Perhaps building up a comfortable retirement has always been a tricky balancing act. But as the Baby Boomer generation inches towards the so-called golden years, determining how much cash one needs to live on in the short-term and how to make savings last for an unknown period of time, is fuelling the need for an effective annuity market with a diverse product range.
According to a newly released report by the C.D. Howe Institute, retiring baby boomers are driving a shift from retirement-fund accumulation to decumulation [sic].
In the "Annuities and Your Nest Egg: Reforms to Promote Optimal Annuitization of Retirement Capital" report, University of Calgary professor Norma Nielson states to enhance retirees' options, policy reforms should level the playing field for annuity products and promote market-driven variety of choice, thus ensuring retirees have at least some funds available to them for the long haul.
"As the bulge in the demographic goes through the system, we're going to move from an area where most people are putting money into their retirement savings to a period of time where there are more people taking it out," she tells Yahoo! Canada Finance. "We're not there yet. We're at the front edge of the (retiring) baby boomers. We don't have enough of them all the way through the system to have reached that state yet.
"But it's the same phenomenon that's going to drive us from an economy where capital is scarce to one where labour is more scarce."
Nielson, the chair in Insurance and Risk Management at the Haskayne School of Business at the U of C, took a comprehensive look at annuity markets in Canada and abroad and in the report she explores ways to improve Canada's current system of law and regulation.
"I think getting some of the government regulations out of the way so that the marketplace can offer inflation-adjusted annuities and buying an annuity if you make it to the age of 85 and treating annuities more like insurance," she says when asked what critical changes need to occur. "We (taxpayers) may end up picking up the tab … there are ways to make it smoother and less expensive for all of Canada."
Very few of those Canadians without workplace defined-benefit (DB) coverage currently choose to annuitize even a portion of their lump-sum savings in retirement, and as cohorts with lower levels of DB coverage enter retirement, the proportion of retirees without annuity-based longevity protection is likely to increase, she warns.
"My own take on this is (banks) are not well positioned right now to deal with longevity risks," she says. "There are securities developing out there such as longevity bonds that are beginning to emerge. If it becomes a fully developed market, that would be the time for banks and others to (get involved).
When asked if there's another country Canada should consider observing with respect to meaningful reform of the annuity landscape, she notes many pointed to Chile as an example.
"But Chile has gone all the way to a completely defined contribution type of system where everybody's responsible for saving their own and it's a different culture and a different approach altogether," she says. "The Canadian system of public programs is pretty similar to what's in the U.S. though not quite as complicated by provincial versus federal programs.
In the report, Nielson writes most middle and higher income earners would likely benefit from placing a portion of their private savings into a life annuity product. And policymakers should provide the proverbial level playing field by integrating insurance, banking, pension, and tax regulations so these are neutral factors in the consumer decision to annuitize, she adds.
"Canadians have always been a little better at saving than some other places in the world but I don't know we've spent enough time educating our citizens about how to spend it once they get there."