The spending habits of retirees in Canada and other developed countries demonstrate a strong tendency for personal consumption to decline with advancing age.
June 16, 2016 – The spending habits of retirees in Canada and other developed countries demonstrate a strong tendency for personal consumption to decline with advancing age, according to a new report from the C.D. Howe Institute. In “How Spending Declines with Age, and the Implications for Workplace Pension Plans,” author Frederick Vettese suggests that this pattern has important implications for pension contributions earlier in life.
“Major studies of the spending habits of retirees in Canada and other developed countries demonstrate a strong tendency for personal consumption to decline in real terms with advancing age,” states Vettese. He adds that, “this decline in real spending, which typically starts at about age 70 and accelerates at later ages, cannot be attributed to insufficient financial resources because older retirees save a high percentage of their income and, in fact, save more than people who are still working.” He cites evidence showing that compared to a household where the head is age 54, the average Canadian household headed by a 77-year-old spends 40 percent less. None of this drop in spending is attributable to the elimination of mortgage payments because they are not considered consumption.
The author focuses on public sector pension plans, which are fully indexed to inflation. His findings show that these plans could move to partial indexation, generating significant savings. “Given that more than 3.1 million active members are contributing to public-sector pension plans, the total annual savings could add up to billions of dollars, he says.” At the individual level, these savings would allow public-sector employees to increase current consumption or to reduce debt.
Given this phenomenon, cost-of-living indexation of workplace pension benefits could be reduced without sacrificing consumption later in life. Vettese concludes that “reduced pension contributions would free up money to be spent today when families struggle to raise children and pay down mortgages on houses, thereby raising plan members’ collective economic welfare over their lifetimes.”
For the report go to: /public-policy-research/how-spending-declines-age-and-implications-workplace-pension-plans
The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. Widely considered to be Canada's most influential think tank, the Institute is a trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review.
For more information contact: Frederick Vettese, Chief Actuary, Morneau Shepell; or Alexandre Laurin, Director of Research, C.D. Howe Institute; 416-865-1904, or email: amcbrien@cdhowe.org.