After largely standing on the sidelines during last year's recession, Canadians are once again turning to registered retirement savings plans (RRSPs) to bankroll their retirement plans, according to a new report.
Higher disposable incomes, rising savings rates, renewed confidence in the stock market and lack of confidence in government and corporate retirement plans is leading Canadians back into mutual funds and other RRSPs, found the CIBC World Markets Consumer Watch report.
"The impressive improvement in the stock market since March 2009 almost guarantees that the current RRSP season will fare better this time around, with more money likely to find its way into income and equity mutual funds," says Benjamin Tal, senior economist and author of the report.
While the recent softening in the equity market will keep investors cautious, the dramatic decline in the overall volatility of the stock market has helped raise Canadians' risk tolerance in recent months. The lack of good investment alternatives in a world of low interest rates makes the decision to dive back into the stock market that much easier, said Tal.
The return to RRSP investments is a big change from last year when the number of Canadians who contributed to their RRSP fell by 1.8 per cent. Even those who managed to take advantage of this retirement investment vehicle ended up cutting their average contribution by 0.4 per cent. This resulted in an overall decline in total RRSP contributions of 2.2 per cent for 2008 — the largest drop in six years.
In 2008, about 24 per cent of taxpayers aged 24-65 made a contribution to their RRSP, with the distribution clearly skewed towards wealthier and older people. But when comparing contribution rates among different age groups with the same income level, the report found, in most cases, Canadians aged 25-35 were more likely to contribute to their RRSPs than Canadians aged 45-to 65.
"In other words, if they have the means to do so, younger Canadians are more inclined to contribute to RRSPs than their older counterparts," said Tal.
While employer-sponsored plans are by far the largest component of the retirement pie, their relative importance is on the decline, said Tal. The number of employer-sponsored registered pension plans fell from over 18 million in 1991 to less than 10 million in 2008, according to Statistics Canada. And those pension funds cover fewer and fewer Canadians, with the coverage ratio (as a share of total employment) falling by almost 10 percentage points over the past two decades.
In terms of the mix between men and women, the share of female RRSP contributors surged in 2008, as women generally fared better economically during this past recession.
But despite this improvement, the RRSP participation rate among men is still higher than women (53 per cent compared to 47 per cent) but that's mostly because women still earn, on average, 20 per cent less than men, said Tal.
"So the higher participation rate among men is not a gender issue, but an income issue. If we compare the RRSP participation rate among men and women in the same income group, we find that the propensity of women to contribute is actually higher."
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