The lucky guy

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Stan worked on the line at GM’s Oshawa plant for thirty years. “Last of the breed,” he says. “Man, look at the news.” Indeed. GM just punted a thousand workers, who will be gone by November. When Stan started there, 15,000 guys crowded the gates. Now there are 3,600. Soon, a third less. “This place is doomed,” he prophecies.

Pensions are one reason, which is why I was talking to the guy. GM Canada has about 30,000 retirees drawing monthly cheques. It also has an unfunded pension liability estimated to be more than $2 billion. That’s despite a $3.2-billion cash gift the company received from the government when GM was bailed out in ‘09. It effectively means most company pensioners today are drawing taxpayer money. Yep, just like civil servants. Except most ex-GM workers get more.

Stan never saved a nickel, has no RRSPs, no TFSA, no investment portfolio and $12,500 in his TD Canada Trust daily savings account earning 0.10%. But he does have a house east of Toronto he paid $220,000 for, plus a wife who works at Loblaws.

But Stan’s one lucky dude. He has a gold-plated pension from the olden days when automakers secretly sweated as the union’s brass swaggered to the negotiating table. He also has a big choice to make. He can collect a monthly cheque until he dies. Or he can commute it – taking over the pension himself with a lump-sum payment. In his case, it will be just under $1 million – some of it rolled into a tax-free registered account, some of it in taxable cash.

“I’m scared,” he said. “I can’t sleep, and now all I do is worry.” That’s normal, I told him. People lacking money worry occasionally about being poor. People who have money obsess about losing it. It’s why rich people never smile.

Well, Stan made his choice finally. He took the money, will have it invested privately and get his monthly allowance that way. Here’s why.

“I don’t trust them.” These are the words of a guy who’s watched the ranks of the employed decimated, seen his company rescued from colossal failure by the government, and knows there’s not enough money in the pot to fund his pension for the next 35 years. In fact, unfunded pension liabilities are a ticking timebomb with the potential to blow up the lives of many unsuspecting people.

For example, Canada Post has an unfunded pension liability of $6.5 billion, which should explain why it’s trying hard to get out of the mail delivery business and laying off armies of people. Across Canada it’s estimated there are $300 billion worth of pensions that public sector workers are expecting that actually have no dollars allocated to them. Some bitter surprises are in store.

Anyway, Stan’s smart. Why even take a chance when you can take the money now?

Then there’s this: “What if they screw up again?” Governments struggling with their own debts and deficits might not be so generous with GM the next time it hits the rocks. Pensioners in Canada could live through the same experience as cops and firefighters have in American cities and states where pension benefits are arbitrarily cut. Already teachers in Ontario have been forced to pay more into their massive pension plan and will be receiving less, just to keep it solvent.

By taking the money and putting it to work, hopefully matching long-term investment returns, Stan will never deplete it and harvest a monthly amount equal to that the pension administrators were promising.

Most importantly he said, “I have to do this for Brenda.” Smart. If Stan took the company pension the way most of his greying buddies are, with its stress-free payments, then died in a few years, Brenda would get a small and temporary survivor benefit. But by commuting the pension amount, Stan’s family owns 100% of the money – forever. If he passes first (“Like that won’t happen…”) then Brenda gets every cent, to support her and help the kids as they get established.

Besides, there couldn’t be a better time for the guy to be doing this, since interest rates have cratered. Low rates make a commuted pension worth more in today’s dollars, since the present value of it rises. If current rates were a couple of percentage points higher then the autoworker’s pension value would be at least $300,000 lower. In fact, his commuted value jumped enough to buy a new RV with the tiny quarter-point bank rate drop in January.

Like I said. Lucky dude.

Finally, Stan can take his wad, invest it reasonably for growth and stability, and end up paying less tax than his pension-collecting pals. That’s because a portion of his income can be deemed return of capital, which means it’s not reportable, keeping him in a lower tax bracket.

Of course, in return for these benefits, he worries. He has to trust someone with his million. And that is the highest hurdle.

The honourable FSBO

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Would you buy a used house from a used MP?

Tim’s not convinced, but he sure was surprised at what Maurice Vellacott stuffed in his door. “No words can describe the feeling when you get home,” he says, “and find a sitting MP has come to your house to drop off a flyer that he’s selling his house and will give you a deal in a private sale.

“That’s a sure sign housing is going to crash……. I know you’re against private sales, but surely it’s safe to buy a house from a guy with “D. Min” and “MP” at the end of his name, right? Right???”

Velacott’s been a Member of Parliament since first elected as a Reformer back in 1997. He and I sat in Parliament together for a while, but as a pro-life MP and bigtime theological dude, he had little in common. I think he may even has trashed my butt once or twice after the Conservatives punted me. But then, who didn’t?

In any case, Vellacott lives in Tim’s Ottawa hood and just blitzed it, handing this out:

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How does any of this possibly matter? Actually it wouldn’t if Maurice wasn’t trying to impress the neighbours by flashing his Parliamentary designation and Godly credentials. Or including his MP’s cellphone number. But because he’s not going to run in the coming election, the politician is clearly trying to bail out of the market when the bailing’s good – and also being cheap while he’s at it.

But cheap is what FSBO is all about. In this instance Vellacott says he’ll be listing his digs for $450,000 in two weeks, “but will sell for $435,000 without any agents involved.” Of course, a house listed for $450,000 in a soggy market like S’toon would probably fetch $410,000 or $420,000, and after commission that would give the MP about $395,000. No wonder he’s passing around flyers.

Even if he found a greater fool to pony up the full price, his after-commission net would be $427,500 – eight grand less than his ‘discounted’ special offer to his beloved constituents. So here’s more proof that FSBO means greed. The DIY seller wants to pay the agent nothing so he can pay himself more. If you think, as a buyer, you’re getting a deal because the commission saving is being passed on to you, think again.

Meanwhile, as Tim asks, is the divine MV’s planned exit a harbinger of tough times ahead?

Well, facts are facts. Sales in Ottawa are stagnant from a year ago, and so are prices. Even CMHC has been warning that “soft employment conditions will temper real estate demand”.

At the same time, stats from back home are also grim. Saskabush sales year/year have plunged by 10% while listings have swollen 16%. Values are already being affected, with the average down 4%. As you may know, this is consistent with a lot of secondary markets in Canada, despite the fact mortgage rates have never been at these levels before, CMHC is still encouraging people without money to buy houses and the media’s turned into endless house porn.

There’s a limit for most people as to how much debt they can choke down in an economy where incomes are stagnant, commodities are in the ditch, full-time jobs are elusive and yet house prices are bloated. Unlike the latte-sipping, hedonistic metrosexual urban butterflies in YVR or the GTA, good God-fearin’ prairie folks (and even those in Ottawa) know their limits. Apparently this is it.

Of course Maurice is bailing. How can you blame him? He’s done with the feds. It’s the smart move.

But don’t be tempted to buy his house and subsidize the guy. You already did that.