Canadian parents save less for retirement than Canadians without kids. And it’s probably deliberate.
In my previous column, I focused on a new study from Canada’s Fraser Institute, which found that when taxes were increased to help fund the Canada Pension Plan (CPP), Canadian households reduced their own personal saving on a nearly dollar-for-dollar basis. That result implies that expanding Social Security, or simply even raising taxes to keep it solvent, might reduce the non-Social Security savings that Americans put aside to help support themselves in retirement. If so, expanding Social Security won’t necessarily mean expanding retirement incomes.
But the Fraser Institute paper, authored by Charles Lammam, François Vaillancourt, Ian Herzog and Pouya Ebrahimi, shows something else interesting, with regard to gauging Americans’ overall readiness for retirement: how households with children save for retirement compared to households without kids.
As I recently argued, the broad goal of retirement saving is to allow a person to enjoy the same standard of living in retirement as they had during their working years. In this context, parents should save less for retirement than non-parents, because part of parents’ pre-retirement incomes goes toward supporting their kids. In other words, you don’t need to replace a standard of living that you never had.
I pointed to research from two University of Wisconsin economists showing that a household with two kids will hold about 10% less wealth than a similar household without kids, and other research from the RAND Corporation’s Suzanne Rohwedder showing that in retirement, people who’d had kids report being just as financially secure as retirees who didn’t have kids. Together, these results indicate that parents may be rationally saving less than non-parents. Studies that don’t account for how children affect retirement saving will find parents to be disproportionately under-prepared for retirement and help foster the perception of a “retirement crisis.”
The Fraser paper adds to that argument. In analyzing how Canadian households’ personal saving reacts to changes in pension tax rates, the authors had to control for a number of factors – including whether the household had children. The Fraser study finds that, all other things equal, for each child a household’s saving rate drops by about 3.5 percentage points. That’s a pretty big difference, but if parents saving for retirement are seeking only to replace their own pre-retirement consumption, not the income that was consumed by their children, it’s a difference that doesn’t matter very much.
Again, this hints at the possibility is that many of the Americans who we believe are causing a retirement crisis through their inadequate saving are doing precisely what they should do and will end up satisfied with the results. If so, a massive overhaul of the U.S. retirement system, such as by expanding Social Security or setting up government-run retirement plans, isn’t what we need. Instead, policymakers should focus on targeted policies for the groups that truly do seem to be underprepared for retirement – such as single, less-educated women. I’ll talk more about what we can do for such groups in a future piece.
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