Entries from September 2017 ↓

What were you thinking?

Much of the hate oozing from the very pores of this pathetic blog yesterday was about pensions. These days it’s estimated 70% of all workers have no corporate plan with any kind of defined benefit (like government workers, teachers and the prime minister). Instead most people have crappy group RRSPs which are stuffed into even crappier mutual funds run by an oft-crappy insurance company. If you’re lucky, the boss kicks in some cash.

And folks change jobs, of course. Sometimes they get to drag behind a portion of a pension as a locked-in retirement account (LIRA). Sometimes not. In any case, registered pension plans run by employers are, on whole, massively inadequate for a world in which people retire at 60 and croak at 90.

The CPP and OAS? Fine, if you live on Cape Breton and like mac & cheese. Every day.

The kids know this. Ask a Mill if she’ll get a pension at 65 and you can watch her tats jiggle in response. Even people on the public payroll who are under the age of 40 have serious doubts about the sustainability of the system. Already funding public pensions is a massive ongoing liability for Ottawa, and every year it augments. As mentioned here yesterday, the annual top-up alone to keep the system stable is more than $400 million. Meanwhile nobody’s topping up private sector pensions. In fact, Mr. Morneau is about to tax the poop out of small business earnings set aside for retirement. And his boss already gutted the TFSA. Seems like we have two sets of rules. No?

Anyway, let’s move on from the hate and dive into the pity.

To make up for the death of corporate pensions (more are murdered weekly), plus their own disastrous lack of self-discipline and silly desire to do stuff like have kids and seek happiness, tons of Canadians have gambled everything on their house. It is their financial strategy, their savings vehicle and their retirement plan. For the few who are now cashing at, or near, peak house, it worked great. What a ride. For everybody else, massive uncertainty.

Here are some scary numbers (thanks to the Ontario Securities Commission):

  • The home ownership rate in Ontario among those 45 and older has hit 76%. Astonishing. And a record number of people own multiple properties, says Scotiabank.
  • Half have a mortgage, half do not.
  • Half have saved nothing.
  • 45% say their home is their pension plan. They’ll have to cash out to retire.

Says the regulator’s report: “Findings suggest a large number of Ontario homeowners, 45 plus (particularly pre-retirees) are replacing retirement planning with the belief that home equity gains will finance their retirement. This approach to retirement planning can be sustainable so long as residential properties maintain or increase in value. However, to the extent Ontarians 45 plus are overestimating their ability to finance their retirement using their homes, or if there is a downward pricing correction in Ontario’s housing market, a number of Ontarians 45 plus may be at risk of not meeting their retirement savings goals.”

And if this is the case in Upper Canada, where a nice house only costs a million or so, just imagine the mess personal finances have become in YVR and the Lower Mainland, where the spending rate is 108% of the average income and properties are extreme. Don’t people understand a one-asset strategy is the ultimate definition of risk?

Nope. Absolutely not. It’s led to a pile of household debt which, at $2.1 trillion, is bigger than the entire economy. People have net worth without any wealth. They make payments to own stuff. It’s absolutely unsustainable.

So the Fed will raise rates again this year and the Bank of Canada will follow. Our central bank rate will have tripled in six months. There’s another full 1% to come in 2018, so mortgages that were 2% will end up being 5%, just as credit is restricted thanks to new lending regs at the banks. This may not cause a housing crash (although Toronto prices are already in a bear market), but we don’t need one to screw things up. With a 76% home ownership rate and scant liquid savings, diminishing pensions plus rising longevity and epic debt, people require house prices to escalate annually – and hold at those levels until the day they need out.

And what are the odds of that?

Right up there with Justin calling me for advice. But I’m ready.

The overlords

It’s a dinner I’ll never forget.

As a gesture of thanks, three days after the election in which I was punted as an MP and cabinet minister, I asked the dozen senior staff in my office at Revenue Canada out for a meal. Nice restaurant overlooking the Rideau Canal. So long.

I sat and reflected on my path ahead. No job. No pension. No prospects. A house in the wrong city. No fortune. No offers. No security. No severance. Across from me, merrily munching on a Salisbury, sat the deputy minister. When I am pounding on doors in Toronto, looking for a break, I thought, he’ll still be here. Guaranteed job, government-paid car and driver, big bucks, long vacations, group benefits and a lifetime defined-benefit pension plan, indexed.

The contrast was stark, and dark. On one side the politician – elected on public whimsy, drenched in risk – and on the other the bureaucrat – paid richly by the public, yet strangely unaccountable.

This may help explain our current circumstances. There’s a huge overlord class of public sector workers in Canada. More than 3.5 million people, or 24% of the working population. For them, risk is foreign, benefits are assured, salaries are guaranteed, with the security of a life-long string of monthly payments after they retire. In comparison, two million plumbers, lawyers, farmers, doctors and hair salon owners have no wage security, no pensions and no paid holidays. Bureaucrats in the Department of Finance have been calling them tax cheats and loophole-abusers lately because the government wants to increase taxes, but not decrease spending.

Federal civil servant pensions cost a lot. The average retirement pay-out for a federal worker is $1.2 million after 35 years on the job. The current shortfall (called the unfunded liability) is $4.5 billion. So Ottawa has to find about $415 million in additional revenue every year for the next 14 years to meet its obligations to retiring workers. By whacking small business owners (who have no pensions) as the government is proposing, an estimated $250 million will be realized.

My former deputy minister, who made a very large salary, did not need to save for retirement. He knew he’d receive a monthly payment based on the five best (highest-paid) years of his career, as well as retain the benefits of the public service health plan. No need to worry about market conditions or fluctuating RRSP and TFSA assets, since all future payments were legislated and funded by the taxpayers. The car and driver he enjoyed daily were not taxable benefits, either. Nor did he ever have to stand for election and throw his fate into the hands of the deplorable masses.

Public workers with DB pensions can also split that income with a spouse as a mechanism to reduce the overall tax bill in retirement. If that constitutes their only income, it’s not hard to split it down to the 20% range – while private sector people cashing in RRSPs may face bills twice as steep. Ironically, the T2 gang are about to strip drywallers, family doctors and haulage contractors of the same benefit, even though none have guaranteed pensions.

In one week the short period of time the government allowed for debate on these major tax changes will be over. Small businesses retaining earnings to tide them over the lean years or to fund a retirement will face a tax rate of up to 73%. And while unrelated men and women who start companies can share income in the form of dividends, if they get married it’s called ‘income sprinkling’ and becomes illegal. Entrepreneurs and medical people who played by every rule in the book, living frugally so they could save for retirement within their corps, are now pilloried and demonized by the very crew who wrote the rules.

Are there some people who hide behind incorporations and manage to shelter money the government desperately needs to pay pensions of federal workers? You bet. But there may be better places to get it than whacking all the folks who, collectively, create half the jobs in Canada. Making the federal pension plan fairer would be a start. Or even taxing the windfall and unearned capital gains on residential real estate.

Most of the people about to be squished by Mr. Morneau are not, like him, 1%ers. Most have no job security, no paid time off, no maternity leave, no benefits, and they sure don’t have access to money for life.

Yes, let’s make the system fairer for the middle class. Now you know how.