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June 22, 2016 | The Unfunded

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

Yesterday this blog dared to dis the CPP, along with anyone who thinks retiring on $16,500 a year is cool. It isn’t. Let’s hope you never find out. The finance minister thinks a weensy enhancement to benefits – which will result in a big bill to small businesses and higher premiums for workers – is a miracle cure for the disease of financial dorkiness. Sadly, no. The public pension changes will only encourage more to save nothing.

But if you really crave retirement security, there’s always Canada Post. Or, used to be. What a great example this now provides of why we’re heading into one mother of a pension crisis. On one hand a majority of taxpayers haven’t saved enough, lack corporate pension plans and have concentrated their wealth in the same asset, which is subject to market, rate and illiquidity risk. On the other hand, others have milked the system to such an extent everyone else will be hit with the spray.

Look no further than Canada Post. The indexed-to-inflation, defined-benefit pension plan there guarantees workers up to 70% of their former salaries, starting as early as 55. Yikes. But, of course, Canada Post is in trouble from something called ‘email’. Revenues and volumes have been declining exponentially, costs have been rising, postage has increased, and the number of employees is falling annually – now just over 53,000, compared with 59,000 five years ago.

But, whoa. Former employees on payroll have a way of turning into retired dudes on an inflation-indexed, defined-benefit pension. So in the same 60-month period, the number of retirees has mushroomed, from 23,635 to 33,448 – a 41.5% increase. This is not happy news, since the pension plan already has an unfunded liability of $6.2 billion which simply means the $21.9 billion sitting in the plan ain’t enough to pay the pensions of the people expecting to get one.

Here’s why. The dark line on the chart below is people who work for the corp and contribute to the pension plan. The lighter line charts the people drawing from it. Won’t be too long now before they cross!


This is a company dying before your eyes because (a) workers who enjoy considerable job protection are getting older every day and retiring in droves and (b) technology is destroying the letter mail business it was founded on, and will continue to do so, plus (c) it’s being bled to death by payments to former workers, no longer adding to the bottom line, and sucking off close to $1 billion a year. On the chart below the green bars represent contributions made by workers and the company. The red bars chart annual payouts to retirees, their survivors and beneficiaries.

Last year the plan shelled out $880 million. It took in $513 million. Try doing that with your chequing account.


Well, there ya go. Pooched. And do you think the government will let the Canada Post Pension Plan go under? If not, then you know who’s going to pay for it. In fact, it’s estimated currently the unfunded shortfall for all public defined-benefit pension plans across the country is more than $300 billion, or about $25,000 per family. Most are in similar shape to that of Canada Post, and represent a taxpayer liability equalling half the size of the existing federal debt.

This is why defined-benefit pension plans rarely work, and especially in a country with a giant cohort of expensive old farts like the Boomers. It’s also common in my business to interview government employees (like teachers) and find out they have zero savings. “Why should I save,” they ask? “I have a defined-benefit pension plan, you know.”

If Millennials, over-educated, indebted and under-employed as they are, want to rebel over something, this would be a good choice. Twenty years from now (or sooner) many of these plans will face collapse as the number of retirees exceeds workies. Governments will be tasked with saving them (and taking it out of the hides of taxpayers who will never have such retirement luxury), or not (and facing a political crap storm).

By the way, Canada Post workers are about to go on strike. The company is about to lock them out. The big issue? Pensions. The employer wants to phase out the DB plan and bring in a glorified RRSP. The employees say, up yours. So the conflict’s already begun.

Your best defence against what’s coming in the decades ahead is to build our own retirement fund, and count on nothing else. Or marry really well.

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June 22nd, 2016

Posted In: The Greater Fool

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