1 Introduction

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In Canada, as well as in all other major industrial economies, the aging of the population poses a number of challenges to the pension system. According to the most recent population projections, the number of seniors aged 65 and over will surpass the number of children aged less than 15 years within 10 years (Martel and Caron-Malenfant 2006). Furthermore, the proportion of retirees will increase considerably, relative to active wage earners, in the near future. In this context, the degree of financial well-being experienced by seniors will likely become an issue of paramount importance, not only for the beneficiaries of pensions, but also for active workers contributing to the pension system, for policymakers and for the business community.

Information about the financial well-being of seniors following retirement remains relatively scarce. While other studies have shown that the pension system has been effective in keeping seniors out of low income, much less is known about the extent to which pre-retirement lifestyles can be maintained for a long time after retirement. In this paper, we fill this gap by developing a series of statistical indicators that can be related to the degree of income security during retirement.

To do so, we use a rich source of longitudinal data (Statistics Canada's Longitudinal Administrative Data base based on taxation records) and we follow a cohort of individuals over two decades after retirement to examine various aspects of income security. Our paper includes the following information: (1) income levels accessed by individuals after retirement for various cohorts of workers; (2) the role of various income components in providing income security during retirement, i.e., earnings, public pensions, private pensions, investment income and other sources; (3) retirement income replacement rates, i.e., an individual's income level at any age (say 70) compared with his/her income at age 55; and, (4) the degree of income instability experienced by seniors (or the degree of year-over-year variation in income levels).

Our findings indicate that more recent cohorts of retirees are better off than earlier ones when they enter retirement, largely because of higher private pension benefits. We also find that for a typical worker, income begins to fall at around age 60, dropping to about 80% of what he or she earned at age 55, and then remains stable for a long period of time. However, this pattern varies considerably, depending upon where the individual stands within the income distribution. We also find that poorer individuals have higher levels of income instability than richer individuals during their late 50s and 60s, but this gap largely disappears as they begin to access the more stable income flows they receive from the public pension system lead.

We proceed as follows. In Section 2 we review some of the literature associated with financial security during retirement. Section 3 describes the data and the methodology we use in this paper. In Section 4 we examine income levels and the evolution of income sources after retirement. Section 5 discusses the results associated with replacement rates. Finally, Section 6 provides some information about income instability at various stages of the retirement period, or the degree of year-over-year variation in income levels.