The curtain has come down on another RRSP season, and not a moment too soon. We now get 10 blessed months to simply enjoy life, without being interrupted by frightening ads predicting we’ll end up working at McDonald’s if we pick the wrong mutual fund.

Canadians responded in spades to this year’s campaign, buying $8-billion worth of mutual funds in February alone. That’s the strongest season since 1998, which was, coincidentally, just before the last stock market bubble burst. (Am I the only one with a déjà vu feeling?)

Those sales numbers will power some fat bonuses, and lots of shiny new BMWs, on Bay Street. But the rest of us shouldn’t get swept away with happy thoughts. Because all the headlines about strong RRSP sales and record-breaking stock markets tell only part of the story. Lurking underneath is a big, unreported problem: The fundamental economics of the whole RRSP system have deteriorated markedly in recent years, and millions of frugal Canadians aren’t going to get nearly as much from their personal savings as they thought they would.

In fact, do-it-yourself pensions have been hammered by exactly the same economic and demographic forces that have wreaked such havoc with group pension plans: growing life expectancy, lower investment returns, and lower interest rates. For group pension plans, these factors have produced multi-billion dollar funding deficits — and some very scary headlines. Most group plans are working through these problems, although challenges remain.

For RRSPs, however, the resulting “deficits” are parcelled into nice little individual packages. Indeed, the whole premise of RRSPs is to shift pension risk and responsibility from governments and employers onto individuals. These personalized deficits never generate big scary headlines. Imagine the Report on Business coverage: “Joe Blow faces $100,000 pension shortfall!” And since neither governments nor employers are harmed (at least not directly) by this hidden crisis, they aren’t agitating for change. In aggregate, however, the RRSP crisis will cause enormous pain to millions of Canadians.

Here’s the math. Right now, Canadians have $600-billion tied up in RRSPs. (About 70 per cent of that is held by the richest fifth of the population, but that’s another story.) Back in the roaring 1990s, financial advisers used to promote RRSPs with logic something like this (all numbers are adjusted for inflation): Suppose you make $50,000, you sock away five per cent of that a year, and you earn real returns (after inflation) of about five per cent. After 30 years, you have a tidy nest egg of about $165,000.

Assume you’ll live 18 years after retiring (in your early 60s), and interest rates continue to earn about four per cent (again after inflation). Your RRSP will then generate monthly income of $1,050, replacing more than 25 per cent of your pre-retirement income. Throw in public pensions (Old Age Security and CPP) and any workplace pension you may receive, and you won’t be living in Bermuda — but you won’t be working at McDonald’s, either.

Unfortunately, this arithmetic has been destroyed by the three unfavourable changes listed above. First, life expectancy has grown by about two years (more for men than for women); now your RRSP has to last 20 years, not 18. Second, investment returns have fallen by at least a percentage point (and the old philosophy that stocks reliably earn more than bonds burst with the dot-com bubble). Third, long-term interest rates (which determine how much pension you can “buy” with your RRSP) have fallen even further, by about two percentage points.

These seem like small changes, but they add up to huge problems for pensions — just as much for RRSPs as for group plans.

Suddenly, your nest egg after 30 years of scrimping is only $140,000. Worse yet, interest rates are lower, plus you’re expected to live longer (how fiscally inconvenient!). So that $140,000 now buys a monthly pension of only $700, just 16 per cent of your pre-retirement income. You have a pension shortfall of $350 a month, or more than $4,000 a year, compared to what you thought you’d get.

Multiply that by the number of Canadians who’ve been duped into believing they can buy their own retirement, and you have a pretty big number. To get back that $1,050 monthly pension, contributions should be 50-per-cent higher: 7.5 per cent of salary, rather than five per cent. Capitalize that unmet funding requirement, and we can conclude that Canadians’ RRSP funds, in aggregate, are something like $300-billion “too small.” I think that deserves a scary headline.

Individual RRSP-holders will have to cough up $300-billion in additional contributions, and quickly. Or they will have to tighten their post-retirement belts considerably. Either way, it’s a 12-figure burden that’s been slipped squarely (and silently) onto the shoulders of individual savers — who have no one to advocate for them.

Maybe the situation isn’t quite so bleak. Maybe interest rates will bounce back. Maybe the stock market will never crash again. Maybe Canadians will stop living longer.

More likely, however, millions of Canadians will be sorely disappointed when they retire — even if they did pick the right mutual fund. Worse yet, many will see an even larger share of their savings diverted to Ottawa’s clawback on pension benefits. This huge, hidden crisis demonstrates the folly of any pension system designed around individual accounts.

Jim Stanford

Jim Stanford is economist and director of the Centre for Future Work, and divides his time between Vancouver and Sydney. He has a PhD in economics from the New School for Social Research in New York,...