Income Adequacy in Retirement: Accounting for the Annuitized Value of Wealth in Canada
Economic Analysis (EA) Research Paper No. 074
35 Pages Posted: 28 Feb 2012
Date Written: February 27, 2012
Abstract
Discussions of pension adequacy for elderly Canadians have used the rate at which income falls with age — the income replacement rate or the ratio of post-retirement income to pre-retirement income. Use of income streams to assess post-retirement welfare requires a standard against which adequacy of the replacement rates can be judged. Because some expenditures (for example, work-related expenses) can be expected to fall after retirement, a declining income stream does not necessarily signal financial problems for seniors. More importantly, income as normally measured captures only part of what is available to seniors if households possess assets, which in retirement are not being used to generate measured income.
This paper uses a different metric, referred to as "potential" income. Potential income is the sum of realized income and the income that could be realized from owned assets such as mutual funds and housing. Households prepare for retirement by saving and borrowing and investing the proceeds. The assets accumulated over a lifetime may or may not be drawn down in later years. If they are not, income streams underestimate the “potential” income available to support retirement. This paper takes this potential into account when comparing the pre- and post-retirement financial status of Canadian households.
Based on data from the 1999 Survey of Financial Security, this analysis shows that when “potential income” is considered, households headed by seniors (aged 65 or older) compare much more favorably with younger households than when normally measured income is utilized. Indeed, when after-tax estimates are used, the potential income per adult-equivalent in senior households exceeds the income of households headed by younger adults.
Keywords: assets, household income, income, retirement, seniors, sources of income, wealth
JEL Classification: D31, J26
Suggested Citation: Suggested Citation
Do you want regular updates from SSRN on Twitter?
Recommended Papers
-
Asset Poverty in the United States, 1984-1999: Evidence from the Panel Study of Income Dynamics
By Asena Caner and Edward N. Wolff
-
Asset Poverty in the United States, 1984-99: Evidence from the Panel Study of Income Dynamics
By Asena Caner and Edward N. Wolff
-
An Income-Net Worth Approach to Measuring Economic Welfare
By Burton A. Weisbrod and W. Lee Hansen
-
Household Wealth and the Measurement of Economic Well-Being in the United States
By Edward N. Wolff and Ajit Zacharias
-
Rooms of One's Own: Gender, Race and Home Ownership as Wealth Accumulation in the United States
-
Household Wealth, Public Consumption, and Economic Well-Being in the United States
By Edward N. Wolff, Ajit Zacharias, ...
-
By Ajit Zacharias, Hyunsub Kum, ...