One of the outcomes of the recession that is considered both a benefit and an obstacle is record low interest rates. The Bank of Canada lowered interest rates to 1 percent in order to stimulate the economy through a recovery, which had its intended effect. But at the same time, low interest rates have lowered personal savings rates, yielded smaller returns on investments, and all but eliminated quality workplace pension plans. As a result, young workers who have yet to build significant savings accounts will be unable to earn the interest that preceding generations once did. These young workers, known collectively as Generation Y, are particularly vulnerable to lower standards of living in retirement.
CIBC says that older generations largely chose to acquire mortgages and invest in property rather than build a savings account. The bank identifies this pattern as synonymous with the notion of building wealth for the future. However, homeowners have later realized how difficult it is to retain cash value from selling property because expenses, taxes, and the cost to acquire a new home deplete cash made from a previous home sale. At the same time, first time buyers have largely been shut out of the home buying market in part due to new mortgage lending rules implemented by Ottawa last year. As a result, the housing market isn’t as profitable as it once was.
CIBC economist Benjamin Tal was one of the authors of the bank report, and says the recession is largely responsible for the very different market young people face today. Low interest rates and a less valuable housing market will hold young workers back from financial security. Tal also stresses that the number of employers who offer guaranteed pension plans is less than a third of all companies in the country, down from nearly 40 percent in the early 1990s. He says all of these factors will reduce the standard of living for Generation Y in retirement by at least 20 percent.
“More than 20 per cent is a significant reduction in the standard of living.”
CIBC advises members of Generation Y to find a job, hold onto it, and put as much money as possible into a savings account.