Columnist image
Dale Jackson

Personal Finance Columnist, Payback Time


Millennials have officially overtaken baby boomers as the dominant generation in Canada. 

According to Statistics Canada, the generation born between 1981 and 1996 now outnumbers the reigning boomers born between 1946 and 1965.

But it’s a hollow victory for the throngs of young workers with little or no retirement pensions. With the fading of the post-Second World War generation, which made up 40 per cent of the Canadian population from the mid 1960s to the early 1970s, goes the defined benefit pension plan.

The defined benefit (DB) pension was the gold standard when boomers dominated the workforce. Worker and employer both paid into it, and regular income - most often tied to the rate of inflation - was guaranteed after retirement. Some included provisions for survivor benefits and other perks younger workers can only dream of today.   

According to StatCan, 48.4 per cent of employed men and 34.5 per cent of employed women were covered under a DB pension plan in 1977. As of 2000, the proportion of DB pensions had plunged to 21.4 per cent for men and 28.7 per cent for women; almost exclusively public sector employees.

The dawn of defined contribution pension

Defined benefit pensions became a huge liability for employers as boomers headed into retirement. Over time they have been replaced by defined contribution (DC) pensions, where workers and often employers contribute a fixed per cent of the worker’s salary to be invested by a third party. The amount the employee receives in retirement depends on how much is contributed and how well the investments perform; exposing them to the whims of broader markets.

One of those third party pension managers, Gren Austin from Wealthsimple Work, told that group sponsored defined contribution pensions may be the last, best chance for working Canadians.  

“We know broadly that pension involvement is down over the decades. And so the onus becomes on the individual, on the Canadian, on the employee, to pay for their own retirement,” he said, adding that employer contributions are basically free money and the plans are better suited to more transient millennial workers.

Employers who sponsor group pension plans, however, are not required to make contributions. In addition to the overall decline in pension quality, research from Deloitte Canada last November found that only 24 per cent of private sector workers participated in any employer-sponsored pension plan.

Workers without pensions are on their own

That leaves a big chunk of today’s workforce having to take matters into their own hands through tax-friendly, government-sponsored initiatives including the registered retirement savings plan (RRSP). The deadline to deduct RRSP contributions from 2023 income is February 29 but contributions can be made any time.

A tax free savings account (TFSA) could be a more suitable pension savings vehicle for lower income earners who won’t benefit as much from an RRSP deduction. Contributions are not tax deductible in a TFSA but gains on investments are not taxed (RRSP withdrawals are fully taxed).

The challenge is finding investments for those RRSP and TFSA contributions that will grow to retirement. Professional management requires fees that tend to consume a disproportionately large portion of investable assets in smaller portfolios.

While debt-burdened Canadians struggle under higher borrowing rates, fixed income such as bonds and guaranteed investment certificates (GICs) are delivering safe, strong rates of return for those with their debt in check.

Millennials also have the advantage of a wide assortment of index-linked exchange traded funds (ETFs) tracking every major global market and sector for a fraction of the cost of professionally managed funds. 

CPP and OAS as retirement supplements

On the bright side, there’s still the Canada Pension Plan (CPP) for working Canadians and Old Age Security (OAS) for everyone. Both are safe and secure - at least for the foreseeable future. 

They don’t provide enough income for most people to live on but are significant retirement supplements that - as a last vestige of defined benefit pensions - are linked to inflation. 

CPP payment amounts are determined by how much is contributed by workers over the years but the current annual maximum at 65 years old is $16,375.

In 2024 the maximum annual OAS payment for individuals between the ages of 65 to 74 rose to $8,560.