Seniors, Retirees and Their Magically Diminishing Incomes:
Brian
Pybus
It’s
suddenly become a very strange world. For seniors, it’s a different
planet. Share values have plunged from triple to single digit while
corporate executives receive millions in ‘bonuses.’ The
icons of capitalist power – banks and auto manufacturers – demand
and get billions of dollars in government bailouts, while mom and pop
small businesses drown. The US government, rather than taking steps
to correct its failure as the ultimate regulatory authority – instead
tries to restore world-wide financial equilibrium by printing hundreds
of billions of dollars. The inflationary spiral almost sure to follow
threatens to finish wiping out whatever savings remain to those savaged
by market failure and layoffs.
It’s bad enough if you’re
a (non)working stiff. There’s years left, you will probably get
another job, or more likely two: you’ll need both in order to
get by. At least you can start over, sort of.
But what if you’re
retired? These are supposed to be your golden years. You’re no
longer a producer, and society says that’s ok. Kick back and
enjoy the fruits of your hard-earned retirement. You’ve earned
it.
But wait. What’s that you say? Your retirement is not turning
out the way you planned? Oh. And why is that?
Your pension plan, heavily invested in equities, has gone south.
All the way to Antarctica. The interest you anticipated on earning
from a lifetime of saving is way, way down, and the feds keep stomping
on the prime rate to get it even lower. You are now eating into your
capital – the kids’ inheritance – but that’s
ok because the laid-off repossessed 40-somethings have just moved
back in with you. With their kids!
Oh.
Well maybe, just maybe, you’ve
stumbled onto the one big flaw in all this government angst over
failed industries, collapsed markets and a zillion layoffs. In their
haste to be seen doing something, anything, they’ve disregarded
a critically important component to any healthy economy: thrift.
Our leaders seem neither to understand, comprehend nor be bothered
to learn about the importance of thrift. And really, why should they?
They’re politicians after all. Thrift? What kind of silly,
arcane and possibly subversive thing is that? Thrift’s not
important. Why, there are patronage appointments to be made, and
votes to buy, and bridges to be built and named, and expense accounts
to be padded, and overseas trips to be taken - with the unelected
wife, of course. Thrift? It has no place here. Besides, at the end
of it all there’s a fully funded and fully indexed government
pension. For the politician that is.
This is exactly the mindset that dictates that the only way to fiscal
recovery is to have society return to our pre-crash borrow-and-spend
habits. And to help prime that pump, governments are prepared to
literally bet the bank: flood the system with hundreds of billions
of dollars in newly printed cash, subsidize and even assume partial
ownership of unproductive and dishonest enterprises, suppress interest
rates while continuing to encourage what can only be described as
massive speculation, and run incomprehensibly enormous deficits.
Nowhere can be heard a voice of prudent reason saying, ‘This
is the wrong way of fixing things.’ No-one, it seems, is speaking
on behalf of savers. The prevailing mantra is we can spend our way
back to financial stability and prosperity. And so anything goes.
With all due respect, this is idiocy.
Within living memory of many, having a job was a means to survive
and provide. That was it. There was nothing left over to save. That
was the meaning of the Great Depression. Along came WWII and in its
wake a new kind of economy, with lots of employment, stuff available
to buy and the ability to save. You saved to buy – consumer
credit was almost unheard of then – and for the future. And
so families and society became prosperous, buying with cash what
one could afford and simultaneously socking away bucks for tomorrow.
The biggest savings vehicle then? Why, good old Canada Savings Bonds.
A saver was treated with serious respect back then. The Canadian
government, well into the1970s, went so far as to provide a reward
to savers in the form of a tax benefit. It was simple enough: your
first $1,000 of interest income was tax free. Not much now, you may
say, but consider this: in 1970 the average annual Canadian income
was $3,200 and by 1975 it was only $5,900. So that $1,000 represented
not only a substantial portion of a taxpayer’s income but even
more importantly a huge pool of savings.
That perk eventually got phased out. In its place came things
like dividend tax credits, tax breaks for capital gains, and other
schemes, all of which were arguably an encouragement to speculate.
This sea change was in hindsight no big surprise as first the federal
and then provincial governments embraced deficit financing in a
very big way. In effect the government was saying: ‘why wait until
tomorrow when you can have it today? Just borrow and let the next
generation of taxpayers deal with it.’ Is it any surprise that
society as a whole began thinking ‘if it’s good enough
for the government it must be good enough for me,’ and started
to treat personal finances in much the same way? Lots of other inducements
to spend began popping up. Late-night shopping, Sunday shopping (yes,
there once was a time when the mall was closed for a whole day!),
24 hour shopping, progressively easier credit availability and terms,
pre-approved credit (everyone, it seemed, carried $25,000 in their
back pocket, because everyone managed to somehow qualify for five
credit cards). Rampant speculation was actively encouraged (borrow
and buy!; mortgage your house and invest!) by those whom you used
to look to for sage and measured advice. The combination of the disincentive
to save, the almost universal shift to speculation, government and
personal deficit financing, and fundamental avarice all brought about
the mess we’re in today. In one generation we’d succeeded
in throwing out the most valuable financial lesson our parents and
grandparents had taught us.
Registered Retirement Plans were introduced a half-century ago to
help those with no pension plan to save towards retirement. It was
viewed as a welcome additional incentive to save. Unfortunately,
it has morphed into the savings vehicle of choice: today,
most Canadians have virtually no savings outside of their RSPs. Even
then the money is only partly yours: an RSP is, after all, a tax
deferral device, as any retiree on an increasingly diminishing income
can ruefully attest.
The federal government has recently come up with a Tax Free Savings
Account with a $5,000/annum contribution limit. The idea is that
you keep tax-free the earnings from your investment in this vehicle.
Good idea, but half-hearted at best, and of no value to seniors.
Interest rates for five year GICs are at 1.9% which means a dismal
$95 in tax-free earnings. And seniors are not as likely to be saving.
In fact, many seniors have accumulated substantial savings, $500,000
or more not being uncommon. Their working years were characterized
by doing everything right, practicing frugality and caution, and
saving. But instead of paying them $25,000 or $30,000 a year in interest,
the return is now down to maybe $10,000. And taxable. That’s
a big negative for someone who no longer works. And while seniors
have – with the possible exception of a mortgage and car loan – all
the expenses the rest of us face, they probably have more if such
factors as health are considered. In addition, seniors are more and
more being beleaguered by their kids who are in financial difficulty
themselves. We now have the ridiculous spectacle of someone with
half a million – still a whack of money – struggling.
It ain’t pretty.
What should be done? Well, government needs to move away from wholesale
subsidization of a rampant consumer economy. It’s not healthy,
it’s finite and it’s a big mistake: at some point we’ll
find ourselves back at this point, albeit even poorer. Secondly,
government needs to recognize that the opportunity to save is an
integral part of any healthy economy. Most important of all, government
should encourage a return to the ‘good old days’ of
individual thrift by introducing some seriously substantial tax relief
for savers.
All that, and maybe close down the malls on Sundays, too.
May, 2009
- Brian Pybus, CDA
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