and they had options of spend it, invest it or save it," Bergmame-Smith said.
She also pointed out the need for better education in financial literacy in our schools.
"I think that should be taught to everyone as early as middle school, but definitely high school, just so they know exactly what they're getting into and how the best way to spend their money or invest their money is," Bergmame-Smith said.
But she goes even further in saying that there is inadequate RRSP promotion to the public by our governments themselves.
"The biggest reason why people aren't creating RRSP's is maybe the lack of education or the lack of awareness of investing. Younger populations might not even know about it because there isn't too much promotion going on by the government, that's for sure," Bergmame-Smith said.
Today it is easier than ever to create an RRSP. There exist online services such as WealthSimple in Canada which allow you to deposit money into an RRSP and invest it in holdings. Grant wonders if the increasing ease of investing may cause a resurgence.
“I wonder what kind of impact WealthSimple is going to have,” he said.