Canadian Retirement Incomes: How Much Do Financial Market Returns Matter?

Abstract

How much might poor financial market returns affect the financial well-being of Canadian seniors? We compare three scenarios: if Canadian financial markets (a) never experienced the financial crisis of 2008 (i.e., continued on their pre-2008 path); (b) experienced the crisis and return to historical trends; or (c) enter a new low normal of depressed stock market returns and continued low interest rates. Using a population microsimulation model, we model the first order impacts—that is, before behavioural responses such as delayed retirement or increased savings—on the retirement income flows of Baby Boom retirees. While annual income from private savings of the median Canadian baby-boom senior drops by over half in the event of continuing low financial market returns, median financial welfare drops by only just over a fifth. Rising social transfers and stable income sources (such as Canada/Quebec Pension Plan and implicit income from home ownership) partially shield Canadian seniors from financial market risk. Canadian research has long recognized that the Canadian social pension system protects poorer Canadian seniors from destitution. Our results indicate that it also helps shield the Canadian elderly population as a whole from financial market risk.