Study: Income security in retirement among the working population

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On average, Canadian workers had family disposable incomes at age 75, when most are retired, that were 80% of their incomes at age 55, when they were working, according to a new study. However, the extent to which they maintained their income in retirement varied with their level of income.

Disposable incomes for wealthier Canadian workers declined significantly after they headed into the retirement years, but those with low incomes encountered relatively little change.

The study used data from Statistics Canada's Longitudinal Administrative Data base to determine the extent to which individuals at the age of 55 were able to maintain their family incomes, as they moved into the retirement years until their mid 70s. It covered the period from 1983, when the people in the analysis were age 55, to 2004, when they reached age 76.

It found that among workers with average incomes at age 55, family disposable income fell after the age of 60, declined until 68, then stabilized at about 80% of the income level they had when they were 55.

Lower income workers (those in the bottom 20% of the income distribution) experienced little change in income as they moved from the age of 55 through the retirement years. This was largely because of the income maintenance impact of the public pension system.

These lower income workers experienced high levels of individual income instability in their late 50s and early 60s. However, after retirement, their incomes became more stable.

However, better-off workers in the top 20% of the income distribution experienced substantial declines in income by time they were 75.

These findings are important because of the aging of the population. The proportion of the population who are retirees will increase considerably.

As a result, the degree of financial well-being experienced by seniors will likely become an important issue. The extent to which an individual's income at, say, the age of 55, is replaced throughout the retirement years is an important aspect of maintaining a pre-retirement lifestyle.

Wide variations in "income replacement rates"

This study calculated the "income replacement rate," which is the after-tax, after-transfer family income at a given age, say 75, compared with the after-tax, after-transfer family income of the same individual at 55. These rates depended on whether an individual was in a richer or poorer family. The analysis also took account of changes in family size from pre- to post-retirement ages.

The study found that on average, the higher the disposable income at 55, the lower the portion of income that was replaced in retirement.

The richest workers, those in the top 20% of the income distribution at 55, replaced on average about 70% of their income during their 70s.

Still, these workers had an average family income of $90,000 after taxes for a family of two by time they reached 75. About 40% of this income came from private pensions or Registered Retirement Savings Plans, 28% from investment and capital gains, and about 18% from public pensions or the old-age security.

People in the poorest 20% of families at age 55 experienced little change in their incomes as they aged. They maintained roughly 100% of their disposable income because their earnings from earlier years were replaced by income from the Canada/Quebec pension plans (C/QPP), Old Age Security (OAS) and the Guaranteed Income Supplement (GIS).

At 75, these workers recorded average after-tax family income of around $30,000 for a family of two. About 60% of it came from the C/QPP, OAS or GIS.

Middle income workers at age 55 replaced between 75% and 80% of their family income through to age 75.

But some workers had low replacement rates. The study found that about one-fifth of workers replaced less than 60% of their age 55 after-tax incomes by the time they reached 75.

Income sources distinguishing low from high replacement rates

Two individuals from families with identical family incomes at 55 may have different levels of income by time they are 75, depending on sources of income available to them.

This study determined what sources of pre-retirement income were associated with high or low income replacement rates. It did so by concentrating on individuals in the middle-income range who had roughly the same income levels at 55. Some of these workers had replacement rates over 100% post-retirement, while others had rates less than 60%.

In early retirement years, at 65, the sources that distinguished low from high replacement rates were access to earnings, and income from investments and capital gains. Together, they accounted for 90% of the difference in income at 65 between workers with low or high replacement rates.

At age 75, however, the main factor determining whether a worker had a high or low replacement rate was access to a private pension. This single source of income accounted for 45% of the difference in income levels between the two groups.

Investment and capital gains income accounted for another 27% of the difference in income at 75.

Family income instability is greatly reduced in retirement years

Income instability refers to the year-over-year change in income levels for any particular family. Higher levels of income instability, that is, larger variations, may affect consumption levels from year to year, leading to uncertainty and stress.

To measure instability, the study looked at the deviation in income around the family's average income over a five-year period. If the family's income was the same in each of those five years, the deviation would be zero. But instability would be relatively high if its average income was, for example, $40,000 over the five years, and each year it fluctuated by 25% above or below this average.

The study found that instability is greatly reduced for both lower and higher income families as workers age.

In their late 50s, average family income for the 20% of workers in the bottom of the income distribution (the poorest families in our sample, though recall that those with pre-retirement earnings below $10,000 were not included in the sample) fluctuated by about 25% because of instability in employment earnings. On the other hand, the richest 20% of families saw their incomes deviate by only about 18% during the same ages.

But as individuals aged, income instability tended to decrease, although it fell more for the lower than higher income families. By time workers were in their early 70s, family income for both groups tended to deviate by only 10% around the average over five years.

This decline in instability was largely associated with the replacement of less stable employment earnings by more stable income from public pensions, OAS and GIS, or from private pensions.

Definitions, data sources and methods: survey number 4107.

The study, "Income security and stability during retirement in Canada," is now available as part of the Analytical Studies Branch Research Paper Series (11F0019MIE2008306, free) from the Publications module of our website.

Related studies from the Business and Labour Market Analysis Division can be found at Update on Analytical Studies Research (11-015-XIE, free), which is also available on our website.

For more information, or to enquire about the concepts, methods or data quality of this release, contact Garnett Picot (613-951-8214) or Sébastien LaRochelle-Côté (613-951-0803), Business and Labour Market Analysis Division.