The Bigger Picture: How the Fourth Pillar Impacts Retirement Preparedness

Abstract

In the face of declining private-sector pension coverage, policymakers have expressed concerns about a perceived lack of voluntary savings for retirement, through vehicles such as Registered Retirement Savings Plans (RRSPs). This gap has fueled the policy debate around broad-based compulsory solutions, such as the Canada Pension Plan expansion or the Ontario Retirement Pension Plan. But other sources of wealth, although not accumulated explicitly for the purpose of supporting retirement, can also play an important role once people stop working. Included are real estate, taxable financial investments, privately owned businesses, other durable assets, and tax-free savings accounts. Employment and business earnings, insurance products, inheritances and other family transfers can all play a role in funding asset accumulation. These additional sources of wealth have been labelled the “fourth pillar” of retirement income by retirement experts. Relying on publicly available survey data, this Commentary studies the impact of fourth-pillar assets on retirement wealth for households relying primarily on voluntary savings. Our findings suggest that fourthpillar assets may significantly improve assessments of households’ retirement readiness and that not giving them full consideration would be an important oversight. About 39 percent of non-retired 35-to-64-year-old Canadian households will be primarily drawing from voluntary retirement savings and private wealth to sustain their retirement. Because of the voluntary nature of their retirement arrangements, these households are often labelled by policymakers as the group most at risk of unsatisfactory retirement outcomes. But once we factor in wealth already accumulated from all sources, we can estimate the number of households in this group still at risk of insufficient retirement wealth. More than 40 percent of them have potentially already accumulated sufficient wealth (net of debts) in RRSPs, real estate, other tangible assets, financial assets and business assets. They would likely fare well in retirement, compared to their working years, without any more savings. This means that a sizeable proportion of households targeted by policymakers as most at risk of retirement income insufficiency are in fact already in good financial shape. In total, this leaves about one-in-five employed 35-to-64-year-old households, most of them in the upper-income quintiles, likely needing to accumulate more retirement capital on a voluntary basis. Therefore, when reflecting on claims that Canadians lack adequate savings for retirement, it is crucial to ask whether fourth-pillar assets have been fully considered in reaching this conclusion. Mandating new retirement wealth accumulation through one channel, such as CPP expansion, may impact accumulations in other channels for households already satisfied with their current tradeoff of future versus present consumption. Because households accumulate wealth in diverse ways and face various circumstances, the impact of fourth-pillar assets on the big picture is far from negligible and should not be ignored.