Income Adequacy in Retirement: Accounting for the Annuitized Value of Wealth in Canada

Baldwin, John R. Frenette, Marc Lafrance, Amélie Piraino, Patrizio
Authors registered in the RePEc Author Service: Patrizio Piraino and John Russel Baldwin

Economic Analysis (EA) Research Paper Series from Statistics Canada, Analytical Studies Branch

Abstract: Discussions of pension adequacy for elderly Canadians have used the rate at which income falls with age; the income replacement rate or the ratio of post-retirement income to pre-retirement income. Use of income streams to assess post-retirement welfare requires a standard against which adequacy of the replacement rates can be judged. Because some expenditures (for example, work-related expenses) can be expected to fall after retirement, a declining income stream does not necessarily signal financial problems for seniors. More importantly, income as normally measured captures only part of what is available to seniors if households possess assets, which in retirement are not being used to generate measured income. This paper uses a different metric, referred to as "potential" income. Potential income is the sum of realized income and the income that could be realized from owned assets such as mutual funds and housing. Households prepare for retirement by saving and borrowing and investing the proceeds. The assets accumulated over a lifetime may or may not be drawn down in later years. If they are not, income streams underestimate the "potential" income available to support retirement. This paper takes this potential into account when comparing the pre- and post-retirement financial status of Canadian households.

Keywords: Families; households and housing; Income; pensions; spending and wealth; Seniors; Household assets; debts and wealth; Household; family and personal income; Income; pensions and wealth (search for similar items in EconPapers)
Date: 2011-11-21
New Economics Papers: this item is included in nep-acc and nep-age
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