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October 30, 2017 | The Wait

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.

When I was twentysomething, before there was Google, proper underwear or safe food and LBJ was napalming jungles, nobody my age trusted the government. Politicians started wars, rewarded cronies, were remote and unaccountable. They deserved to be protested against. So we did. I was even in a riot once. Thrilling.

Today the kids seem to loathe Boomers, corps, business owners and wealthy people, especially any with two houses. They applaud higher taxes (on others) and focus on issues like gender equity, sexual harassment and climate change. Apparently there’s nothing worth marching about, anymore. Besides, it’s easier to crowdfund.

In short, we saw government as the problem. Imposing and taking. The moisters see it as the solution. The leveler, equalizing.

This brings us, oddly, to pensions. Much discussion here yesterday about whether or not it’s smart to take your CPP when first offered (age 60) or to wait five or ten years when the stipend is larger. Boomers may be facing that decision daily now, but the moisters are the ones who will truly frame the next retirement crisis. If the kids think they have it tough now, just wait four decades. It’ll be brutal.

One reason young voters fawn over T2 (besides the weed & tats) is a belief the government will actually take care of them when they age and quit work. No surprise. It’s exactly what the feds have led their Millennial base to think. This is a core issue, since the current cost of real estate is decimating young finances. Almost their entire net worth and virtually all monthly cash flow is being concentrated in a single, inflated asset by millions of people just entering careers. TFSA contributions are piteous (93% have not maxed) and RRSPs aren’t faring any better.

Meanwhile corporate pensions continue to shrivel, turned into crappy little group RRSPs run by insurance company dweebs who shovel them into their own mutual funds. If you’re under 40 and not a public servant, chances are your retirement plan is hope.

“We have come to a conclusion that we are going to improve the retirement security of Canadians,” money minister Bill Morneau said last summer when a gaggle of provinces agreed to reform. “We’re going to improve the Canada Pension Plan that will make a real difference in future Canadians’ situations.”

“A real difference.” So what does this mean?

The average CPP payment today is $653, and the max allowable is $1,114, which you receive after contributing for four decades. To get it you pay about 5% of your wages into the pot. Starting in 2019, everyone will have bigger premiums in return for eventually higher benefits – about $4,400 per year extra (that’s the maximum – the average will be much lower). The new premium system will be fully in place by 2025 but benefits will flow much later.

To garner the extra four grand a year, a person will have to work and contribute for 40 years, which means the enhanced payments will start flowing routinely in 2065. Thus the first generation to benefit will be today’s teenagers. Not the Millennials, the GenXers or anyone else now devoting their complete financial resources to a house.

So, obviously, government, politicians or the public pension plan are not the solution. It may sound cruel, but anyone for whom the CPP (plus the taxable OAS pogey) is a major pillar of retirement income, has failed financially. This was never intended to be more than a supplement to a work pension and private savings – an enhancement to keep people out of poverty, not to finance a middle-class lifestyle. The sooner we all understand this, end the house lust and start sticking dough away for the 25 or 30 years after employment, the better.

In this context the early-CPP debate is silly. If you really need to sweat about getting $650 a month now as opposed to $850 five years into the future, you’re in lousy financial shape or already starting to lose your marbles. Having said that, everybody should collect at sixty. Once again, I will tell you why…

  • Any time the government gives you money, take it. Handing over pensions five years before most people think of retiring, when they are still employed, is idiocy. This could, and probably will, be changed on a whim in the future.
  • But what about the 30% more if you wait five years? If you absolutely know you’ll live to 95, think about it. But for most folks it makes more sense to collect the largesse as soon as possible, and invest it. Sixty monthly payments of $600 from age 60 to 65, for example, equals $36,000. That amount invested for a decent return becomes almost $60,000 in ten years, tax-free if inside your TFSA – turning out enough income to increase your OAS by 50%. That sure beats waiting to get an extra $150 a month.
  • Delaying until 65 or 70 to get more CPP income might also edge you into a higher tax bracket if you’re drawing from RRSPs. That would pretty much wipe out any benefit. Remember that during the year you turn 71 all RRSPs must be converted into RRIFs, meaning you’re forced to start taking the capital as taxable income. Why not bank your pension cheque for 11 years before that happens? Put the loot into a TFSA and when it comes out, no impact on your tax bracket.
  • You can split your CPP payments with your spouse, reducing the tax bite.
  • Do you think you’ll have more fun with your  monthly cheque when you’re 76 as opposed to 60? Seriously?
  • You’ve contributed to this plan your entire working life, thus it makes sense to suck out cash the moment you have a chance. That way you’ll drain more from the plan than you ever contributed, which is excellent revenge for being, like, really old.

Some things don’t change, moisters. Never trust the man.

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October 30th, 2017

Posted In: The Greater Fool

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