Executive summary

View the most recent version.

This study is concerned with the economic welfare of individuals following retirement, and hence we use a family-income concept, usually family income after taxes (i.e., disposable family income). Using a rich source of longitudinal data, we track the income levels of individuals over a period of more than 20 years as they enter retirement and we calculate a number of statistics that can be related to the degree of financial preparedness for retirement.

Our results indicate that, on average, family income peaks at around age 60, then declines until around age 68, and remains stable thereafter. However, this pattern varies tremendously depending upon where one is located within the income distribution. There is little change, on average, in the income levels of lower income people as they move through retirement, while individuals near the top of the income distribution experience significant declines in income through retirement.

By their late 60s, public pensions (including the Canada and Quebec Pension Plans, Old Age Security and the Guaranteed Income Supplement) account for about half of the income of bottom quintile individuals, and private pensions and registered retirement saving plans for only 18%. Among top quintile individuals, private pensions, investments and capital gains provide the major source (57%) of income.

More recent cohorts of retirees (say those age 55 in 1998) have higher family-income levels than their earlier counterparts (say those age 55 in 1983) when they enter retirement, largely because of higher private pensions. Whether these increased benefit levels will continue for future cohorts is unknown, since private pension coverage has been falling among younger workers.

A replacement rate is an individual's income at any age, say 70, compared with his income at age 55. Among individuals aged 55 in 1983, median replacement rates started falling below 1.0 at around age 60, fall to about 0.8 by their late 60s and then remain stable.

Replacement rates vary considerably across income levels, however. The median replacement rate for the middle quintile stabilized from 70% to 80% of pre-retirement income, well within the target range usually considered necessary to maintain pre-retirement living standards. Nevertheless, by age 70, almost a quarter had fallen below the 60% level. Among individuals in the bottom quintile, median replacement rates remained at about 1.0 throughout their retirement years. Individuals in the top quintile experienced a larger drop in replacement rates, to around 0.7 by their middle 60s, since they were starting from a much higher income base at age 55.

In addition to variation in replacement rates across the income distribution, there is variation in rates within an income quintile. Individuals with virtually identical family incomes at age 55 can obviously have very different replacement rates in retirement. Focusing on the middle income quintile, analysis indicates that high replacement rate individuals are distinguished from low replacement rate individuals (from the same income quintile at age 55) by employment earnings early in retirement, investment and capital gains, and in later retirement, access to private pension income.

The evidence suggests that there has been little change in the pattern of replacement rates across cohorts. More recent cohorts (e.g., those age 55 in 1995) appear to have similar patterns of replacement rates as they age as retirees in the 1983 cohort.

In addition to income level and replacement rates, income instability can be an issue for retirees. By income instability, we mean the amount of year-to-year variation in income levels for any individual. High levels of income instability can lead to consumption issues in some years, and possibly emotional stress.

We reach two main conclusions. First, poorer individuals have higher levels of income instability than richer individuals during their late 50s and early 60s, but as the pension income kicks in and stabilizes incomes, the gap in income instability between the rich and poor disappears. Secondly, income instability declines for all groups as they age, largely because of the stabilizing effect of public pension income sources.