My first document

MonthlyMarketRecap July2023

Julywasanotherpositivemonthformostfinancialmarkets.SentimentseemedtoshiftwiththeoveralltoneofNorth Americanmarketsbecomingmoreoptimisticthatarecessionmaybeavoidedanda‘softlanding’mightbeachieved. Strongerthanexpectedlabourmarketsandarobustconsumerhavecausedeconomistsandfinancialexpertstocontinue topushoutthetimelineforapossiblerecessionbyanywherefrom6monthstoayear.

Wearepotentiallyseeingsignsofaweakeningconsumerascreditcarddebtanddelinquenciesincrease.Unemployment, whichisalaggingindicator,continuestobeatornearhistoricallows,butnewjobsandwagegrowthhavestartedtoslow. WehavewrittenpreviouslythatCanadiansaremoreinterestratesensitivethanAmericans,becauseofhigherhousehold debtlevelsandthestructureofmortgageshavingatermoffiveyearsorlessAsmortgagesarecomingdue,many Canadiansareextendingtheamortizationperiodstohelpkeeptheirmonthlymortgagepaymentsconstant.Thisinaway, minimizessomeoftheimpactofhigherinterestratesintheshortterm(whichhistoricallywouldnothavebeenanoption inpastratehikingcycles).Ithelpswithmonthlycashflow,butthesacrificecomeswithitaddingyearstoamortgage.

TheBankofCanada(BoC)andTheU.S.FederalReserve(TheFed)eachraisedinterestratesby0.25%inJuly.Language frombothcentralbanksisthattheyremaincommittedtotheir2%inflationtarget.

CANADA

• TheBoCincreaseditsbenchmarkinterestrateby0.25%toarangeof5.00%-5.25%.Whenconsideringtherisks ofunderorover-tightening,theyaremoreconcernedaboutnotdoingenoughnowandsquanderingtheprogress madetodate.TheBoCprojectedthatinflationwouldreturntoits2%targetbythemiddleof2025,aboutsix monthslaterthanitspreviousforecast.TheirnextmeetingisSeptember6.

• TheCanadianunemploymentrateinJunemovedhigherto5.4%,fromMay’s5.2%.

• TheConsumerPriceIndex(CPI),ameasureofinflation,decreasedinJuneto2.8%year-over-year,fromMay’s 3.4%.Coreinflation,whichexcludesmorevolatileenergyandfoodprices,decreasedto3.2%.

• Retailsalesroseby0.2%inMay.Juneestimatesarefornogrowth.Year-over-yeartotalsaleswereup0.5%. Consumerspendingaccountsforover60%ofCanadianeconomicactivity.

• TheCanadianeconomygrewby0.3%month-over-monthforMay.StatisticsCanadaestimatedGDPtodeclineby 0.2%inJune.

• Nationalhomesalesincreasedby1.5%month-over-monthinJune.Newlistingsincreased5.9%month-overmonth.Thenationalaveragesalespriceincreased6.7%month-over-month.Activityinthehousingmarkethasa significantrippleeffectonthebroadereconomy.

• ThereisanewtentativedealthatneedstobevotedonfortheB.C.portworker’sstrike.Thisimpactsmorethan30 portsandapproximately7,400workersItisestimatedthatB.C.portsmove$800millionofcargoeveryday.The longerthestrikecontinues,thegreatertheimpactontheCanadianeconomy.

U.S.

• TheFedincreasedinterestratesby0.25%toarangeof5.25%-5.50%ThenextpolicymeetingisSeptember19 and20.

• TheU.S.economygrewby2.4%annualizedforthesecondquarterof2023,almostafullpercentstrongerthan the1.5%expected

• TheU.S.unemploymentratefellslightlyinJuneto3.6%,fromMay’s3.7%.Thisisstrongerthanexpected.

• U.S.inflation(CPI)fellto3.0%inJune,annualized,from4.0%inMay.Thecoreinflationratedecreasedto4.8%.

• RetailsalesintheU.S.increasedby0.2%inJunemonth-over-month.Thiswasthethirdstraightmonthly increase.

• TheInstituteofSupplyManagementreportedthatitsPurchasingManagersIndex(PMI)was49.0inJulyfrom 46.9inJune.Althoughimproving,areadingbelow50.0generallymeansmanufacturingiscontracting.Thisis thetenthconsecutivemonththereadinghasbeenbelow50.

• ThenumberofexistinghomesalesintheU.S.increased2.0%inJulymonth-over-monthInventoryisslowly improving.

• OnAugust1,Fitch,acreditratingagency,downgradedtheU.S.Long-TermratingtoAA+Outlookstable,from AAA.Theysitedanexpectedfiscaldeteriorationoverthenextseveralyearsduetothegovernmentdebtburden andrisinginterestcosts,theerosionofgovernanceandalackofmedium-termfiscalframework,debtceiling standoffsandlast-minuteresolutionscausingtheerosionofconfidence.Wedonotexpectthistohavea meaningfulimpactonfinancialmarketsorinternationalflowsintotheU.S.treasurymarket.Almostevery developedeconomyisexperiencinghigherdebtlevels.TheU.S.isstillviewedasasafehavenintimesofmarket stressandwillcontinuetobeuntilthereisanotherviableoptionforinvestmentflows.

• Year-to-dateU.S.corporatebankruptcyfilingsareatthehighestlevelsince2010.

• Creditcardusagehasincreased,anddelinquenciesareapproaching2008levels.

• StudentloanpaymentsbeginagaininAugustafterapandemicpaymentholiday.

INTERNATIONAL

• Inflationintheeurozonedecreasedto5.3%,a16-monthlowinJune.

• TheEuropeaneconomyhasenteredatechnicalrecession(twoquartersofnegativegrowth).

• TheEuropeanCentralBank(ECB)increasedinterestratesby0.25%to3.75%.

• InflationintheUnitedKingdomisslowing.TheJunereadingwas7.9%withcoreinflationcominginat6.9%.

• EarlyAugusttheBankofEnglandincreasedinterestratesby0.25%to5.25%,withtheexpectationofmore increasestocome.

• China’seconomyslowedinJune.Chinacontinuestofacerisksfromitspropertymarket,growinglocal governmentdebt,thepotentialfordeflation,recordyouthunemploymentandweakeningglobaldemand. China’sgrowthandeconomicstabilityhaveimplicationsforglobalgrowthandtrade.

OURBELIEFS/INCONCLUSION

Itisstilljustoverayearsincethedramaticinterestrateincreasesstarted.TheBoCandTheFedbothacknowledgedthelag effectofinterestrateincreasesintheirlateststatements.Thefulleffectoftheinterestincreasesalreadymadehasyetto workitswaythroughtheeconomy.Bondyieldcurvesalsocontinuetoremainsignificantlyinverted,meaningitistooearly todeclarevictoryagainstinflationorapendingrecessionuntiltheseyieldcurvesnormalize.Thiscontinuestobeoneofthe reasonsweremaincautious.Althoughwehavehadafairamountofvolatilitythisyear,wehavenotexperienceda significantorsustainedmarketdraw-downin2023.Typically,inagivenyear,themarketexperiencestwodrawdownsof 10%ormore.Septemberalsotendstobeaseasonallyweakmonth.Economicindicatorsareexpectedtoweaken. Therefore,weremaincautious.Ourdefensivepositioningallowsustoparticipateinthemarket,withdownsideprotection, andcollectanattractiveyieldwhilewewaitforeconomicdatatoprovidefurtherdirection.

Onbehalfoftheteam,

Sources: Reuters.com‘U.S.leadingindicatorspointtorecessionstartingsoon,’SafiyahRiddle,July20,2023. Bankofcanada.ca statscan.gc.ca crea.ca

ScotiaWealthManagement–OnPointWeekly

AGFCapitolInsights

CIGlobalAssetManagement

INSIGHTS&VIEWS

July6,2023

Contributors

RebekahYoung

416.862.3876

rebekah.young@scotiabank.com

RethinkingRetirementinanAgeofLongevity

GOVERNMENTSANDHOUSEHOLDSALIKENEEDA(BETTER)PLAN

• Canadiansarelivinglongerbutgainsinhealthyyearsarenotkeepingpace.

• Almosthalfofseniors75years+haveatleastonedisability,whileoveraquarterof Canadiansaged85years+resideinalong-termcaresettingdespitemost Canadiansperceivingmajorfailingsinthesearrangements.

• Canadianswanttoageinplace,butfewhaveaplan—letaloneonethatfactorsin health-relatedconsiderations—toguideretirementreadiness.

• MostCanadianswouldleanongovernmentprovisionsshouldtheyfallonhard luck,butgovernmentsareequallyill-prepared.Healthandlong-termcaresystems arealreadystretchedevenbeforefactoringinfurtheragingonthehorizon. Unhelpfully,theyalsoskewtothemostcostlyandleastdesiredoutcomes.

• First-bestisacoherentagingpolicyframeworkthatbreaksdownsilosacross healthcare,long-termcare,andfinancialsecurityandisbackedbyacrediblefiscal plan.(Spoileralert:itlikelyrequiresgreaterinvestmentsevenafterefficiencies.)

In-HomeCareCostsQuicklyAddUp

• Inanycase,mostCanadiansverylikelyneedtosavemoretopreservetheoption toageinplaceandhedgeagainsttheriskthatpolicycoordinationfailurespersist.

• Theoft-cited$1mnwatermarkforretirementattheageof65couldeasilydouble underarangeofplausiblescenariosasevenmodestout-of-pocketexpensesto supportaginginplacewouldquicklyoverwhelmmosthouseholds(chart1&2).

• Itisinthegovernment’sinteresttohelpCanadianshelpthemselves.Progresshas beenmadeinputtingafloorunderseniors’incomethroughgovernmenttransfers andmandatoryprograms,butmoreworkismeritedinlettingmarketincome providemorelift.

85ISTHENEW65

Sources:ScotiabankEconomics,StatisticsCanada, NIA.*NIAsurveyfinds49%perceivecoststobe <$1,100/mos.SeeBox1forassumptions.

Canadiansaregettingolder.Canadiansaged65years+nowaccountfornearlyone-fifth ofthetotalpopulation(19%or7.3mn).Thiscohortisgrowingatsixtimestheclipof Canada’syouthandwillcontinuetoclimbasthelastoftheBabyBoomersmarktheir65th birthdayby2031.ThenumberofCanadians85years+isgrowingtwiceasfastasthe generalpopulationandisexpectedtotripleby2051whenthelastoftheBoomersturns 85(chart3).Meanwhile,thefastest-growingcohortis95years+(albeitfromalowbase). Canadiansarealsolivinglonger.Overthelasttwodecadesalone,Canadianseniorshave gainedtwo-and-a-halfyearsinlifeexpectancy.Whileadvanceshaveslowedinrecent years,theystilltranslateintoanadditionalmonthinlifeexpectancywitheachpassing year.Men,inparticular,arebenefitingwitha65year-oldmantodayenjoyingathree-year gaininlifeexpectancy(19.5years)versusatwo-yearimprovementforwomenoverthe lasttwodecades.Nevertheless,hisfemalecounterpartisstilllikelytooutlivehimby almostthreeyears.

INSICKNESSANDINHEALTH

Notalloftheseadditionalyearsarehealthyones.Lifeexpectancyadjustedforhealth (i.e.,thenumberofexpectedyearsinfullhealth)hasnotkeptpacewithlongevity.Only15 ofthe21yearsareexpectedtobeinfullhealthfortheaverage65year-oldtoday.Again, improvementshavemostlyaccruedtomen.Awoman’shealthy-yearadvantagenarrows tolessthanayear.Givenherlongerexpectedlifespan,atypical65year-oldwomanis expectedtolivealmostsevenyearsinpoorhealthversusfiveformen(chart4).The

largestpenaltybefallslowerincomeCanadianswiththreefewerhealthyyears(fora65yearold)relativetotheirtopincomequintilepeers.

Chronicdiseaseprevalenceincreaseswithageandovertime.Whilemedicaladvancesin someareasprolonglongevity forexamplereducedmortalityratesfromcancersandheart disease itopensthedoorforothers.ThePublicHealthAgencyofCanada(PHAC) documentssharpincreasesindiseasewithagewithalmostthree-quartersofseniors(65 years+)havingatleastonemajorchronicdiseaseandathirdwithmultipleconditions.By theageof85,overfour-in-fiveseniorssufferfromhypertension,overhalffrom osteoarthritis,andone-quarterfromdementiatocitejustafewcommonconditions,while themultiple-morbidityrateclimbstoone-half.

Thepresenceofdiseaseisnotnecessarilyindicativeofoverallwellbeing.Forexample, overtwo-thirdsofseniorsreportedtheirmentalhealthas“verygood”or“excellent”inthe lastCanadianCommunityHealthSurveyin2017–18 slightlyhigherthanworking-age Canadians despitemanylivingwithchronicdiseases.Clearly,theabsenceofdiseaseisonly onefactorinaperson’sperceptionofhealthwithotherimportantfactorsreflecting economicsecurity,socialconnectedness,andpsychologicalwell-being.

AGINGWITHROSE-COLOUREDGLASSES

Canadiansmightbelivinglongerbuttheydon’tnecessarilyinternaliseit.Asurveybythe CanadianInstituteofActuaries(CIA)showsCanadianstendtounderestimatetheirlife expectancybyalmostfouryears.Theyalsounderestimatetheirneedforcare:lessthana quarterexpectthey’llneedtoaccessalong-termcarefacilityintheirlifetime,butstatistics suggestcloserto40%ofthosewholiveintotheirninetieswillneedsuchcare(andthreequarterswillbewomen).Canadiansalsotendtooverestimatetheirfull-healthhorizon:less thanathirdexpecttoexperienceadisabilitylaterinlifeversusaself-reporteddisabilityrate ofalmostone-halfamongthoseover75yearsofage(chart5).

AnoverwhelmingmajorityofCanadianswanttoageinplace.Thepandemichas reinforcedthisnear-universaldesirewithCanadianscollectivelyholdingthealternativesin lowregard.ThesameCIAsurveyreportsthathalfofCanadiansfeeltheavailabilityoflongtermcareisfairtopoor,whilemorethanhalfperceiveitsqualitytobefairtopoor.Almost halfalsoassesstheirabilitytoafforditasfairtopoor.

YetCanadianstendtosignificantlyunderestimatethepotentialcostsofalternatives. AnothersurveybytheNationalInstituteonAging(NIA)findsthatalmosthalfof Canadiansbelievein-homecarecostswouldcostlessthan$1,100permonth.Thatwould buylessthananhouradayofsupportbasedonagencyratesofabout$40/hr.The CanadianMedicalAssociation(CMA)benchmarks22hoursperweekasalevelofcare consistentwithkeepingpatientsathomeinsteadofinalong-termcaresetting.That wouldroughlytranslateinto$3,500permonth thisislikelyafloorsinceitreflectsonly generalsupport,nothealthcareservices.Atanextreme,continuouscareinthehome wouldruncloserto$30kpermonth.

ThemajorityofCanadiansdon’tevenhaveafinancialplanforretirementletaloneone thatbuildsinabufferforpotentialhealthcarecosts.LessthanhalfofCanadians undertakefinancialplanningforretirement,accordingtotheaforementionedCIAsurvey, despiteamplestudiesattributingplanningtobetteroutcomes.Lessthanone-in-three Canadiansconsiderlong-termcareneeds,thoughonlyone-in-tenhaveactuallysetaside fundstopayforit.Themajoritywoulddefaulttogovernmentsupports financial,health, andlong-termcare despiteperceivingmajorfailingsinthelevel,accessandqualityofcare

FALSESENSEOFSECURITY

Thefiscalfootingtosupportanagingpopulationisfarfromestablished.Healthcare spendingtallied$331bnlastyear almost12%ofGDP accordingtotheCanadian InstituteofHealthInformation(CIHI).Whileseniorsconstitute19%ofthepopulation, theyconsumeabout45%ofhealthcarespending.Costsescalaterapidlyinsenioryears withpercapitaspendingonan85year-oldthricethatofa65year-old(chart6). Governmentshaverecentlyrampeduphealthcarespending,butbiggerpressuresstilllay ahead.By2051 whenthelastoftheBoomersturn85 theParliamentaryBudgetOfficer (PBO)estimatesprovinceswillbespendinganadditionalpercentagepointofGDPon healthcare.

Long-termcarecostsarebarelyreflectedinfiscalplans.Long-termcareisnotuniversalin Canadaanditsfundinganddeliveryvariessubstantiallyacrossprovinces.Canadaspends about$33bnonlong-termcare,accordingtoCIHI,withthebulkofit(80%)deliveredinan institutionalsetting(e.g.,along-termcarehome).Thepublicpurseshouldersaboutthreequartersofcostsforinstitutionalcareandapproximatelytwo-thirdsforhome-or community-basedcarewithassistanceoftenmeans-tested.Thesefiguresdonotinclude generalhouseholdsupport,nordotheyaccountforabout75%ofin-homeneedsthatare metthroughinformalsupport,bothofwhichcanbeessentialtoaginginplace

Unmetdemandforlong-termcareisalreadysubstantial.TheCanadianMedical Association(CMA)putsdemandat1.5mn(2019):380kforfacility-basedcare(including 20%‘unmet’demandorfolksonwaitinglists)and1.2mnforhomecare(includingabout8% unmet).ThismayverywellunderestimategapsasanearlierStatisticsCanadastudy(2018) near-doubledunmethomecareneedsamongseniors(at170k),whileover400kseniors withdisabilities(or20%)self-reportedunmetneedsduetocosts.

Thisdemandissettointensify.ThesameCMAstudyprojectsthatdemandforlong-term carewillclimbto2.3mnby2031(1.7mnforhomecareand606kforinstitutionalcare).This wouldliftcosts appreciatingwithwagesthateclipseinflation toalmost$60bnby2031. Forillustrativepurposes,extendingthisoutto2051asthelastoftheBoomershit85would bringthattheoreticaldemandto$230bnannually.(Unlikeelderlybenefitsthatpeakasthe lastoftheBoomersturn65,health-relatedcostsaredrivenbythe85-yearthreshold.) Admittedlythissimplisticallyassumesawaylabourconstraintswhenjobvacanciesin relevantsectorsalreadysitwell-aboveothersectorsintheeconomy.

Currentconstructsunnecessarilydrivecostshigher.Unmetsupportservicesinthehome areboostingdemandforinstitutionalcare.CIHIestimatesthat10%oflong-termcare residentscouldbecaredforathomewithappropriatesupports.Inturn,chronicunmet demandinlong-termcarehomesispushingmoreseniorsintohospitalsettings.InOntario, forexample,over15%ofhospitalbedsareoccupiedbyalternative-level-of-careseniors. Aginginplaceismutuallybeneficialtohouseholdsandgovernmentsalike,butpolicybiases skewinthemostcostlydirection(chart7).

Themostlikelypathaheadisoneofgrowingunmetdemandforgovernment-provided healthandlong-termcareservices.Simpleextrapolationscouldreasonablysee incrementalfiscaldemandsongovernmentsintheorderof2pptsasashareofGDPby 2051iflong-termcaredemandwerebroughtonthebooks(chart8).Inreality,governments willfaceahostofcomplextrade-offsinaworldoffiniteresourcesandashrinkinglabour force.Moreprobable,amuddling-throughapproachlikelyinvolvesacombinationof growingunmetdemand,greatermeanstestingforsomebenefits,andhighertaxation.

Bettingonthepublicprovisionofappropriatelong-termcareoverthelongrunmight bebesthedgedwithaback-upplan.Retirementincomecanplananimportantrolein enablingaginginplacewherepublicprovisionsfallshort.

ITAIN’TBROKE,BUTNEEDSFIXING

TherearemanybrightspotsonCanada’sretirementincomelandscape.Itspolicy frameworkisanchoredaroundtwokeygoals:alleviatingpovertyamongthoseseniorsin greatestneedandhelpingthosebetteroffavoidsignificantdeclinesinretirementliving standards.Itsfoundationalpillarprovidesaminimumlevelofincome(i.e.,OAS-GIS)that isfinancedthroughgeneraltaxrevenue.Amandatoryearnings-relatedpillarisfinanced throughobligatoryemployeeandemployercontributions(i.e.,CPP/QPP).Finally,a voluntarypillarincentivizesretirementsavingsthroughpreferentialtaxtreatment(e.g., RPPs,RRSP,TFSAs).Therehavebeenwell-documentedreformsovertheyearsthatmerit credit,includingfullyfundingthemiddlepillarandputtingafinancialfloorunderseniors.

Seniorsarelesslikelytoliveinpovertyrelativetothegeneralpopulation.Three-infivefederalhouseholdtransferdollarsflowtoseniorswithelderlybenefitssetto surpass$100bnbytheendofthedecade.Elderlypaymentsprovideanannual$8kto 93%ofseniors,when,coupledwithCPP/QPPbenefits,provideaneffectiveafter-tax incomefloorof$16.6kfornear-allseniorsaccordingtothe2021CanadianIncome Survey.Themedianincomeforallseniorsstoodjustabove$33k measuredatthe individualnothouseholdlevel(chart9).

Seniorsgenerallyrequirelowerincomeinretirementyears.Asimpleruleofthumbis thatCanadiansneed70%oftheirworking-lifeincomeinretirementyears.Seniors typicallystartdrawingdownsavings(insteadofaccruingthem),whileconsuminglesson aggregateinretirement,thusdepressingincomeneeds,andinturnreducingtaxliabilities. ThispatternisobservedinthelastSurveyofHouseholdspending(2019)withcurrent consumptionoftheaverageseniorhouseholdabout30%lower($48.5k)thanhouseholds aged55–64years.Beyond85years,researchoutoftheUSsuggestsanotherdeclinein theorderof30%.

Admittedly,averagesmaskwidevariationsacrosshouseholds.Expendituresamongthe highestincomequintileofseniorhouseholdsaretwicethatofthelowestincome householdsaccordingtomoregranularnationalaccountsdata.(Ontheotherhand,lowest incomeseniorhouseholds,onaverage,benefitfromhigherpost-retirementincomerelative topre-retirementyearsowingtoage-basedpolicysupports.)Withshelter-relatedcosts comprisingadominantandgrowingshareofexpendituresacrossincomebracketsand ages,anotherdividinglinecanbehouseholdstructure:povertyratesamongsingleadult households whetherseniorornon-senior standmultiplesabovetherestofthe population(chart10).Seniorfemalesarehitthroughmultiplechannels:livinglonger,facing moreunhealthyyears,andlikelyoutlivingherspouse.

MARKETINCOMEMATTERS

Fewwoulddisagreethatmarketincomeiskeytoacomfortableretirement.Market incomecanbedrawnfrompensionassets(employee-sponsoredorpersonal-registered), otherinvestmentsourcesoremployment.Taxdatashowsthatfour-fifthsofCanadian seniorsdrewdownamean$20.8kannuallyinafter-taxmarketincomein2021,rivaling near-universalpaymentsunderthefirsttworetirementpillars(chart9,again). Marketincomesourcesareunderpinned(forthemostpart)byimprovedvoluntary wealthaccumulationamongCanadians.Thisisowingtoahostofwell-documented

changesrangingfromgreaterpolicyincentivesforvoluntarysavingstohigherfemalelabour forceparticipationtoshiftsinworkforcepensions(thoughtheshareofthelabourforcewith planshasstagnateddespitegrowthinnumbers)overthepastseveraldecades(chart11). Structurallyhigherinterestratesandstockreturnshavealsoprovidedalift. NetwealthofCanadianhouseholdshasdoubledoverthelasttwodecades.Thismeasure capturesabroaderpictureoffinancialwellbeingasitconsidersnotonlycapitalwealth accumulation,butalsonon-financialwealth(e.g.,housing)aswellasoff-settingliabilities.The medianvaluestoodat$329kin2019accordingtothelastSurveyofFinancialSecurity.Not surprisingly,seniorsenjoyahighernetworthrelativetoyoungercohortswithalifetimeof capitalaccumulationbehindthemandhomesmostlypaidoff.Peakingatpre-retirement,the mediannetworthof55–64year-oldhouseholdsstoodat$690kwith70%holdingamedian valueof$350kintheirhomes.Byretirementage,only12%heldamortgageagainsttheir homes.

Again,thereareenormousvariationsacrosshouseholds.Atwo-adulthouseholdhadapreretirementnetworth at$920k almostfourtimesthatofasingle-adulthousehold.The meannet-worthofahomeowner at$950k isalmost25timesgreaterthanarenter(chart 12).Moregranular(andmorerecent)datafromnationalaccounts butavailableonlyonan averagenotmedianbasis notsurprisinglyshowsawidevariationacrossincomebrackets.The averagenetworthofa55–64year-oldhouseholdstoodcloseto$1.5mn(andfinancialassets closeto$1mn)whereasthelowestincomequintileheldhalfthatvalueandthehighestquintile almostfourtimesthenetworth(chart13).

BUTISITENOUGH?

Evenmodesthealthshockscouldquicklyerodetheautonomytoageinplaceformost Canadians.TheCIAbenchmarksatypicalCanadiancouple’saccumulationneedsataround $1mn(adjustedto2023dollars)basedonaverageseniorhouseholdconsumption.Itwould nottakemuchtonear-doublethatamountunderanynumberofreasonablehealthand/or longevityscenarios(chart2,againandbox1).Evenverylighthomecareneeds(i.e.,5hrs/ week)afterage75wouldimplyaccumulationneedsabout1.5timeshigherifonelivedto100. Moderateneeds(e.g.,22hoursperweek)afterage75wouldbemorereasonableat$1.3mnif expectedlongevitywere85years,butextendingthisouttoa100-yearlifespanamountsto $2.2mn.

Amessier,butperhapsmorerealistic,scenario—lightneedsfromage75–85,thenmoderatecarefrom85–95years,andcontinuouscare forafinaltwoyearswouldimplysavingsneedsof$2mn.Asnotedearlier,itisaminorityofseniorCanadianhouseholdsthatenter retirementyearswiththislevelofcapitalamassed,especiallyifnon-financialassets(i.e.,housingassets)arenettedout.

Abottom-upincomeapproachsimilarlyillustratesthepotentialshocktohouseholdpocketbooksthatwouldrenderaginginplace unaffordabletomost.Themeandisposableincome(i.e.,takingintoaccounttaxesandtransfers)ofaseniorinCanadaamountsto$5,000per monthaccordingtonationalaccountsdata.Evenverymodestin-homecarecostsborneout-of-pocketdetailedintheearlierscenarioswould beoutofreachfortheaverageseniorhousehold oratleastwithoutelevatingtheriskofprematurelydepletingsavings(chart1,again).

Thisadmittedlyonlypaintsabroad-strokepictureforillustrativepurposes.Enormousheterogeneityacrosshouseholdstructuresand incomesmakesaverybigdifferenceinretirementreadinessandtheabilitytowithstandahealthorlongevityshock.Italsodoesnottake intoconsiderationimplicationsofincomeneedsforleft-behindspouses.Thekeytake-awayfromthissimpleexerciseistounderscorethat mostCanadianscouldnotaffordsuchashockandwouldsuffereitheramaterialdeteriorationinfinancialsecurityand/orwouldfacemore limited,potentiallyless-desirablecareoptions.

RETHINKINGRETIREMENT

Canada’sbestbetisacoherentagingpolicyframeworkthatbreaksdownsilosacrossdisciplinesandisbackedbyacrediblefiscalplan. Recognisinginconsistencieswouldbeafirststep.Thefragmentedandsiloedhealthandlong-termcaresystemsbiastowardsthecostliest routestocarewhicharealsotheleast-desiredbyCanadians.Theretirementincomesystemsareanchoredtoout-datedagestructuresthat leantowardsaprematurepivottodecumulationdespiteCanadianslivinglonger.Whilesocialsafetynetsinsenioryearsprovideadegreeof insurance,theyarenowherenearwhatitwouldtaketoageinplaceevenwithverymodest,non-medicalcareneedswithoutgovernment backing.Theyarealsospreadtoothinacrossagrowingseniorpopulation.Lookingouttothenextdecade,cash-strappedgovernmentswill likelyneedto(further)means-testarangeofsupportsacrossthelong-termcareandfinancialsecuritylandscape,puttingevenmore pressureonvoluntarysavingsfortherest.

Canadashouldrefreshitsretirementpolicyarchitecture.Astartingpointcouldbeanet-neutralapproachtobetter-focusinguniversal financialsupportsinthefirstpillaronthoseingreatestneed,whilefurtherenablingmarketincometoprovideagreaterliftfortherest. Governmentscouldalsotargetglaringgaps:overathirdofseniorslackanymarket-basedretirementincome(privatepensionorpersonal registered);lifetimerentersarelikelytoreachretirementwithlittleornoequityofanytype;thechasmbetweentwo-adultversusoneadulthouseholdsisfarlargerthenanyage-determinedthresholdsanddisproportionatelyaffectsfemaleseniors.Governmentsmayeven considerformalizingafourthpillarintheframeworktoincludenon-financialassets.HousingplaysanoutsizedroleinCanadians’networth, yetthereisminimaldiscussiononhowtobestleveragethisassetinretirementplanning.

Thereisnoshortageofinkspilledonpossiblesolutionsthatcouldbeconsideredinthecontextofsucharefresh.Ideastargetingthe accumulationphaseincludeincentivestoworklonger,increasingRRSPlimits,orcomplementingtraditionalregisteredpensionplanswith tax-freeworkplacepensionstoencouragevoluntarysavingsamonglowertomiddleincomeCanadians.Thegovernmentcouldalso considerpotentiallynewsavingsincentivesspecificallytargetingrenters(forexample,distinctcontributionincentivestoRRSPsorTFSAs and/orincorporatingco-contributoryfeaturesofRESPsorRDSPs).OtherproposalsaimedatthedecumulationphaseincludelongevitytestedRRIFrules(e.g.,deferredannuitizationagesandminimumamounts),aswellasrisk-poolingmechanisms(absentadeeplong-term careinsurancemarketinCanada)suchasdynamicpensionpoolsthatwouldfillagapbetweenannuitiesandRRIFdrawdowns.Theremay alsobespaceformorethoughtfulapproachestoincorporatinghousingwealthintofinancialsecuritycalculationsespeciallygiventhe relativelylowuptakeoftoolslikereversemortgagesorhousinglinesofcredit

Absentsuchreforms,Canadianslikelyneedtosavemore(ordifferently)forretirementanddissaveless(ordifferently)inretirementif theywishtopreservetheoptiontoageinplace.Theymayriskleavingsomethingonthetableattheendoftheday,butitmaybethe mostrealistichedgeagainsthealthandlongevityriskand,importantly,theriskthatpolicycoordinationfailurespersist.

AtypicalCanadianhouseholdwouldnotlikelybeabletowithstandalongevityand/or health-relatedshockandstillpreservetheabilitytoageinplace.Clearlythereis enormousheterogeneityacrosshouseholdsrenderingan‘average’analysisoflimitedvalue toindividualsplanningforretirement,butitdoesprovideonaggregateasignalto policymakers,financialplanners,andCanadianhouseholdsthatthepotentialfinancialgaps canbeenormous.

Westartwithanoft-cited(andadmittedlysimplistic)benchmarkthatCanadiansneed$1mn toretireatage65.WeestablishabaselinebuildingontheCanadianInstituteofActuaries(CIA) illustrationthataseniorcouplewouldneed$900k(in2019)toretireat65yearsand comfortablydrawdown$50ktomeetannuallyconsumptionneedsoverthenext20years. Theyassumeinflationat2%andconservativeinvestmentreturnsof3.5%.Annualconsumption needsareconsistentwiththe2019biannualSurveyofHouseholdSpendingforsenior households.Inflatedto2023dollars,averagespendingneedswouldbecloserto$55kannually, workingouttoanupfront$1mnincapitalaccumulationattheageofretirement.(Thislevelof drawdownwouldbeapproximatelyconsistentwithapre-taxincomeof$65k.)

Wedevisefourlevelsofintensityofpotentialhomecareneeds.Weassumeahomecareworkerwageof$40/hr(wagesgenerallyrun between$30–40/hrwithanagencyfeeontopofthat).Weassumehomecarecostswouldappreciatewithwageinflationatanhistoric 3%annually.Noneoftheassumptionsincorporateadditionalcostsrelatedtomedically-trainedprofessionalcareinthehomewhich wouldleadtosubstantiallyhighercosts,butaremorelikelytobeprovidedpublicly.

◼ “Lightcare”assumes5hrs/weekofsupportinthehome alevelconsistentwiththeaverageutilisationlevelofhomecareat present.Weassumegovernment(s)cover1/3ofthecost,butitisnotscalable.Thiswouldtranslateintoanannualtotalcostof $10.4k,ofwhichabout$7kwouldbeout-of-pocket.

◼ “Moderatecare”assumes22hrs/weekofsupport athresholdthattheCMAindicatescanmakethedifferencebetweenstayingat homeversusinstitutionalcareforseniorswithmoderatelevelsofneed.Wedonotscalethegovernment’ssharegivencurrent fundingbiasestowardsinstitutionalcare,ratherweassumeaceilingcontributionat$6kannually aboutdoublethecurrent average.Thiswouldtranslateintoanannualcostof$43kwith$36kborneout-of-pocket.

◼ “Modifiedcontinuouscare”assumes45hrs/weekofpaidsupportwiththeremainingbalance(75%)ofcareprovidedinformallyfor anindividualrequiringcontinuouscare.Again,weassumegovernmentswouldsupportonly$6kannuallywithanassumptionthat institutionalcarewouldotherwisebethegovernment’sdefaultoptioninthesehigher-needscases.Thiswouldtranslateintoan annualcostof$94k,ofwhich$88kwouldbeout-of-pocket.

◼ “Continuouscare”assumesround-the-clockpaidsupportinthehome.Again,assumingonlymodestgovernmentsupport($6k), thiswouldtranslateinto$350kinannualcosts(!).

Wetestcapitalaccumulationneedsatretirementunderseveralhealthandlongevityscenariosforillustrativepurposes.Thesame healthycoupleinourbaselinethatrequires$1mnatretirementtofunda$55kannualdrawdownovertwentyyears(i.e.,to85yearsof age)wouldneedslightlymore$1.1mnifonerequireslighthomecareinthosefinaltenyearsor$1.3mnifhomecareneedsaremoderate. Thisquicklyescalatesinacasewherecontinuouscareisrequired.

Thenumbersclimbfurtheroncelongevityscenariosarefoldedintopotentialcareneeds.Wealsoassumeinallscenariosthat householdconsumptiondropsbyanadditional30%beyondtheageof85yearsinanaging-in-placeenvironmentwithsheltercosts largelystablebutotherdiscretionaryconsumptiondeclining.Thehealthycoupleinthebaselinewouldrequireabout$1.3mnincapital accumulationatage65yearsifthey(oroneofthem)livesto100yearsinalargelyhealthyandindependentstate.Lightcareneedsafter theageof75woulddrivethisnumberto$1.5mn,formoderatecareneedsto$2.2mn,allthewayuptoover$9mnforcontinuouscare. Perhapsamorelikelyscenarioisoneofgradualdeclines forexample,ahealthyfirstdecadeinretirement,lightcareneedsages75–85 years,followedbymoremoderateneedsfromages85–95,andcontinuouscareinafinaltwoyears.Suchascenariowouldsuggestcapital accumulationrequirementsof$2mnatage65years ortwiceasmuchasthebaselineofacoupleliving20healthyyearsto85.

ThisreporthasbeenpreparedbyScotiabankEconomicsasaresourcefortheclientsofScotiabank.Opinions,estimatesandprojectionscontainedhereinareourownasofthedatehereofandaresubject tochangewithoutnotice.Theinformationandopinionscontainedhereinhavebeencompiledorarrivedatfromsourcesbelievedreliablebutnorepresentationorwarranty,expressorimplied,ismadeas totheiraccuracyorcompleteness.NeitherScotiabanknoranyofitsofficers,directors,partners,employeesoraffiliatesacceptsanyliabilitywhatsoeverforanydirectorconsequentiallossarisingfrom anyuseofthisreportoritscontents.

Thesereportsareprovidedtoyouforinformationalpurposesonly.Thisreportisnot,andisnotconstructedas,anoffertosellorsolicitationofanyoffertobuyanyfinancialinstrument,norshallthis reportbeconstruedasanopinionastowhetheryoushouldenterintoanyswaportradingstrategyinvolvingaswaporanyothertransaction.Theinformationcontainedinthisreportisnotintendedto be,anddoesnotconstitute,arecommendationofaswaportradingstrategyinvolvingaswapwithinthemeaningofU.S.CommodityFuturesTradingCommissionRegulation23.434andAppendixA thereto.Thismaterialisnotintendedtobeindividuallytailoredtoyourneedsorcharacteristicsandshouldnotbeviewedasa“calltoaction”orsuggestionthatyouenterintoaswaportradingstrategy involvingaswaporanyothertransaction.Scotiabankmayengageintransactionsinamannerinconsistentwiththeviewsdiscussedthisreportandmayhavepositions,orbeintheprocessofacquiringor disposingofpositions,referredtointhisreport.

Scotiabank,itsaffiliatesandanyoftheirrespectiveofficers,directorsandemployeesmayfromtimetotimetakepositionsincurrencies,actasmanagers,co-managersorunderwritersofapublicoffering oractasprincipalsoragents,dealin,ownoractasmarketmakersoradvisors,brokersorcommercialand/orinvestmentbankersinrelationtosecuritiesorrelatedderivatives.Asaresultoftheseactions, Scotiabankmayreceiveremuneration.AllScotiabankproductsandservicesaresubjecttothetermsofapplicableagreementsandlocalregulations.Officers,directorsandemployeesofScotiabankand itsaffiliatesmayserveasdirectorsofcorporations.

Anysecuritiesdiscussedinthisreportmaynotbesuitableforallinvestors.Scotiabankrecommendsthatinvestorsindependentlyevaluateanyissuerandsecuritydiscussedinthisreport,andconsult withanyadvisorstheydeemnecessarypriortomakinganyinvestment.

Thisreportandallinformation,opinionsandconclusionscontainedinitareprotectedbycopyright.ThisinformationmaynotbereproducedwithoutthepriorexpresswrittenconsentofScotiabank.

™TrademarkofTheBankofNovaScotia.Usedunderlicense,whereapplicable.

Scotiabank,togetherwith“GlobalBankingandMarkets”,isamarketingnamefortheglobalcorporateandinvestmentbankingandcapitalmarketsbusinessesofTheBankofNovaScotiaandcertainofits affiliatesinthecountrieswheretheyoperate,including;ScotiabankEuropeplc;Scotiabank(Ireland)DesignatedActivityCompany;ScotiabankInverlatS.A.,InstitucióndeBancaMúltiple,Grupo FinancieroScotiabankInverlat,ScotiaInverlatCasadeBolsa,S.A.deC.V.,GrupoFinancieroScotiabankInverlat,ScotiaInverlatDerivadosS.A.deC.V.–allmembersoftheScotiabankgroupand authorizedusersoftheScotiabankmark.TheBankofNovaScotiaisincorporatedinCanadawithlimitedliabilityandisauthorisedandregulatedbytheOfficeoftheSuperintendentofFinancial InstitutionsCanada.TheBankofNovaScotiaisauthorizedbytheUKPrudentialRegulationAuthorityandissubjecttoregulationbytheUKFinancialConductAuthorityandlimitedregulationbytheUK PrudentialRegulationAuthority.DetailsabouttheextentofTheBankofNovaScotia'sregulationbytheUKPrudentialRegulationAuthorityareavailablefromusonrequest.ScotiabankEuropeplcis authorizedbytheUKPrudentialRegulationAuthorityandregulatedbytheUKFinancialConductAuthorityandtheUKPrudentialRegulationAuthority.

ScotiabankInverlat,S.A.,ScotiaInverlatCasadeBolsa,S.A.deC.V,GrupoFinancieroScotiabankInverlat,andScotiaInverlatDerivados,S.A.deC.V.,areeachauthorizedandregulatedbytheMexican financialauthorities.

Notallproductsandservicesareofferedinalljurisdictions.Servicesdescribedareavailableinjurisdictionswherepermittedbylaw.

PaigeMaclean

SeniorWealthAdvisor,PortfolioManager

905.948.4757

paige.maclean@scotiawealth.com

NickRychlo

SeniorWealthAdvisor,PortfolioManager

905.948.4758

nick.rychlo@scotiawealth.com

LizSiddle

AdministrativeAssociate

905.948.4759

liz.siddle@scotiawealth.com

AnthonyMarino

AdministrativeAssociate 905.948.4756

Anthony.marino@scotiawealth.com

www.macleanrychlo.com

ThispublicationhasbeenpreparedbyanadvisorofScotiaMcLeod,adivisionofScotiaCapitalInc.(SCI).Thispublicationisintendedasageneralsourceofinformationandshouldnotbeconsideredaspersonalinvestmentortaxadvice.Wearenottax advisorsandwerecommendthatindividualsconsultwiththeirprofessionaltaxadvisorbeforetakinganyactionbasedupontheinformationfoundinthispublication.Opinions,estimates,andprojectionscontainedhereinareourownasofthedatehereof andaresubjecttochangewithoutnotice.Theinformationandopinionscontainedhereinhavebeencompiledorarrivedatfromsourcesbelievedreliablebutnorepresentationorwarranty,expressorimplied,ismadeastotheiraccuracyorcompleteness. NeitherSCInoritsaffiliatesacceptsliabilitywhatsoeverforanylossarisingfromanyuseofthispublicationoritscontents.Thispublicationisnot,andisnottobeconstruedas,anoffertosellorsolicitationofanoffertobuyanysecuritiesand/or commodityfuturescontracts.SCI,itsaffiliatesand/ortheirrespectiveofficers,directors,oremployeesmayfromtimetotimeacquire,hold,orsellsecuritiesand/orcommoditiesand/orcommodityfuturescontractsmentionedhereinasprincipaloragent. Allperformancedatarepresentspastperformanceandisnotindicativeoffutureperformance.SCIand/oritsaffiliatesmayhaveactedasfinancialadvisorand/orunderwriterforcertainofthecorporationsmentionedhereinandmayhavereceivedand mayreceiveremunerationforsame.AllinsuranceproductsaresoldthroughScotiaWealthInsuranceServicesInc.,theinsurancesubsidiaryofScotiaCapitalInc.,amemberoftheScotiabankgroupofcompanies.Whendiscussinglifeinsuranceproducts, ScotiaMcLeodadvisorsareactingasInsuranceAdvisors(FinancialSecurityAdvisorsinQuebec)representingScotiaWealthInsuranceServicesInc.Thispublicationandalltheinformation,opinions,andconclusionscontainedinitareprotectedby copyright.Thisreportmaynotbereproducedinwholeorinpart,orreferredtoinanymannerwhatsoever,normaytheinformation,opinions,andconclusionscontainedinitbereferredtowithoutineachcasethepriorexpressconsentofSCI.Maclean RychloFinancialGroupisapersonaltradenameofPaigeMacleanandNickRychlo.