Pension Reform

For the past while the feds have been giving a bit of lip service to the idea of pension reform. It seems they finally woke up to the fact that many boomers are either recently retired or soon to retire and failed to, or were unable to plan for their sunset years. The result is that these old buggers either stay in the work force or return to work when they wake up to the fact that the little nest egg just isn't cuttin' it. When old guys aren't falling off one end of the employment ladder there's no room for young guys to climb on to the other.  Both groups suffer.  The dream of old guys to retire to a sandy beach sinks like the sunsets they were hoping to see.  Young guys who hit the books and got an education line up for night shift jobs at Tim's and Mikey D's.  Their Grandmas have all the day shifts.

No surprise that any pension reform suggested by government will involve either, or both, increased taxes and increased plan contributions.  It's likely that any increase in CPP benefits would not affect present CPP recipients.  Rather, the increase would kick in  for future retirees.  This means that retired boomers would be subject to higher taxes without participating in increased benefits.  Thus, the group whose very dilemma triggered the need for reform would be left out in the cold.

Nobody wants higher taxes, especially retirees living on fixed incomes or under-employed young people.  The business community, according to the C of C, is totally opposed to increased contributions.  As you know, for each dollar individuals contribute to CPP, their employer is compelled to match it.  I suspect that the greatest fear among business is that the feds will change the rules and make employers contribute $1.40 for each employee $1.00 as is the case with EI premiums.  This would be a 40% increase in employers' contributions.

Now, here are my ideas;

1. Remove the $5,000.00 annual cap for deposits to Tax Free Savings Accounts for retirees.  If a larger portion of the investment income, earned on unregistered funds, were free of tax this would effectively provide additional income for this group without increasing either taxes or contributions.  I'd expect there would have to be some sort of means test for this.  Gazillionaires shouldn't be included.
2. Increase the Pension Income Tax Credit.  Again, this would reduce taxes for those who need the break without affecting others.  Once again, Richie Rich shouldn't be included in this program. 
3. Tax-Free Muni Bonds.  South of the border, interest paid on Municipal Bonds is generally exempt from federal and state taxes.  Again, this would be great for retirees.  It would be huge for the municipalities who would have access to a whole new source of funding for infrastructure renewal and capital expenditures, without going to the feds or the provinces as is now the norm.  The resultant reduction of income tax would easily be replaced by normal taxation of the income produced by the increased economic activity.  A win, win!

If you like these ideas, send the link on to your MP.  Maybe we can start a grassroots movement.

A Little More About The Last (Next) Ten Years

Since last Friday's post I've been doing a lot of thinking about the last ten years and wondering if there's any logic which might help us look forward to the next ten years.  Most of my gang are either retired or hope to retire in the next ten years.  Timing may be a critical factor.

I can't get it out of my head that the next ten years are unlikely to be any better than the last ten.  Why would they be?  News spreads instantaneously.  No more waiting for the morning paper.  The markets react negatively to everything from earthquakes and floods to oil spills and acts of terrorism and positively to increases in commodity prices and excellent earnings reports.  At the end of the day, I have come to believe that there are more negative influences than positive ones.

The TSX was driven to an all time high of 14,984 on May 16, 2008 as it rode on the back of the price oil.  I doubt that we'll ever see $147 oil again.  It wasn't worth it then and it won't be worth it in the future.  I believe the difference now is that regulators will never allow the price to be manipulated to this level again.

Imagine where you'd be today if you had cashed in on July 8, 2007.  That five year rally compounds to 201.56%.  Yup, better than a double in five years!  Back to the beginning of the ten year period, $100.00 invested July 8, 2000 would have been $110.23 at the end of the ten years, July 8, 2010.  Yup, ten years... 10%.  Ugly!

Just over one year ago I wrote A Brief History of Volatility.  If I had to guess, I'd guess that we're in for more of the same.  I believe that those who stay in for the next ten years will have a ride like they've never imagined.  There will be periods of tremendous gains.  You know, the times when greed rules and we hang in there believing that it'll keep on rolling.  There will be huge down cycles when fear takes hold.  In these times some will cash out to stop the bleeding, some will hang in hoping upon hope for the next extended rally, which may never come.

What are your plans?  Are you intent on hanging in there and riding it out no matter what?  Do you have any reason to believe that the next ten years will look more like the eighties or nineties?  Do you have an exit strategy to move toward guarantees when (if) the markets reach a predetermined level?  Are you talking to finance guy or does he no longer return your calls?  Do you have a plan at all?

Why we fell in love with funds. Do we still love finance guy today?

Most of the investing by my gang consists of contributions to our RSPs and for a large part that began in the eighties when we finally had some money and woke up to the fact that we weren't going to be able to work forever.

In the ten years, ending July 8, 1990, the TSX rose from 2,116 to 3,596 or 69.94%. We fell in love with finance guy and his wonderful mutual fund products.

In the next ten years, ending July 8, 2000, the TSX shot to 10,380 for a ten year increase of 288.65%. We declared finance guy to be an absolute genius and bragged to each other that our guy was the best!

In the ten years ending yesterday the TSX rose to 11,433 or 10.14%. Yup, 10% for ten whole years!

A GIC invested at 5% for the same period would have returned 62.88%

What do we think of finance guy now?