Thursday, May 15, 2014

Is Debt an issue for Retiree's in Canada

Using data from the Canadian Financial Capability Survey, this study found that, in 2009, 1 in 3 retired individuals age 55 and over, whether single or in a couple, held mortgage or consumer debt. Since retirement usually coincides with a drop in income and an increased reliance on savings, debt management is a frequently cited component of retirement planning. 

The median amount owing for retirees with debt was $19,000. At the high end of the debt scale, 17% owed $100,000 or more. The likelihood of holding debt decreased with age but increased with household income and financial knowledge. Individuals with some  postsecondary education were more likely to hold debt than those with less schooling, while households with a high net worth were less likely to have debt. Being divorced was a strong correlate of holding debt among retirees.

The majority of retirees report that their finances are what they had expected them to be prior to retirement, that their income is sufficient to cover expenses, and that they are able to stay on top of bills and keep up with their financial commitments. After controls for personal and financial factors were applied, those with any level of debt were found to be more likely to
while 9 in 10 retirees without debt reported they had no trouble keeping up with bills and other financial commitments, 7 in 10 with debt reported this to be the case.

Roughly 1 in 10 retirees was divorced. This group had lower positive response rates for all three financial security questions, even after controls were applied for other factors, including debt.

For example, 65% of the divorced reported that their financial situation was as good as or better than they expected before retirement, compared with rates of 77% or greater for those who were in a couple, were widowed or never married. The substantially lower-than-average income and net worth of the divorced coincide with their poorer perception of their financial condition.

Immigrants, as well as those having relatively low income or net worth, also report lower perceptions of financial security.

The incidence and level of debt among the pre-retired population age 55 and over were higher than among  retirees. Two-thirds of pre-retirees carry mortgage or consumer debt with a median value of $40,000.

Debt management is a recurring theme in retirement planning literature. Debt may be problematic for older workers if not paid off before retirement since repayment can be more difficult on a reduced income. On the other hand, carrying debt into retirement may not necessarily be an issue if repayment is manageable and the household is financially sound.

Financial planning is particularly important for women for several reasons. Compared with men, women have a longer life expectancy and they usually retire having spent fewer years in the labour  market with less earned and saved (Glass and Kilpatrick 1998, and Marshall 2000). Divorce or widowhood during this period can also affect economic well-being.

With funding for retirement shifting onto the individual, most Canadians believe they must take an active role in planning for the event. Indeed, among those age 25 to 64, 81% reported they were preparing financially for their retirement. However, only 46% of those preparing for retirement knew how much savings they would need to maintain their standard of living (Schellenberg and Ostrovsky 2010).

One in 3 retirees holds some form of debt. Debt can include mortgages; student, payday, or other loans; outstanding balances on credit cards or lines of credit; or any other unpaid debt or liability.

Among those age 55 and over, one-third of the retired and two-thirds of the not-yet-retired report having some form of debt. The proportion holding debt in retirement is about one-third for both fully retired couples (where both partners are retired) and for people living on their own. The proportion of couples with debt is higher when one spouse is retired (61%) or when neither spouse is retired (75%). Research has found that dual-earner couples tend to have higher average debt per person, relative to income—possibly due to their sense of security from having two incomes (TD Economics 2011)

Among retirees, average debt was $60,000, while the median (the value where half owe more and half owe less) was $19,000. This large difference between the median and the mean is characteristic of a skewed distribution: one wherein a small group carries a high debt load while most owe smaller amounts. Of retirees with debt, 1 in 4 owes less than $5,000. Debt in this range may simply be related to using credit as a convenience or as promotional financing. For example, some big-ticket items can be purchased on credit with no payments or interest for up to one year. One-third of households with debt owe between $5,000 and $24,999, and another one-quarter owe between $25,000 and $99,999. The remaining 17% of households carry a debt of $100,000 or more. The problem is that more seniors are collecting debt and the government in an attempt to save money is reducing the support it gives to seniors in Canada when compared to other OECD countries.

As (seniors') poverty rates were falling in many OECD countries between 2007 and 2010, in Canada they rose about two percentage points.

As well, the report notes that public (government) transfers to seniors in Canada account for less than 39 per cent of the gross income of Canadian seniors, compared with the OECD average of 59 per cent, meaning more Canadians depend on workplace pensions to bridge the gap.

Meanwhile, public spending on pensions in Canada represents 4.5 per cent of the country's economic output, compared with and OECD average of 7.8 per cent.

Canadian seniors depend on income from private pensions and other capital for about 42 per cent of their total.

"As private pensions are mainly concentrated among workers with higher earnings, the growing importance of private provision in the next decades may lead to higher income inequality among the elderly," the report warns.

"Those facing job insecurity and interrupted careers are also more exposed to the risk of poverty because of the lower amounts they can devote to retirement savings."

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