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Millennials in a pension pickle as they overtake boomers



Canada, once dominated by the baby boomer generation, has officially shifted its demographic landscape. Millennials, born between 1981 and 1996, now outnumber the boomers, born between 1946 and 1965, according to Statistics Canada. However, this generational shift brings with it a significant challenge for the younger workforce - the dwindling availability of defined benefit pension plans.


The defined benefit (DB) pension plan was the gold standard during the boomers' era. Both employees and employers contributed, ensuring a guaranteed regular income post-retirement, often tied to inflation rates. This comprehensive package, which sometimes included survivor benefits, is now a distant memory for many millennials.


Statistics from StatCan reveal that in 1977, 48.4% of employed men and 34.5% of employed women were covered by a DB pension plan. Fast forward to 2000, and these figures had plummeted to 21.4% for men and 28.7% for women, primarily within the public sector.


The decline of defined benefit pensions ushered in the era of defined contribution (DC) pensions, where both employees and employers contribute a fixed percentage of the worker's salary. The retirement payout is then contingent on the amount contributed and the performance of investments, subjecting employees to market fluctuations.


Gren Austin from Wealthsimple Work suggests that group-sponsored defined contribution pensions might be the last, best chance for working Canadians. He emphasizes the individual's responsibility in funding their retirement, highlighting employer contributions as essential and stating that these plans suit the more transient millennial workforce.


Despite this potential solution, Deloitte Canada's research from last November reveals that only 24% of private sector workers participate in any employer-sponsored pension plan, leaving a substantial portion of the workforce to fend for themselves.


In response to the pension void, many workers turn to tax-friendly government initiatives such as registered retirement savings plans (RRSP) and tax-free savings accounts (TFSA). The RRSP, with a contribution deadline of February 29, offers a deduction for contributions but taxes withdrawals. On the other hand, the TFSA, with non-deductible contributions, allows tax-free gains on investments.


The challenge lies in finding investment options that will grow these contributions to support a comfortable retirement. While debt-burdened Canadians grapple with higher borrowing rates, fixed income sources like bonds and guaranteed investment certificates (GICs) are proving to be secure and profitable for those with manageable debt.


Millennials are fortunate to have access to index-linked exchange-traded funds (ETFs), offering a cost-effective way to track global markets and sectors compared to professionally managed funds.


Despite these individual efforts, the Canada Pension Plan (CPP) and Old Age Security (OAS) remain crucial retirement supplements. Although they may not provide sufficient income for independent living, they serve as a last vestige of defined benefit pensions by being linked to inflation.


CPP payments are determined by the cumulative contributions made over the years, with the current maximum at 65 years old standing at $16,375 annually. In 2024, the maximum annual OAS payment for individuals between 65 and 74 increased to $8,560, offering a reliable safety net for retirees.


As millennials take the reins as the dominant generation, they face the daunting task of securing their financial future in the absence of traditional pension plans. The road to a stable retirement requires strategic planning, utilizing available government programs, and navigating the complex landscape of investment options.


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