Pensions as my parents knew them are dead. Not only do they not make sense for the next generation, they never made sense to begin with.

Pensions were negotiated without full consideration for the long-term liability they represent, creating unsustainable systems whereby new contributions only pay retiree income and are not actually saved for contributors’ own retirement. Private pensions are also unprotected: eg. Sears pensioners saw their income cut by 30% and $400M in health benefits cancelled when the company filed for bankruptcy, as pensioners hold no priority in bankruptcy restructuring. Thousands of Canadians have faced similar fates with Nortel, Indalex, and others.

These shortcomings are exacerbated by the changing environment: Increasing lifespans are challenging the norm of retiring at 65. The growing informal and self-employed sector make saving for retirement difficult, and a sustained low-growth environment means the pension gap is expanding.

This is a critical issue for Canada.

There is a $3T retirement gap as of 2015, which will balloon to $13T by 2050. 12M working Canadians have no workplace pension. The annual benefit of Canada’s social security totals ~$20K, enough to avoid poverty but not enough for a dignified quality-of-life. Less than 20% of Canadians have enough private savings to adequately supplement public coverage.

This means that most Canadians risk late retirement, and/or insufficient income to last through retirement. It means that for the average Canadian, over 4 decades of full-time work is insufficient for peaceful, dignified rest in their old age.

Pensions for the next 50 years can be secured but will require novel solutions, primarily in the form of government-managed reverse-mortgages.

Reverse-mortgages allow homeowners to exchange home equity for regular income while living in the property. They help mimic traditional pension flows, eg. pay into a mortgage while working, cash out through a reverse-mortgage in retirement. Currently, they have complex structures and concerns have been raised that lenders take advantage of this, but a government-managed program could avoid such pitfalls.

Consider the following “base case”: a retiree with a $500K home enters a reverse-mortgage at 5.49% and other conservative assumptions are held (eg. <3% annual home appreciation vs. 5.65% actual over the past 30 years).

This delivers $1500 monthly for 15 years, nearly matching the maximum benefit from public coverage while leaving over $100K in equity. In a highly conservative case where the home value doesn’t increase at all, 14 years of income could be sustained before equity is exhausted (ie. net value becomes negative).

While the interest due can create sticker shock, it is critical to remember the unique benefits:

A reverse-mortgage program allows retirees to maintain their retirement quality of life and still potentially pass on meaningful inheritances. To enable wide-spread reverse-mortgages, the government will need to play a role in managing the ecosystem, starting by redesigning the product.

Note: I am not recommending specific policy, focusing instead on the high-level steps to achieving desired outcomes. “Canadian government” is used as a general term to include federal and provincial regulators/policymakers, including agencies such as OSFI.

The Canadian government will need to support the development of new reverse-mortgage products engineered for the mass-market retiree in mind. This would include three key features: