We Just Haven’t Needed It Yet

This is a guest post by Dave, who is also looking to retire no later than 45, but unlike Tim has no kids and doesn’t want any.  Dave is from Ontario and is working towards his CGA certification.

Both my own and my wife’s family really don’t know how we’re able to live without it, but since we moved into our new house we’ve gotten by without a dryer pretty easily.  We talked about buying one at the same time that we bought our washing machine (there were no appliances in the house we bought), but decided to try to live without it and see how it went.  After 20 months, I think I can comfortably say that we don’t really need it.

Rather than spending the money on a dryer and the constant electricity it eats up, we spent $12 on a retractable clothes line for our basement.  I don’t need to worry about lint fires (something that caused one of my wife’s friend’s houses to burn down this winter), upkeep (other than perhaps a new $12 line) or breakdowns with my “old-school” system.

Living without a dryer (especially after having grown up with one) has meant some logistics needed to be taken into consideration, especially in the winter, when things take an extra day or so to dry.  One solution to this was to actually buy more clothes and linen, especially items that need washing more frequently such as clothes I wear to the gym and towels.  The downside of not having a dryer that my wife and I both miss is fluffy towels, which is now a luxury when we go to other people’s places or hotels, but is basically the only major thing that we miss from not having this appliance readily available.

So, is this a world-changing sacrifice, giving up the convenience of this appliance?  Not really at all, but I figure it saved me a few hundred dollars on the initial purchase (or less if I bought used) and probably $100-$200 per year to run it.  Not having a dryer by itself would not make or break my monthly budget, but as a part of a money-saving plan this is one of the many areas that we looked at that has reduced our monthly expenses to as low as we couple possibly get them.

Would I recommend our laundry system to everyone?  There’s only my wife and I in our house, so our laundry needs are not too large, but I think it would be easily done for a large family – in fact I know it’s possible because up until the last hundred years or so people did not have the option of plugging something in to cut the drying time down for their clothes.   I think that most families had more children per family then today and I think that people survived by line-drying.

Electrical smart-meters are being implemented in the coming months in my city, as in most Canadian cities.  Reading about other people’s experiences (which on a whole are not positive) I’m thinking that having one less large appliance adding to my energy costs is not going to be a bad thing.

Could you give up your dryer?  How about your washing machine?  How have you tried to cut back on electricity expenses?

Pension Reform Ideas

This is a guest post by Robert, who lives in Calgary and works as a financial adviser. He is married, has three kids and plans to retire at age 35.  Robert and his wife then plan to return to school and become teachers, eventually living and working overseas.

I like to joke that I don’t understand why no one checks with me before developing public policy. In reality, if I want my ideas to become a part of the conversation, I need to publicly join the discussion. I understand that it’s easy to criticize the government’s policy, but creating public policy is complex. The needs of all citizens should be accounted for, and it needs to be presented in a way that is politically palatable. Let’s look at the philosophy and values behind retirement and pension reform.

Where does our feeling that we are entitled to retire come from? A couple hundred years ago, entire families would do hard manual labour, such as on a farm or in coal mines and life expectancy was around 35 years old. If children survived to adulthood, they could expect to live to age 65 on average. In a predominantly agrarian or industrial society, workers were considered unable to contribute if they survived to age 65. A pension would retire them from the factory floor and pay them as long as they survived, probably at most 5 years. Today, with advances in public health, life expectancy from birth is around 67, although adults can expect to live well into their 80s. Further, our economy has shifted from agrarian and industrial to knowledge-based. The physical demands on knowledge workers are not comparable, besides which their expertise increases with age.

There is no real physical need for most people to retire. In an agrarian society, most children begin working quite young. Retirement is unlikely in such a society, so let’s suppose that over 65 years of life, 57 of those are spent working for a ratio of 88%. Today, public and higher education account for the first 22 years, with children seldom working during this time. Assuming a person works to age 65, then retires for a further 20 years, the ratio of working years becomes just 53%. Because people are able to be productive longer, due to work that is less physically taxing, and because people are living longer, retirement must not be mandatory. I think this is already the case, in most of the country.

We want to retire, but this is a preference, not a need. Who should provide this retirement? In the past, employers have provided it, in order to remove physically unable workers. Today, workers are living longer and pensions are underfunded. Retirement savings should be a personal decision. But employers are ideally situated to withhold savings from paycheques. The government has taken advantage of this in instituting CPP. Why is the government involved? Elderly citizens, some of whom are unable to work or who have no experience working, should not be allowed to live in poverty. Having a minimal pension scheme provides assistance to these valuable members of our society.

When a public pension system was originally envisioned, Old Age Security was instituted as a temporary measure until CPP began functioning. As with many government programs, the political will didn’t exist to end the temporary measure. One of the benefits of OAS is that it is means-tested, meaning that people who are over age 65 and have more than $70,000 income receive only a reduced benefit. Since CPP is conceived as a forced saving pension benefit, it should be fully funded. It is currently near 20% funded, with a goal of reaching 30% funding by 2075. This benefits current recipients at the expense of future recipients.

My preferred solution would be to immediately shift the payments of benefits from CPP to OAS. Current savers should expect to receive their entire CPP benefit from a fully funded public pension at retirement age. Current recipients, however, should receive a larger proportion of their income from OAS (which is means-tested) instead of CPP, especially given that the total contribution was under 4% for many years. Assuming the maximum entitlement, instead of receiving $517 from OAS and $960 from CPP, current pensioners would receive $1285 from OAS and $192 from CPP. More of the money would be subject to clawback, meaning that it would once again become a safety net for elderly Canadians. Once CPP is fully funded, it will provide a greater proportion of government retirement benefits and it will be more secure.

Because only working Canadians are entitled to CPP, but all Canadians who lived in Canada at least 40 years are entitled to OAS at age 65, some modifications would need to be made. A couple where only one spouse worked (2 OAS + 1 CPP) would receive a larger entitlement ($2762 vs. $1994). At the death of one spouse, OAS ends, whereas CPP pays a 60% pension to the surviving spouse ($1400 vs. $1093). Whether or not this would require a greater public expense depends on the income of Canadians over 65 (the age OAS begins). This could be addressed either by reducing OAS or by increasing the retirement age, possibly to 67, and also allowing people to begin CPP as early or as late as they choose.

CPP should maintain the mandatory component, but could add an optional component. This way, 9.9% of each paycheque, up to $4700 per year (currently), would be saved toward retirement. If a worker chooses, they could have an additional amount, possibly 9.9% of each paycheque beyond the current maximum, also saved for their account. In this way, they would either have a larger retirement benefit or an earlier retirement date. Because of the increased fund size, larger provinces, BC, AB, ON, should set up their own provincial pension plan, the way Quebec has.

For healthy people, retirement is not a right. It is a preference that must be planned for and prepared individually. It is helpful that we have CPP to provide forced savings, but it is unsustainable in its current form. OAS is a program that provides for seniors with only moderate income. Shifting the benefits from CPP to OAS would allow CPP to become sustainable and OAS to be modified as conditions require. How would you react to a government proposal of this type? Would you write your MP to endorse it?