Canadian Interest

Why 30-year olds are screwed?

April 12, 2011

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In his recent newsletter, financial planner Kurt Rosentreter explains why 30-year old Canadians are, financially speaking, screwed. One reason for the dismal outlook is simply the way things are today what with traditional pensions disappearing and home prices as high as they are. But the main reason, according to Mr. Rosentreter, is the way today’s 30-year olds are playing the hand they are dealt: being totally clueless when it comes to spending, taking on monster debt loads at today’s low, low interest rates and saving little or nothing despite not having a pension.

Today’s 50 year old will make it – they are the last generation to get in before the big mortgages hit and they may still get inheritances from their financially responsible, recession era parents who will die in the next 20 years, providing money for their retirement thankfully. It’s today’s 30 year olds who will be 50 in twenty years that are screwed. With little hope of being debt free in 20 years, with a bad attitude towards savings and debt elimination, with rising costs of children’s education, no pensions coming, frequent career change, wild stock markets, record low interest rates and longer and longer life with rising health care costs, today’s 30 year olds need to win the lotto to have a hope of achieving their financial retirement as culturally expected in Canada. Working to age 70, albeit part time, may become the norm for many in the next twenty years.

I would add one more point to Mr. Rosentreter’s list on why 30-year olds are screwed. The effect of retiring Baby Boomers on public finances is going to be akin to a swarm of locusts moving through a field of crops. Today’s retirees can count on receiving benefits from Old Age Security and Canada Pension Plan. 30-year olds have no such assurance and may find that they are left to fend for themselves.

Liberal Proposals on the Canada Pension Plan

April 6, 2011

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If elected, the Liberals promise to work on a new, voluntary supplement to the Canada Pension Plan that they call the Secure Retirement Option (SRO). Here’s how it would work: Canadians can voluntarily contribute an additional 5 to 10 percent of their paycheck into a retirement fund backed by the CPP. A contribution to the SRO will result in an equal reduction in the RRSP contribution room. It is not entirely clear but the wording in the document seems to suggest that the SRO will be a definited contribution plan and hence not a true pension. Since any changes to the CPP will require the assent of the provinces, the Liberals only promise to “pursue this innovative approach”.

The Secure Retirement Option is a new public option, within the CPP, that would change the outlook for those Canadians who currently do not have a pension plan. It would allow them to avoid the risk, complexity and hidden management fees of RRSPs. A two-person household, with earnings that start at $35,000 per year, and rise to $65,000 per year over time would need to have annual pension of $14,000 on top of the existing Canada Pension Plan and Old Age Security to secure a pension worth 60 percent of their household income at retirement. A voluntary six percent contribution rate from gross pay over the working years to an SRO account would put the household on track to achieve that goal. Participating workers who contribute more, or those whose employers provide additional contributions, would receive an even more generous pension.

The SRO is the same supplementary CPP option that received much media attention in the run up to the pension reform roundtable last year. But it doesn’t appear all that different in substance from the Pooled Registered Pension Plans that the Government announced it is working on last December.

The Platform also says that the party will support “a gradual increase of the defined benefits under the core CPP” but details are conspicuous by their absence. How much of an increase are the Liberals talking about? By how much will CPP contributions by both employers and employees increase? Of course, we can’t expect too much from an election platform. Mentioning benefits while omitting any discussion of costs is par for the course for a political document.

Canadian Learning Passport: Check the fine print

April 5, 2011

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In their election platform unveiled over the weekend, the Liberal Party of Canada is proposing that if elected they will implement a new program called the Canadian Learning Passport. Under the program, the Liberals will pay $1,000 annually over 4 years for every high school student who attends college, university or CEGEP. Kids from low-income families will receive $1,500 per year. The Learning Passport benefit will be directly deposited into a child’s RESP and the amount will be reduced for part-time students.

The Liberal Platform also mentions in passing that the Learning Passport “will simplify the existing scheme of tax credits by ending and rolling in the modest Textbook and Education tax credits” [Emphasis mine]. For the 2010 tax year, the education amount is worth $400 and the textbook amount worth $65 for every month that a full-time student attends University. For a full-time student attending University throughout the year, these tax credits could be worth as much as $837 per year, which is anything but “modest”. Talk about giving with one hand and taking away with the other!

As reader Phil pointed out the other day, it would be far simpler to directly reducing tuition for all students. But then I suppose the Liberals are banking on the fact that people like receiving $1,000 (or rather a net benefit of $1,000 less the value of existing tax credits) directly more than some abstract promise of tuition fee reductions. And they are also likely hoping that Canadians aren’t paying close attention to the fine print.