Not your grandparent’s retirement

Here are projected population pyramids for Canada (2016 – 2036). (Source: Populationpyramid.net ). The triangles have been added by me to illustrate those of retirement age among the population projections.

Canada2016edit

Canada2021

Canada2026edit

Canada2031edit

Canada2036edit

Notwithstanding the advances in medical science, we understand that people do not live forever –yet they do live longer so while the population itself is increasing, the proportion of the population that is technically retired (i.e. past the age of 65) is increasing as well; this proportion of retirees can be seen in a stylized fashion by the ever expanding triangles above.

Then there was this article in this morning’s Globe and Mail (click on link to go to the full article): Still working in retirement: Three people tell their stories

Working in retirement is the new reality for many. Some struggle financially and can’t afford to retire, while others simply don’t want to stop working. Often it’s a combination of factors that determine whether you can choose your retirement date.

We asked three people to share their experiences.

Linda Hawkins, 67, registered nurse, Toronto

Ms. Hawkins is a registered nurse in the cardiac catheterization lab at Toronto Western Hospital. She loves her job but she would have liked to retire last year and travel. The sudden loss of her partner of 10 years altered her situation financially and emotionally, however.

“When you have two incomes and you move to one, it’s difficult,” says Ms. Hawkins. “Two people can live in a house for the same cost as one person. The only difference is the cost of food, which isn’t a lot for people at our age.”

She says she’s still working because, first of all, she needs a reason to get out of bed in the morning. Also, despite making a statutory declaration of the common-law union with her partner, she hasn’t been able to provide sufficient documentation, such as a shared mortgage or joint bank account, to claim survivor benefits for his pensions. Although they shared expenses, each kept their own bank account and Ms. Hawkins had already paid for the house in her name.

Even though she has worked as a nurse for 45 years, Ms. Hawkins says she doesn’t have enough pension income to retire, even factoring in Canada Pension Plan (CPP) and Old Age Security (OAS) benefits. When her boys were growing up, she worked part-time and, back then, part-time workers weren’t eligible to contribute to a pension plan, although that’s changed now.

Another concern is that she might not be able to care for herself someday and would need to go into a nursing or seniors’ home. “That changes everything,” says Ms. Hawkins. It costs at least $3,500 to $4,000 a month just for a single person at a no-frills facility in Toronto. I don’t want to be a burden on my children.

(Italics and underlined text above added by me)

Comments

The nurse in the case above still has recourse to claim survivor benefits; while each case is unique –and perhaps the article doesn’t delve deeply into the minutiae of her particular case– there appears to be enough of reason to argue against the pension administrators original decision and fight further for funds that would make a material difference in this person’s standard of living.

It is also interesting that in using the words “she needs a reason to get out of bed in the morning” the nurse shows that the idea of retirement as a concept has changed and will continue to change — by necessity for most and by choice for some. From the point of view of dependency ratio, Statistics Canada shows that there will be fewer working age people compared to retirees going forward. (Source: Dependency ratio by Statistics Canada)

dependencyratio

I suspect that a future Federal Government will make the unpopular decision to raise Old Age Security (OAS) eligibility further (it will go from 65 to 67 in 2023). Lest we forget, retirement is a relatively new concept in modern societies and Canada is no different. Our concept of retirement came to fruition in the 1930s when the Prime Minister Mackenzie King introduced the Old Age Pensions Act in Canada in 1927. The starting age for benefit payments at that time was 70 and the pensionable age for government benefits remained 70 until 1953.

In addition to the challenges of  the dependency ratio, this past generation has seen a crumbling away of the social contract between employers and employees. The move to shift market risk onto employees and at the same time cut the cost of employee benefits has seen the shift of retirement pension plans from a defined benefit to a defined contribution template. People cannot invest well; most cannot fathom what market risk means and almost all who do not have the comfort of a gold plated pension, wholly misunderstand the need to match future cash flows with future liabilities in one’s so called golden years. It isn’t just a game of growing one’s assets. Everyone’s balance sheets and income statements are different with a unique set of constraints.
The paucity of long-term guaranteed income will drive many retirees back to the
workplace. It remains to be seen what effect technology will have on making current jobs redundant. For the moment, industries such as health care are facing the prospect of losing many of their workers to retirement in the coming decade. Will they come back and if they want to come back will there be a job waiting for them?

Advertisements

George Magnus on Boom and Bust

Fast forward to 4:00

George Magnus, former chief economist at UBS, in conversation with RT’s Erin Ade on the emerging markets sell off, the concern with China, the demographic challenges facing advanced economies as well as Russia and China, and an assessment of Ben Bernanke’s tenure as FED chairman.

BOC’s benchmark policy rate to continue flatlining

The Bank of Canada is set to release its interest rate announcement and Monetary Policy Report tomorrow morning at 10 AM (ET). There is an expectation of no policy rate change and the possibility of an easing bias by market participants. The former appears a good bet given the flow of economic data recently, from employment falling by 46,000 in December to  inflation remaining below the BOC’s 2% target yet remaining just within the central bank’s (1% to 3%) operating band.

 The chart below illustrates three metrics, 2 observable the other an estimate, that BOC watchers pay close attention to: core inflation (in dark blue), the BOC target (i.e. policy) rate (in teal), and the output gap (in brown measured against the right Y-axis). It is the latter that should be reason enough to believe that the BOC policy rate will continue to flatline for the short term (2 years) as the slack in Canada’s economy continues to widen despite a low nominal central bank policy rate, credit extension by the banking sector, and federal and provincial governments that are running budget deficits.  

core.outputgap2

My personal view is that there is no reason for the BOC policy rate to move up before the 2015 Federal elections. The Conservative government of Stephen Harper will be running, according to its Executive Director Dimitri Soudas,  on a platform of supposedly ‘strong, stable leadership’ (below).dimitri.soudas
Moreover, there is the determined effort on the part of the current Conservative Federal government to ‘balance the books’ and return Canada to the promised land of budget surpluses. For a graphic on how federal governments from the time of Lester B. Pearson’s Liberals to Stephen Harper’s Conservatives have fared in this endeavour, see this graphic from the CBC.

The idea of conflating the budget of a federal government with that of a household is attractive but it doesn’t work for Canada; it can for other nations, such as those under the monetary straitjacket of European Monetary Union, but it doesn’t make sense in the Canadian context. Every nation has a particular political economy to deal with that is the legacy of history and goepolitical relations. Moreover, the nature of a nation’s currency –is it sovereign or is it shared or pegged to global reserve currency– is worth considering as is the composition of that nation’s debt ownership.

Currently, the Canadian context is one where the household sector has taken on an increasing amount of debt –both residential mortgage and consumer– that will be serviced for the coming decades and at the same time the federal government has gone into deficit spending mode since the 2008 financial crisis.

Debt to income ratio in Canada

Debt to income ratio in Canada

household.debt.percent.GDP 

The Bank of Canada understands this and has made the explicit assumption in previous Monetary Policy Reports that the business sector would drive growth in the economy through capital investment. That hasn’t happened.

Arguably, businesses require signals from the consumer in order to have the confidence to enact capex. Say’s Law need not apply for most companies: supply does not create its own demand. The decision in favour of capex is demand driven. Absent that effective demand, businesses can propel growth via a combination of increasing efficieny or financial engineering. The former prescription has meant offshoring, outsourcing, and hiring more workers as temporary and, increasingly, the autommation of work that requires fewer and more specialized workers (if any as the graphic below concerning the decoupling of productiviy and employment illustrates).

destroying_jobs__chart1x910_0

The latter prescription has meant, at best, bringing leverage onto a company’s balance sheet as a catalyst to translate modest top line sales growth into robust bottom line profitability and, at worst, aggressive revenue recognition to make a balance sheet and income statement look better than it really is.

Fundamentally, the deficits of one sector emerge as the surpluses of another. If we consider the debt burden of most Canadian households in terms of the stock of liabilities divided by the flow of income, we recognize that the moribund income growth entails curtailing future discretionary consumption. Canadians have brought forth a lot of future consumption by taking on mortgage and consumer debt. This requires debt servicing. Furthermore, the demographic factors facing Canadian society are a challenge that this country’s policy makers are inadequately prepared for. As the dependency ratio increases, the growth trajectory decreases: older Canadians, many of whom have saved inadequately for retirement, won’t consume as they did during their working years.

The Bank of Canada will continue to cling to the hope that the sagging loonie will spur greater demand for Canadian exports and thus make their heretofore forecasts appear more credible. This is more faith and hope then scietific reasoning as the flipside to this is that it will make capital expenditures more expensive as that is invoiced in USD. The Canadian dollar remains a petrocurrency:

CAD remains a petrocurrency

CAD remains a petrocurrency

Head winds to growth:

  • Household deleveraging
  • Government deficit reduction
  • Aging demographics

Tail winds to growth

  • A depreciating currency
  • Credit expansion
  • Easy monetary policy

Market rates will continue to ebb and flow on the steady trickle of economic and financial data. Mortgage rates, in turn, will go up and down as a result based on the risk appetitite of the major banks. What won’t change is the policy rate: the Bank of Canada will be circumspect in articulating an easing bias as it won’t want to further inflame a housing market that is becoming expensive for most Canadians yet, in the face of the head winds facing the economy it is unlikely how the slack out of the economy will disappear over the coming years.

(Full disclosure: the author’s views are his own and he added allocation to XLB iShares in anticipation that 2014 would be a bounceback year for Canadian Long Bonds)