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Monday, April 24, 2017

Poor Planning Gone Mad

Posted by Tim Stobbs on September 8, 2010

At some point in their lives I think everyone has meet someone who was bad at planning.  You know the type, they don’t save much if anything for their retirement because they will get to the ‘later’, but later never seems to come until they have managed to get themselves into a tight spot.  Now normally this isn’t a big problem since they only mess up their own lives with perhaps some limited spill over to immediate family.  Yet what happens when governments are the ones who are poor at planning?

That essentially is what we are facing in the next decade as the boomer retire and both federal and provincial governments start dealing with some fundamentally unpleasant and unpopular decisions (which is obviously why they have manage to avoid making those choices for so long).  In even the US the situation is somewhat similar with a few variations, but in general we are facing some fairly bleak issues such as:

  1. Lower Income Tax Revenues – It doesn’t take much research on Google to realize that the ratio of worker to retirees is about to take a nose dive from approximately a 5:1 ratio down to 2.5:1 in the next couple of decades.  With that in mind you can expect a fairly significant drop in income tax revenue for governments as those high paying boomer drop down to retirement incomes.
  2. Higher Health Care Costs –  Along with all those retirees will come higher health care costs in the next few decades.  For example in my home province of Saskatchewan, health care is 40% of the provincial budget right now.  Add in the boomers and it isn’t hard to see we have a huge cost issue.
  3. Unsustainable Retirement Benefits – Both the US and Canada have this issue in one program each.  In the US its Social Security and in Canada it is Old Age Security.  Given the other two cost pressures these programs can not continue as they are, but no one has been willing to bring up that issue yet.  I wonder if we will have massive protests like France is having right now.

So what can be done to fix it?  Well in general  you should prepare for a combination of less service or benefits and more taxes.  How exactly that axe will fall will depend heavily on the particular political slant of the government.  How rapid these changes will occur will depend if our governments are willing to deal with the issue now or wait until they are in a similar situation to Greece and have to make massive changes rather quickly.

But what about you? From a personal point of view what can you do about this? Well that’s a little hard to say, but some general ideas include:

  • Avoid Debt –  With governments in a less than ideal spot, bond markets are going to demand a higher rate of return for government debt which will affect you if you have a fixed rate mortgage.  The solution: get rid of the mortgage.
  • Avoid Government Dependence – Make sure your retirement plan includes a drop in your government retirement benefits for the programs mentioned above.  In general a 50% drop isn’t out the range of possibility.
  • Get Healthy and Stay There – Prevention goes a long way with your health and since that is going to likely cost you more as you get older you should try to take care of it now.  Get in the habit of eating better and getting some exercise.  It will make your retirement more enjoyable and possibility save you a lot of money.

What do you think of the government’s poor planning?  Who should pay for the screw up that is now facing us?

Comments

9 Responses to “Poor Planning Gone Mad”
  1. Robert says:

    I don’t believe the future is so certain. I think planning is important, but I’ve also found that life never goes according to plan, sometimes better, sometimes worse. In this case, it seems obvious that there will be a greater demand on government pensions and health benefits, with lower tax revenues.

    However, emerging economies don’t have the demographic bubble or low birth rate that we have. It is conceivable that immigration, as one example, could solve the problem of a dwindling tax base (and productive output) for us, if we resist the urge to close our borders. That would also address OAS funding.

    Health care costs are already out of control (40% of the budget? Really?), so it will require more creative solutions. I expect more focus on routine and urgent care and less coverage for elective and extraordinary care. At the same time, I hope for more focus on prevention. Only time will tell, but I agree that we should make as much effort as possible to be self-reliant and not count on government support.

  2. Canadian Dream says:

    @ Robert,

    I agree the future isn’t certain and regardless of your planning life always throws a few curve balls. I was merely indicating the issues facing us.

    You are correct immigration might assist the issue of modifying worker to retiree ratio, but given there has been no work on significantly altering our numbers to date. I was not holding my breath for that solution.

    I agree with you if there was more work on prevention we could reduce our health costs, but the system really isn’t setup for that yet. I hope that changes.

    Yep 40% or $4.2B out of $10.2B total in SK for health costs. Disgusting no?

    Tim

  3. HGM says:

    Regarding the perceived lack of government preparedness, which in turn leads an individual to be be more vigilant and compensate for a depleted (posssibly non exist?) OAS pension, I would say that the government has done its best to be prepared. With all the programs in place, the government has done two things: 1. Get the message out that they can’t look after everyone and 2. Been reasonably successful in getting people to take action and start saving. For example, I would say one of the reasons that this blog exists, albeit subconciously and indirectly, is due to the government indicating that it will not have enough money in the future. This has been a constant message for at least 15 years and has caused me to fear for the future. Fear, what a great marketing tool. I have a feeling that the residents of Greece, Spain, and other countries that are in a difficult economic situation did not have governments 15 years ago that took tough measures. Cretien did his part in 93 and for the next 10 years. He cut the military, reduced the deficit to zero and then had many years of surpluses (I’m not a Liberal partisan, just reflecting on the facts). Now, if there was only a fear that could actually create government productivity and reduce the tax load. I’m hoping health care professions will still be around when I’m needing those final drips of morphine….or maybe, at that time, I’ll just start smoking and enjoy all those evils I missed out on.

  4. Jack Burns says:

    The immigration approach has been used forever and seems to have failed. If we continue to pay immigrants large government benefits basically upon arrival it defeats the purpose. You want to come to Canada–you must be in a certain group or of a certain calibre. That group does not include impoverished or terminally ill. I know this may sound cruel but it is the truth. We need productive people–not dependent people. Also–we need JOBS!!! It’s great to have immigrants to raise the tax base but what are they going to do–flip burgers? We’ve sent all the good jobs to them and now they are sending the un-needed to us!
    From a pension point of view–I was self employed most of my working life and as such I failed to build for my retirement. I did crazy things with the fortune that we small business owners make. Things like buying groceries, paying rent and the ultimate extravagance–paying myself a wage. As such, I moved to a less costly country. Panama is now my new home. As I was unable to increase my income, I needed to reduce my expenditures. I find this an easier path than increasing a wage. I have set up a small business here. I don’t make a ton of money but at least I can enjoy my life. Isn’t that what retirement is supposed to be all about. Forget the govenment when it comes time to retire. All of the promises they made and benefits bestowed “to get elected” will be just as quickly taken away when the crap hits the fan. Personally, I say look to another country to live in our “golden years”.
    Cheers,
    Jack

  5. Robert says:

    I’m not saying immigration is helping now. I’m saying it may pick up as boomers retire. Or maybe a pandemic will decimate the population of the elderly. Or maybe they’ll all move to Panama. I really don’t know what will happen, but there are a number of things that could happen to resolve some of the issues.

    Having said that, it’s probably wise to plan for the worst, but hope for the best.

  6. I would think that the comments and suggestions stated by this website are very valid and quite pertinent to the problems at hand. We don’t need just anyone to come to this country we need people who have the skills and language abilities to fit in and grow and develope out country. We can afford to be very picky about who we choose and we should be picky. One of the big ideas is maybe NOT to offshore all the jobs that we can as we do need employment in Canada. One measure would be for Mr. Carney to raise interest rates a little more. It has to happen sometime and now is as good a time as any!

  7. Jack Burns says:

    I agree with Mr. Snelgrove. The jobs we shipped offshore so the corps could make a bigger profit (under the “lie” of supplying us with cheaper goods)is now coming back to bite us in the butt! I’m definitely not a lover of tax but in our quest for profit the “short sighted businessmen” and balls-less politicians have helped to create this mess. What did they think we would be making after all of the good jobs were gone. What happens to the educational system when it sees no demand for greater skills because the jobs aren’t here–they’re in China or India. Maybe they will create “Chinese as a second language” classes!
    I know too, that closing or tightening the borders is a problem unto itself but–do you want your grand kids to aspire to low level jobs–if they can get one because the immigrants have taken them too! If you are going to allow immigrants in they must be of higher education and we must place restraints on the government services they are entitled to until they have completed pre-determined achievements (creating jobs, Doctors, scientists, (no lawyers) etc. I live in a foreign country and it is normal for governments to be picky–we should be too!
    We, as a country are in trouble and there is no easy fix but–someone must take the bull by the horns–no matter how politically suicidal it is!
    Jack

  8. Canadian Dream says:

    @HGM,

    Just a correction. OAS is paid out the general revenue fund (there are no savings). In the US the money is held in government bonds (which basically means the money goes in one way and ends up in the general revenue fund).

    Tim

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