Enough with the rich people. Let’s talk about Joe & Joan Frontporch.
So 93% of us have not maxed our TFSAs. Last year Canadians withdrew an average of $17,000 from their RRSPs, spending most of it on real estate. Every year those withdrawals increase. The average TFSA, which can hold $52,000, has assets in it worth $11,037. About 80% of that’s in cash or interest-bearing, brain-dead GICs. The average RRSP contribution is less than $3,500. The number of people contributing has fallen 10% in the last five years.
Meanwhile there’s $2 trillion in household debt, 65% of which is in mortgages. Debt is growing faster than savings, by a wide measure. Together we have about $780 billion in retirement savings, or less than half what we owe.
That’s the background for what is to follow. So sit.
Personal finances are a mess, save for real estate appreciation. Millions of Joes and Joans have decided the best plan of action is to concentrate their net worth in a house rather than build liquid assets. The emotional touchstone of this confused nation is to pay off your mortgage as fast as possible. It should be on the coat of arms. Right below the crazed beaver, the horny moose and the pointy thing. Even when mortgages have been in the 2% range, citizens throw all of their cash against the borrowing – which is why TFSAs, RRSPs and other investment accounts are a disaster.
Backstopping this collective insanity is the belief most people have that their government will support them when the thirsty underwear years arrive. In fact T2 has said as much. The feds rolled back the retirement age from 67 to 65 for OAS payments and ‘reformed’ CPP, dramatically hiking premiums that workers and employers pay, for a modestly higher benefit.
But it’s doomed. Today the average CPP payment is $644 and OAS adds $570. That’s $14,500 a year – enough to buy groceries, dog chow, lottery tickets and essential fluids. Not enough to run a house on. Or live, actually. But even that’s not something anyone today 40 or under should count on – despite the CPP bump.
OAS is welfare for old people. It comes from general government revenues and is awarded solely based on age. It’s also hideously expensive – $43 billion a year now, or about 20% of the entire federal budget. By 2030, when the Boomer bulge is sucking it all up, the costs will be above $100 billion. Politicians for years have known this is unsustainable, but have been unable to deal with it because of the above. Without it, Joan & Joe are screwed. But without reform, their kids will be bled dry financing it.
The Harperites tried to fix it (a little) by rolling the retirement age from 65 to 67, delaying the OAS handout. The Trudeauites came in and quickly reversed that. Now T2’s economic think tank, headed by Dominic Barton, has told the Libs they need to rethink that decision, saying both OAS and CPP be “should be recalibrated and increased to meet the Canadian reality of an aging society and a considerably longer life expectancy.”
Just hours after that report hit the media, the PMO sent a junior minister (Jean-Yves Duclos) to say this:
”Reversing the previous government’s arbitrary decision to [raise] the OAS age of eligibility was a commitment we made with the middle class and the most vulnerable Canadians in mind, and it was absolutely the right thing to do. We are not going to change that as we know if we didn’t reverse the previous government’s reform of the age of retirement the most vulnerable Canadian seniors would have lost an amount up to $13,000 per year, and 100,000 seniors would have been in a situation of poverty, raising our senior poverty rate from six to 17 per cent for seniors aged 65 and 66. We are open to encouraging seniors to stay in the work force, if they are able and willing to.”
The social justice warriors among us may think this is good news. It’s not. The senior level of government has again kicked a big, ugly can down the road. You can be sure that the issue will not be addressed until there’s (a) a new Conservative majority government, with cajones or (b) a crisis. The latter is maybe a decade away. The former – who knows?
In any case, it’s reasonable to assume OAS is about to go from universal to voluntary. Already the benefits are clawed back, starting at an income of around $73,000 and is taxed into oblivion by $117,000. Coming soon will be a CPP-like system which promises you even more pogey if you delay taking the money until a later age – perhaps 67 or 70. That won’t do much to make the system any less of a Titanic, but it might slow the flooding a little. Moisters will still have to clean up the mess. If you think taxes suck now, just wait.
Meanwhile Joe and Joan save little, invest less, love their house and expect you to save them. Tell your kids what’s coming.