Poor Planning Gone Mad

Posted by Canadian Dream 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?

The Demographic Crunch

Posted by Canadian Dream on June 23, 2009

***Warning: Idle Speculation Ahead***

Is is me or is there a lot of older people around?  There must be since the government is subtly changing the Canada Pension Plan (CPP) to help encourage people to work longer.  After all it’s going to be very painful very quickly with a large number of higher income tax payers dropping off the tax rolls as the baby boomers retire.  Not just because they are all paying less tax, but rather the costs associated with their health care as well.

So with all this future strain on the balance sheet of the federal government how long do you think it will take them to look at Old Age Security (OAS)?  After all they already adjusted the rules about the CPP.  This is where things will get interesting.  Adjusting OAS is politically not very palatable and we are in a phase where majority governments at the federal level are turning into a endangered species.  Hence I can see most politicians being very careful not to piss off all of the baby boomers in one go and pulling a Kyoto (if we ignore it perhaps the problem will go away?).

Which taken in a longer context would sort of work, only the problem will be a massive structural deficit for decades while the politicians wait for boomers to die off.  So that is likely out in any practical sense.  So that leaves four main options: raise taxes, cut other services,  cut benefits to everyone on OAS or cut benefits to all the new people who will use OAS in the future.  I’m guessing cutting benefits to everyone on OAS is going to be off the table very quickly leaving raise taxes (but not for seniors), cutting other services and cutting future OAS benefits.

So in the end, the younger generations will be picking up the tab for the boomers in one way or another.  Of course I could be completely wrong, this is all just idle speculation.  What do you think the federal government will do in the future to OAS?