7 Conclusion

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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). To account for the effect of family size on purchasing power, we adult-equivalent adjust (AEA) all income measures.²¹ AEA family income provides us with an estimate of the economic resources available to each individual in the family, assuming all individuals have equal access to the family's income.

Using longitudinal data to track cohorts as they age, we find that average family income peaks at about age 60, declines until age 68 and is stable thereafter. However, this pattern varies considerably across the income distribution. People at the bottom of the distribution experience relatively little change in their incomes as they age, while those at the top witness a significant decline, on average. Hence, the income gap between the high- and low-income individuals falls as the cohorts age; income inequality falls as cohorts enter and move through the retirement years.

By their late 60s, Canada and Quebec Pension Plans (C/QPP), Old Age Security (OAS) and Guaranteed Income Supplement (GIS) accounted for about one half of the income in the bottom quintile, and private pensions and registered retirement saving plans for only 18%. Among top quintile individuals, C/QPP, OAS and GIS accounted for only 18% of income, while private pensions, investments and capital gains accounted for 60%.

Are more recent cohorts better off than their earlier counterparts as they enter retirement? Generally speaking, the answer is 'yes.' The increase is largely related to the higher levels of private pension benefits received by the more recent cohorts, which in turn reflect higher earnings levels during their working years. Whether these increased benefit levels will continue for future cohorts is unknown. However, private pension coverage has been falling among younger workers, and it could affect their benefits levels at retirement.

While private pension benefits rose among more recent cohorts of retirees, investment income fell; the decline is likely related to the fall in interest rates in recent years.

A replacement rate is an individual's AEA family income at any age, say 70,²² compared with their income at age 55.²³ Hence, a replacement rate of 0.8 means that the individual has an adult- equivalent-adjusted family income at age 70 that is 80% of that at age 55.

For the 1983 cohort, median replacement rates started falling below 1.0 at around age 60, fell to about 0.8 by their late 60s and then remained stable. However, this pattern varies depending upon where the individual is in the income distribution. Generally speaking, among poorer individuals (in the bottom quintile) median replacement rates remained at about 1.0 throughout their retirement. Public pensions and other income sources maintained their income levels. However, about 20% of this group had replacement rates below 0.8 by the time they were 70. Given the low base from which they were starting at age 55, this could be an issue.

For individuals in the middle quintile, median replacement rates remained stable at from 70% to 80% of their pre-retirement income over the retirement years, well in line with standard assumptions about desirable replacement levels. Nevertheless, by age 70, almost a quarter had replacement levels below 60% of their pre-retirement income.

Individuals in the top quintile experienced a larger drop in replacement rates, since they were starting from a much higher income base at age 55. For this group, median replacement rates fell to around 0.7 by their middle 60s, and remained at that level as they aged.

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.

Generally speaking, we find that poorer individuals have higher levels of income instability than richer individuals during their late 50s and early 60s, largely because of greater instability in employment income. As the cohorts age, however, the more stable benefits from the public pension system lead to more income stability among the low-income individuals and the gap in income stability between the rich and the poor disappears.

^21. As a result of the adult-equivalent adjusted (AEA) adjustment, the income values reported in this paper are an estimate of the economic resources available to each individual in the family, and are not the raw family income values. To interpret AEA (adult equivalent adjusted) family income in a more intuitive manner, simply multiply the AEA-adjusted value by two. The result is the disposable income for a family of four. For example, average AEA-adjusted family income for the 1983 cohort peaked at around $45,600 at age 60. This is the equivalent of a disposable family income of $91,200 for a family of four.

²² Actually, the average income over ages 64, 65 and 66—i.e., their permanent income at around age 65.

²³ Actually, their average income over the ages of 54, 55 and 56.