Skip to main content Accessibility help
×
Home

Income Replacement in Retirement: Longitudinal Evidence from Income Tax Records

  • Frank T. Denton (a1), Ross Finnie (a2) and Byron G. Spencer (a1)

Abstract

Applying an employment-income-based procedure for determining retirement, we analysed a large longitudinal data file of Canadian personal income tax returns for individuals to determine who has retired and to assess how successful they are in maintaining their incomes after retirement. The methodological approach may be of interest for possible application in other countries that have suitable data. Our main conclusions are as follows. First, in the two years immediately after retirement, the after-tax income replacement ratios average about two thirds when calculated across all ages of retirement. Second, the ratios tend to increase with the age of retirement. Third, the ratios increase with years in retirement, at least in the first few years. Finally, income replacement ratios are highest in the lowest income quartile and generally decline as income increases; within each quartile, the replacement ratios are higher for those who retired later than for those who retired earlier.

Nous analysons un grand fichier de données longitudinales des déclarations de revenus pour les individus canadiens, en appliquant une procédure de détermination de la retraite, qui est basé sur le revenu d’emploi, afin de évaluer qui se sont retirés et comment ils réussissent à maintenir leurs revenus après la retraite. Cette approche méthodologique peut être d’interêt pour une application éventuelle dans d’autres pays qui ont des données appropriées. Nos principales conclusions sont les suivants. En premier, dans les deux ans qui suivent le départ en retraite, les ratios de remplacement du revenu après taxes atteignent en moyenne environ deux- tiers lorsqu’ils sont calculés sur tous les âges de départ en retraite. Deuxièmement, les ratios ont tendance à augmenter avec l’âge de la retraite. Troisièmement, les ratios augmentent avec les anneés de la retraite, du moins dans les premières années. Enfin, les ratios de remplacement du revenu sont les plus élevés pour le quartile des revenu les plus bas et diminuent généralement à mesure que le revenu augmente ; avec chaque quartile, les taux de remplacement augmentent davantage pour ceux qui ont pris leur retraite plus tard que pour ceux qui l’ont prise plus tôt.

Copyright

Corresponding author

*Correspondence and requests for offprints should be sent to / La correspondance et les demandes de tirés-à-part doivent être adressées à: Byron G. Spencer, Ph.D. McMaster University Department of Economics, KTH-426 Hamilton, ON L8S 4M4 (spencer@mcmaster.ca)

References

Hide All
Alan, S., Atalay, K., & Crossley, T.F. (2008). The adequacy of retirement savings: Subjective survey reports by retired Canadians. Canadian Public Policy, XXXIV(Suppl.), S95S118.
Ambachtsheer, K. (2008). The Canada Supplementary Pension Plan (CSPP): Towards an adequate, affordable pension for all Canadians. Toronto, Ontario, Canada: C D Howe Institute Commentary, No. 265.
Banks, J., Blundell, R., & Tanner, S. (1998). Is there a retirement-savings puzzle? American Economic Review, 88(4), 769788.
Benartzi, S., & Thaler, R.H. (2007). Heuristics and biases in retirement savings behaviour. Journal of Economic Perspectives, 21(3), 223238.
Bernheim, D., Skinner, J., & Weinberg, S. (2001). What accounts for the variation in retirement wealth among U.S. households? American Economic Review, 91(4), 832857.
Denton, F.T., Finnie, R., & Spencer, B.G. (2009). Patterns of retirement as reflected in income tax records for older workers (Research Paper No. 257). Hamilton, ON: McMaster University Research Program on Social and Economic Dimensions of an Aging Population (SEDAP).
Denton, F.T., Finnie, R., & Spencer, B.G. (2011). The age pattern of retirement: A comparison of cohort measures (Research Paper No. 283). Hamilton, ON: McMaster University Research Program on Social and Economic Dimensions of an Aging Population (SEDAP).
Denton, F.T., Mountain, D., & Spencer, B.G. (2006). Age, retirement, and expenditure patterns: An econometric study of older households. Atlantic Economic Journal, 34(4), 421434.
Denton, F.T., & Spencer, B.G. (2009). What is retirement? A review and assessment of alternative concepts and measures. Canadian Journal on Aging, 28(1), 6376.
Gough, O., Adami, R., & Waters, J. (2008). The effects of age and income on retirement decisions: A comparative analysis between Italy and the UK. Pensions, 13, 167175.
Gower, D. (1998). Income transition upon retirement. Perspectives on Labour and Income, (Winter) 18-23 (catalogue no 75-001-XPE). Ottawa, Ontario, Canada: Statistics Canada.
Hurd, M.D., & Rohwedder, S. (2006). Alternative measures of replacement rates (Research Paper No. WP 2006-132). Michigan Retirement Research Center. Ann Arbor, Michigan, U.S.A.: University of Michigan.
Hurst, E. (2008). The retirement of a consumption puzzle. NBER Working Paper No. 13789. Cambridge, Massachusetts, U.S.A: National Bureau of Economic Research.
LaRochelle-Côté, S., Myles, J., & Picot, G. (2008). Income security and stability during retirement in Canada. In M.G. Abbott, C.M. Beach, R.W. Boadway, & J.G. MacKinnon (Eds), Retirement policy issues in Canada. McGill-Queen’s University Press. Also available as Research Paper No. 236. Hamilton, Ontario, Canada: McMaster University Research Program on Social and Economic Dimensions of an Aging Population (SEDAP).
Modigliani, F., & Brumberg, R.H. (1954). Utility analysis and the consumption function: An interpretation of cross-section data. In K.K. Kurihara (Ed.), Post-Keynesian economics (pp. 388–426). New Brunswick, NJ: Rutgers University Press.
National Center for Education Statistics. (2001). International comparisons in education, Education Indicators: An International Perspective, Education and the Labor Force—Participation in Education, Labor Force Participation Rates. US Department of Education. Retrieved March 22, 2010 fromhttp://nces.ed.gov/surveys/international/IntlIndicators/pdf/Labor_Force_Participation_Rates_2001.pdf
Organization for Economic Cooperation and Development (2003). Education at a glance: OECD indicators, Table A.12.1. Retrieved March 22, 2010 fromhttp://www.oecd.org/document/37/0,3343,en_2649_39263238_13634484_1_1_1_1,00.html
Ostrovsky, Y., & Schellenberg, G. (2009). Pension coverage, retirement status, and earnings replacement rates among a cohort of Canadian seniors. (catalogue no. 11F0019M). Analytical Studies Branch Research Paper Series No. 321. Ottawa, Ontario, Canada: Statistics Canada.
Saez, E., & Veall, M. (2005). The evolution of high incomes in North America: Lessons from the Canadian experience. American Economic Review, 95(3), 831849.
Schulz, J.H. (1992). The economics of aging (5th ed.). New York: Auburn House.
Schwerdt, G. (2005). Why does consumption fall at retirement? Evidence from Germany. Economic Letters, 89, 300305.
Skinner, J. (2007). Are you sure you’re saving enough for retirement? Journal of Economic Perspectives, 21(3), 5980.
Smith, J.P. (2003). Trends and projections in income replacement during retirement. Journal of Labour Economics, 21(4), 755781.
Statistics Canada. (2006) Longitudinal Administrative Databank. Retreived September 12, 2011, fromhttp://www.statcan.gc.ca/daily-quotidien/110119/dq110119g-eng.htm. Ottawa, Ontario, Canada: Statistics Canada.

Keywords

Metrics

Full text views

Total number of HTML views: 0
Total number of PDF views: 0 *
Loading metrics...

Abstract views

Total abstract views: 0 *
Loading metrics...

* Views captured on Cambridge Core between <date>. This data will be updated every 24 hours.

Usage data cannot currently be displayed