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Retiring into the unknown

With our nest eggs in ruins, the feds look at pensions for everyone


 

Retiring into the unknownMost of the carnage wrought by the economic crisis that’s ripped through the country over the past year is obvious: the lost jobs, the bankrupt companies, the shuttered manufacturing plants. But a bigger and far less visible effect of the financial meltdown has been the way it decimated the retirement plans of millions of Canadians in just a few cruel months.

Four years ago, Chris Morales and his wife, Sally, moved to Wasaga Beach, a few hours north of Toronto—a move he envisioned as the first step toward semi-retirement. But lately, the 51-year-old has had to downsize in ways he’d never expected. It started when he lost his advertising industry job last August. Morales cut out the travel he and his wife once enjoyed, as well as the practice of leasing new cars every few years. He has since started his own consulting company, but he has had to dip into his rainy-day fund to do it. Now savings are a big concern, he says. All of the money he diligently put away in RRSPs over the years has taken a hammering. “As you look forward you go, wow, do I keep contributing? What’s the value of it going to be when you really do need it 15 years from now?” Morales once dreamed of retiring by age 56. “That’s not going to happen,” he says. He now expects to be hard at work for at least another decade.

Nobody escaped the steep market downturn of the past year. But for those nearing retirement, who have done most of the saving they’re likely to do in their lifetime, it was disastrous. Jobs will one day return and plants will reopen, but for many the past several months have taken a toll on their nest eggs from which they may never recover. In the process, the crisis has uncovered a deep and growing problem for the middle class. At one time, most working Canadians would have been okay despite the market collapse, because they could count on their employers to fund their golden years with reliable pensions. Now, according to a recent study by the C.D. Howe Institute, less than 20 per cent of those working in the private sector have a guaranteed pension plan, and that figure is declining. That leaves 80 per cent of Canadians in the private sector to fend for themselves, and they’re not doing it well. In the last half of last year, the net worth of Canadian households dropped by eight per cent, or $14,000, on average, according to a recent Statistics Canada report, and it’s still going down. Last year also proved one of the worst in over 25 years for equity funds—a popular savings vehicle for those looking to grow retirement savings—with losses exceeding 20 per cent, according to Morningstar Canada. And such funds have continued to lose money this year, falling between five and 10 per cent in both January and February.

Even those with pensions are starting to get nervous as they read about huge and growing deficits. One of the largest pension plans in the country, the Caisse de dépôt et placement du Québec, announced last month that the value of its assets had dropped by $40 billion, or 25 per cent. OMERS, a large pension fund for Ontario municipal employees, reported a loss of $8 billion last year. Air Canada’s pension is facing a $3.2-billion shortfall and some retirees are wondering what will happen if the company is once again forced into bankruptcy. In fact, most pension plans are experiencing some degree of solvency deficiency, says Dan Braniff, who heads the advocacy group the Common Front for Retirement Security. That has prompted many large companies to start pushing to reduce the amounts they’re required to pay into the plans—a troubling move for retirees, who risk seeing their payouts drop significantly if a company goes bankrupt with its plan in deficit.

Still, those with pensions are definitely the lucky ones. As long as their employers don’t go bankrupt, their retirements will likely be comfortable. It’s people like Roy Furlani Jr., who worked for nearly 30 years as a nickel miner and was rewarded with no pension at all, who will be in real trouble. Until last year, when the 47-year-old was laid off from his job at Xstrata’s Sudbury mine, he made $24 an hour working the dangerous underground job. But he lived day-to-day and didn’t have the money to save for the future. Any money he did have put aside evaporated when he was out of work after damaging his back on the job several years ago. Had Furlani been able to work just a few more years for the company (he’d moved from being a contractor to a full-time employee just seven years ago), he would have qualified for the company pension. But now, with no house, no savings and no job prospects, his future is suddenly looking bleak. “It’s not only heartbreaking,” he says, “but demoralizing.”

Without a pension, or with a weaker “defined contribution” plan that doesn’t guarantee annual payout amounts, people such as Furlani are generally left to their own devices to plan for retirement. Even in boom times—when people should have had more money to save—this proved to be a difficult task. “Credit and household debt have been increasing very dramatically in the last decade,” says Tom Hamza, president of the Investor Education Fund, adding that savings levels actually briefly went negative. One-quarter of Canadians have neither an RRSP nor a pension plan, according to Statistics Canada. In the current economic climate, it’s suddenly a problem that’s not easily ignored. “People’s confidence in the boundless economic good news that was coming forward has been shaken fundamentally,” says Hamza.

That crisis of confidence has sparked a more urgent search for solutions. In the federal budget earlier this year, the government said it would set up a task force this spring to recommend ways to improve financial literacy. Hamza, who’s anxiously waiting to see what will come of the task force, argues that financial education is something that needs to begin as early as high school. Managing money, after all, is a complex job, and hiring an independent financial adviser is a luxury few middle-class families can afford. At the end of their day, many people simply don’t have the time or inclination to sort through the competing sales pitches from companies offering advice and services.

That’s why many argue that the real fix lies not in education, but in reforming the pension system. Today’s system is one of two solitudes, explains Malcolm Hamilton, a partner with human resources consulting firm Mercer. There is a substantial plan for public servants, and then there is a spotty system in which some companies offer plans of differing qualities to their employees. With some rare exceptions, the private system has smaller benefits, substantially higher risks and higher operating costs. This, says Hamilton, “is something that needs to be addressed.”

Increasingly, retiree groups such as Braniff’s have been pushing for a more inclusive system that would effectively expand the Canada Pension Plan, offering all Canadians the kind of guaranteed benefits that public workers enjoy. By pooling resources and putting them in the hands of CPP investment experts, there would be less susceptibility to market volatility and more protection for workers whose companies go bankrupt. Bernard Dussault, the former chief actuary of the CPP, is another big proponent of such a system. “When Canadian workers reach 65, 35 per cent find themselves in poverty,” he says. A universal system would substantially boost the amount retirees are paid, to as much as 70 per cent of their career earnings. Dussault argues that such a plan would only work if it were mandatory. “Everyone would like to have savings,” he says, “but not everyone likes to save.”

Mercer’s Hamilton argues a gentler approach may be in order. He’s not opposed to a universal system, but suggests that it should offer members the ability to opt out of the plan. No matter how the system is fixed, whether it’s through large provincial plans or a national plan, the important element, he says, is to make plans more widely available to employers of all sizes. More likely than not, employers, especially small businesses who now find the costs of offering plans prohibitive, would jump at the chance to offer these benefits. “If people yawn and ignore them, that’s the time to step back and say, ‘do we need to somehow compel people?’ ”

The recent financial meltdown finally seems to be spurring governments into action. B.C. Premier Gordon Campbell is proposing to launch a new province-wide plan next year, which employers, employees and the self-employed could voluntarily join. There is some speculation that Alberta—which along with B.C. has studied pension reform—and perhaps even Saskatchewan could follow suit. The plan will likely be a group retirement savings vehicle without a guaranteed payout, but it would give residents easy access to professional investment managers. Meanwhile, the federal government has been holding hearings into ways to strengthen the pension system on a national level. Dussault, who represents the National Association of Federal Retirees, appeared last week to push for his expanded version of CPP, and he says the government seems to be receptive.

Such changes could be a blessing to Canadians like Morales, who earned money for decades in an industry that didn’t offer pensions, and for those like Furlani, whose pension and retirement security vanished along with his job. “We all got screwed out of our benefits,” he says. “We ended up with nothing more than the right to say that we worked for Xstrata.”


 
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Retiring into the unknown

  1. In my humble opinion putting money in the stock market for retirement is like putting it in a ponzi scheme. Unless dividend yields are high enough to give an adequate income in retirement then people will have to liquidate their holdings for cash. The only way people can cash out is for new money to come in just like a ponzi scheme. I think this is too disaster prone. If you have to start cashing out in a serious years long slump like the one we’re having now you could run through your holdings way too quickly. I think corporate bonds are too risky for the average family. I think the only way to do it is to save money the old fashioned way by putting aside part of your paycheque in the bank in GICs inside and outside RRSPs and stay within CDIC limits. It may be really boring but your money should be OK. I think you will have a lower standard of living when you’re young but a higher one when you’re old. And don’t rely on your house to provide the funds you need. As we’ve seen in the past and as we’re seeing now real estate can be a risky proposition. You can live poor when you’re young but you can’t when you’re old.

  2. Savings go into inflation protected bonds. Money you can afford to lose goes into the stock market. Beyond that, vote for politicians who will significantly increase CPP. Then retire to someplace where the cost of living is a lot cheaper then here.

  3. We are too well fed in this country. Time to realize that , compared to a lot of the world, a spam sandwich a day is luxury. Live within your means. If it means a simple standard of living be happy with it.

  4. People are forgetting the other downside to people not retiring. They’re not making any room at the top so newly minted graduates like me can squeeze in at the bottom.

  5. If you are within 10 years of retirement you should only have about 10% in the stock market. That should be common sense. You have to preserve captial when in or near retirement. Retirement is a lifestyle that is usually below a working standard of living, because you don’t need as much. Also, no one should retire in their 50s (unless you have a public pension). Work for as long as you can, but if you don’t “need” the money do something you enjoy. No need to put up with long commutes, crappy bosses, backstabbing coworkers. Retire and then find a job you like that pays whatever. Work offers benefits that retirement cannot.

  6. The reason retirement savings have collapsed is that the marketplace has been excessively deregulated. Banks issue useless CDOs for their risky loans which are AAA rated by the ratings agencies for example. Companies and trusts do not reveal their debt or toxic assets. Failed CEOs receive tax payer funded bonuses. The list goes on. The latest G20 leaves these abuses untouched and so look for a repetition!

  7. I have a novel idea for all the RRSP investors out there. When you invest your money keep an eye on it, daily if you can. So many people just throw it in and blindly trust the mutual fund, or whatever instrument you chose, and just “let it ride”. If you would have paid a wee little bit of attention you would have realized it was time to go to cash a year ago, give or take. Investing is like driving a car, you don’t just jump in it and automatically how to do it.

  8. MY FATHER WAS A RICH FARMER….HE RETIRED AT AGE 75 AFTER WORKING ALL HIS LIFE…SOLD THE FARM FOR $65,000………..THEN LIVED TILL HE WAS 95…MY MOTHER 20 YEAR YOUNGER ALSO SPENT HER ENTIRE MARRIAGE WORKING THE FARM….THEN INTO RETIREMENT….SHE IS STILL ALIVE AT AGE 87…NEEDLESS TO SAY THE FARM MONEY IS LONG GONE…THANKS TO MIN COME AND HAVING A DAUGHTER SHE HAS BEEN OK…..BUT CPP HADNT CUT IN FOR THEM…BUT EVEN WITH CPP…I HAVE A RELATIVE THAT WORKED HER WHOLE LIFE IN A DOCTORS OFFICE….NOT A BAD JOB …BUT WITH RAISING KIDS….NO MONEY FOR RRSP AND NO COMPANY PENSION…..IF SHE HAD DONE THE SAME JOB DOING ADMITTING IN THE HOSPITAL…SHE WOULD HAVE AN INDEXED PENSION…A PRETTY HEALTHY ONE AT THAT…NO WORRIES ABOUT THE COMPANY GOING BROKE AS THE AUTO WORKERS AND OTHERS WITH QUOTE GOLD PLATED PENSIONS………………WHY SHOULD THE ONLY WAY TO GET A CUSHY RETIREMENT…………….BE A GOVERNMENT JOB…….

    • WHY ARE WE YELLING

    • Go back on your meds friend.

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