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 report from the C.D. Howe Institute. Author Frederick Vettese suggests this pattern has important implications for pension contributions earlier in life.
“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 says.
Vettese 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% 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.”
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