Ross Urquhart: The looming retirement crisis
When it comes to retirement, unless you are close enough to feel its magnetic pull, chances are you haven’t done the math and imagined what life will be like in those “golden” years.
Most of us hit our peak earnings in the years before retirement and finally enjoy the exalted status of being a true “homeowner”, along with the luxury of affording new and better vehicles and a few other indulgences after years of toughing it out through leaner times. And it’s not like we stuck our heads in the sand when it came to retirement. We paid down our debts, put money in RRSPs, and contributed to the Canada Pension Plan—we built our asset base. Unfortunately, according to the majority of economic pundits, in spite of our efforts it won’t be enough. Our future, apparently, is a wonderland of volatility. Recent history has shown that no one—no government expert, no Wall Street wunderkind, no genius academic—is capable of supplying a financial forecast we can rely on. There are now, simply, too many variables. The result is a lack of investor and consumer confidence and, in turn, precious little hope for economic growth similar to what we enjoyed in past decades. We may not be looking at one continuous recession but there is just no sign of an economic “boom” on the horizon, which, experts say, is what is needed to lift us out of these doldrums.
How this translates, according to our own federal finance department, is that a retirement savings shortfall encompassing anywhere from 40 to 80 percent hangs over the foreseeable future. It’s happening now thanks to a bottoming out of interest rates and the resulting loss of income from secure investments. If you need to make more than two percent on your retirement savings, to pay the bills and keep what you’ve got, you must enter the “market” and put your money at risk, and, lately, your chances of losing that investment are as high as your chances of gaining the required return. In other words, from now on vast numbers of retired people will go to bed each night fearing the life they worked so hard to achieve will be gone by the time they wake up the next morning. It’s not a healthy way to spend the last couple decades of your life.
A recent survey of working Canadians showed that 73 percent are saving less than one quarter of what they believe they need—including 45 percent of people 50 years or older. Almost half are saving less than five percent of their annual incomes toward retirement. If you believe the government will help, don’t hold your breath waiting. The federal government has indexed Old Age Security and added a supplement for those who have nothing else but together this wouldn’t put a roof over your head let alone pay food and utilities. If you worked and paid into the Canada Pension Plan you are definitely better off, especially if you wait until at least 65 to draw on it, but even when added to the Old Age Security benefit, together they fall well below the poverty line.
We all need retirement savings, but how to save, what to save, and where to save has become so complex that we need expert financial advice, and that costs money—and still fails to guarantee a safe return.
The federal finance department does recognize the problem, especially during elections, but their policy amounts to letting “private entrepreneurs” create a solution, which is an ideological way of saying you’re on your own. Politicians and bureaucrats, as much as they gush about creativity and prattle on about their search for new ideas and innovative solutions, are loathe to institute such things because they might fail and, thereafter, it becomes identified with them—and that’s scary. Politicians, as a group, are not known for their courage. (It gets in the way of party solidarity, messes with their chances of making cabinet, and intimidates people they hope will fund their re-election campaigns.)
Many people are suggesting that helpful improvements can be made to the Canada Pension Plan—me included. Once I received a group mail-out from my member of Parliament asking for ideas on pension reform and I replied that if they truly want to help retirees achieve a more comfortable and less anxious old age then why not allow RRSPs to be used “tax-free” to purchase increased payments on CPP. For instance, for every $10,000 transferred from an RRSP to the CPP fund, an extra $40 to $50 per month could be purchased—similar to a life annuity. That puts their money in the hands of those trained financial experts managing the CPP fund (supposedly the best in the land) and gives the beneficiary a return in the five to six percent range for the rest of their lives. The CPP fund is nonprofit, has a history of being well managed (consistently averaging in excess of six percent per year), so the cost to the government should be negligible. People reaching retirement needing a dependable income base, who only have $50,000 to $250,000 in RRSP assets and are afraid of being taken by shady or incompetent financial managers, could find this option of substantial benefit. (My MP’s “assistant” thanked me for my efforts and assured me he would send it on to the finance minister, but for some strange reason I never heard back.)
The government, of course, stubbornly resists changes to the CPP program, unless it reduces payouts or increases votes in some way, but most of what is being suggested (unlike my proposal) are changes which encourage younger workers to save through optional extra payments, usually with matched payments by their employer, which is the kiss of death to a proposal as this is normally accompanied by a well-orchestrated scream from the business community. The department’s reasons for turning these proposals down, as always, returns to the general theme of preferring solutions found outside of government. It’s a nice thought, except that it isn’t happening, and increases in poverty always translate into direct costs to government, so why not work toward preventing such trends?
The lack of effort being put forth in solving this looming crisis is also difficult to fathom in purely political terms. When you ignore a situation involving people who have had money most of their lives—by working for it—and who subsequently discover they have entered poverty upon retiring, you risk being viewed as the cause of their distress. Indeed, it’s difficult to understand politicians turning a blind eye to any politically powerful group facing so significant a change. (Not that politicians know this anxiety firsthand thanks to the generous retirement package they have assembled on their own behalf.)
Regardless, past history does suggest that the coming years will, by political necessity, include a confused and, ultimately, expensive scramble to deal with this problem. Too bad it can’t be solved before it gets to that point. And if governments believe they can throw up their hands and say it isn’t their fault, perhaps someone should remind them of how they brought interest rates down, and are keeping them down, to facilitate new investment and growth (and reduce the payments on their own massive and growing pile of debt). Continuing low interest rates may or may not be a good policy, but they have negative consequences, which include leaving those people who have worked and saved for a secure retirement hanging out on the end of a very long limb.
One evening during the holidays I heard a volunteer at a local food bank interviewed and they talked of seeing people who used to donate now standing in line for a food basket. Given the current financial trends and lack of government policies to meet their needs we may be seeing a lot more of that in the future.