How much we need to save for retirement?

Suppose we are a family with two kids. We spend about 20% of our after tax income to cover mortgage payments. For the remaining 80%, we spend our money equally split between ourselves and our kids. In short, we spend about 40% of the after tax income on ourselves.

How much money we have for retirement from our mandatory pensions? We contribute more than 10% (10.2% this year) of our income to CPP (Canada Pension Plan). Our company retirement plans vary for different companies. Typically, total contributions from both employees and employers top 10% of our income. Together, that’s 20% of our income. Suppose we start to work at 30 and retire at 65. That is 35 years of working and contributing to the retirement plans. Our average lifespan is 82 years old. This translates to 17 (82-65) years of retirement living. With 35 working years and 17 retirement years, the ratio of contribution time to payout time is roughly 2 (35/17). Suppose the investment return from retirement funds is 0%, adjusted for inflation. Then our retirement benefits would be 20%*2= 40% of our income level. This is the same as our pre-retirement living standard. Here we haven’t included OAS (Old Age Security) payment yet. We also haven’t considered the option to monetize the home equity capital accumulated over the years. 

For a family with two children, the retirement income from mandatory pensions alone will ensure our retirement living standards higher than that of pre-retirement era. We don’t need to save extra money.

We also have the opportunity to invest in tax exempt RRSP (Registered Retirement Saving Plan). Only 5% of the RRSP quotas are used. Even many people without children don’t use the RRSP quotas. Overall, most Canadians would like to spend more on improving today’s life and the life of next generation, instead of hoarding for retirement. 

Furthermore, Canada already suffers from below replacement fertility for several decades. This makes our society unsustainable. Young families should be relieved from heavy taxation and deductions so they can have more resources to raise next generations. 

Shouldn’t the government reduce the amount of CPP deduction so people can enjoy more financial freedom? Instead, CPP deductions have been increasing over time.