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A new report from TD Economics warns that unless the pension system is reformed, a growing number of Canadians won't have adequate income in retirement to maintain their standard of living.
The report released Thursday comes in advance of next week's meeting of federal and provincial finance ministers in Prince Edward Island, where the retirement income system will be discussed.
"If we don't see material changes within the next five years then we're going to start running into greater risks that individuals are going to experience this decline in the standard of living," said Craig Alexander, TD's chief economist.
He said a decline in personal savings, rising household debt levels, volatile markets and declining employer pension coverage will affect the lifestyle of future retirees.
"The bottom line is that more Canadians are likely to find that they experience a lower standard of living in retirement over the next four decades," Alexander said.
He said close to 25 per cent of seniors are not meeting the traditional benchmark of 60 to 70 per cent replacement of their pre-retirement income.
Alexander said the analysis by TD Economics shows the middle class will be particularly affected in years to come, especially those without pension plans.
He said the retirement system is doing a good job of keeping retirees out of poverty, but not enough to ensure they can maintain their standard of living, and governments need to act, starting with gathering better information on household income and savings.
The last survey of financial security by Statistics Canada was done in 2005 and Alexander said a lot has changed on household assets and liabilities in the last five years.
He said the updated information is needed so governments can pursue a "rush prudently, don't run blindly" approach to reforming the Canadian retirement income system.
Alexander said governments need to improve financial literacy among Canadians so people have the capability to competently manage their own financial affairs. He is also calling on governments to raise annual limits for RRSPs and defined contribution pension plans, and to improve the rules for employer-sponsored defined benefit plans.
His report suggests the use of a public supplementary pension plan to help those in greatest need, rather than changes to the Canada Pension Plan, which wouldn't necessarily help the minority of people who aren't saving enough now.
The Canadian Labour Congress has proposed increasing CPP benefits. Currently, the average Canadian receives a monthly retirement pension of $502.57 from the CPP.
The labour congress proposal would "effectively double" the average benefit and would see the maximum increase to $1,635 from the current level of $934.17. That would require Canadians to deduct a greater amount from their paycheques.
But the Canadian Federation of Independent Business said Thursday that its members are against that idea.
"Proposals by unions to double CPP would serve as a major job killer, as economists worldwide recognize that payroll taxes are a drag on job growth and economic development," federation president Catherine Swift said in a statement.
"With EI payroll tax premiums set to rise for the next several years, beginning in 2011, an increase in CPP premiums could hamstring Canada's economic recovery, just as it begins to gain momentum."
Instead, the business group has written to the federal and provincial finance ministers to say governments need to consult with businesses on other ways to improve the retirement income system.
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