The Pension Bet

An article I saw today was about the Yukon government investing $36.5 million in bonds that are now frozen and they might see some of this money returned over the next 10 years.

I am distressed over the Canadian government's "solution" to the short fall in the Canada Pension Plan. They have set up a system where taxpayers are paying more into the system right now than what is being paid out, and our CPP payroll deductions are indexed to be a percentage of the average wage in Canada.

This part of the plan does not distress me. What I'm betting on is the second part of this plan is going to be a disaster for Canadians. They are investing the extra money into the markets instead of paying down our debt, or at least that's my belief from what I've read on it and I believe it is about 5 years of pension money. They are thinking they will do better on the markets then paying back debt and do better for Canadians.

If you went to sleep for 20 years and saw what are markets looked like by comparison to when you went to sleep you'd be in an utter panic mode to sell everything and preserve the wealth, yet the almighty Canadian government has started taking our hard earned pension dollars putting them into that over valued mess. I don't see those dollars going anywhere but the toilet.

I'm just wondering how much asset backed bonds Canadians own. I was distressed the first time I read the plan, and that newspaper article just makes me wonder when we are going to be told how our government lost our tax pension dollars.

It is such a sad bet.

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Currency devaluation, social policy - Reflections from vacations

I just got back from a three week vacation in Costa Rica, where one US dollar gets you about 520 Costa Rican colones.

I know little of Costa Rica's economy, except that their main export is from agriculture and their main "industry" is tourism. Currently there is negotiations for a free-trade deal with the United States and every where you go graffiti shows opposition to a free-trade deal with the US. Their taxes are low with universal health care and education being the two most important items taking up the majority of the taxes.

I went to Costa Rica to explore the idea of learning Spanish, so I went for a two week introductory course and I stayed with a home stay family. The family consisted of grandparents and young adult grandchildren. What was strikingly different from Canada is this family with "retirement" age adults did not have entitlement attitudes towards pension, but continued working. They were a hard working family.

I would have to say our Canadian attitude towards entitlement and social programs leaves a foul taste in my mouth. First, not a senior currently collecting a pension paid for it. I so clearly remember my amazement as a very young adult with a job in the bank and seeing this pittance of a tax for pension and then also seeing how much seniors were getting in pension and I brought it up with my employer about how little the pension tax was compared to the pension payout and I was told that over the long term the money put in would pay for the pension and I was shown a bit of compounding, which still made no sense to me, but I simply assumed those older and wiser understood these things better.

I now know that our pension system was set up based on a pyramid scheme that would be illegal under today's law. The relative amount -- meaning correcting for wage increases -- we pay for pension today is much, much, much higher than what was paid in my youth, but it is still utterly unsustainable in terms of the pension entitlement expectations, and political leaders saying anything otherwise are either ignorant or lying. One day I will post more on the topic as I believe that I live in one of the greatest countries, but the unraveling of this pyramid scheme has the potential to destroy us, and could ultimately pit youth against age when age is defenseless. Certainly our currency and savings are at extreme risk from unsustainable debt and entitlement expectations and we are at risk of seeing it unravel as Mexico, Costa Rica and Zimbabwe have all experienced, unless we change our attitude and work together to make something sustainable and fair.

But, the Costa Rican people do not burden their children with their entitlement expectations, but instead continue to take responsibility for their economic future.

I wondered about the huge numbers for the currency in Costa Rica and I remembered traveling in Mexico in the 90s after their currency was grossly devalued and they were in the process of switching from old pesos to new pesos at a rate of 1000 old pesos is one new peso. They had periods of inflation of 30-40% per year, perhaps more. My Mexican friend in university in the 80s had talked about Mexican inflation and how her family had worked to move their money to more stable currencies as they saw the buying power of their savings rapidly decline. My last vacation in Mexico in the 1990s a Canadian dollar traded for about 3 Mexican pesos. Today it trades for 10.5 Mexican pesos so Mexico has continued to have a rate of inflation that grossly destroys the buying power of savings.

The young man at the school I attended talked about how over the previous few years if you had a US account you saw the number of colones increase pretty much daily as their currency deflated relative to the US currency. It made me wonder what had happened with government management of Costa Rica's economic resources. The young man in my homestay was highly interested and informed on political issues and he talked about the many social programs Costa Rica had at one time and their glory years of spending beyond their means and increased wealth. He mentioned the huge consequences to Costa Rica when one of their Presidents failed to yield to demands to cut social spending when their debt load to other nations was high. I do not know Costa Rica's full story, but it appears they faced a hyper-inflation due to high debt, an inflation that is not yet under control. I saw price increases of up to 25% at retail establishments in the mere 3 weeks that I was there.

There is something in place to control the currency exchange rate for the past year or so. The young man at the school said that you could no longer see your colones increase dramatically by holding a US account. What is this control? Currently in Zimbabwe there is an "official" exchange rate mandated by law. They have hyperinflation running at 4500%. At black market rates the exchange rate for 44,000 Zimbabwean dollars, the price of a loaf of bread, is about 18 cents. At the official rate mandated by law that loaf of bread costs $176.

Costa Rica is an inexpensive country for travel, but the tourist areas have become grossly expensive for the local people. The average price of meal in the tourist areas that I visited seemed about twice the price that I paid in San Jose in close proximity to the school, and other students said they visited tourist areas on the Pacific side where the price was double again to what we were paying in the Caribbean coast. A policeman`s monthly wage in Costa Rica is about $350 per month and with the prices I saw, inexpensive by Canadian standards, I can not imagine how they make ends meet. It seemed to me that the prices were anywhere from 20 to 75% less. Bottled water was about $1 as was pop. A lunch you`d spend $6-12 here was $2.50-5 in town, but as much as $7 in the Caribbean coast.

I discovered it is wise to always ask the price first because if you say what you want and then it is packaged, they will take you to the cleaners in terms of what they expect you to pay. I paid $2.65 for a coffee in a very small cup with two refills, whereas when I cautiously shopped for my coffee the next day I paid 70c for a coffee that was twice the size of the cup of the previous day.

In another example, the going price for the locals for a bag of cut mango fruit, the fruit of two very small mangoes or one large mango was 40c. I paid 60c, but my last day at the beach this other vendor, after I had confirmed the 60c price in the morning, had halved the amount in the bag and made it look the same by loading the bag with pits, which I only discovered after I returned to my friends, who had given me 60c for a bag each. He tried to charge $1.20 in the afternoon and I settled at 70c. I did not ask the price again before I just asked for it. So even asking the price earlier you still have to confirm the price again before you order. I found in many places Costa Ricans do not think twice about changing prices and the terms of what you think you`ve agreed to simply because they figure you can pay more.

Anyway, Costa Rica is a great country to visit right now, and depending on where -- ie Atlantic versus Pacific coast -- it is inexpensive by Canadian/American standards. The tours arranged for tourists are perhaps a little less expensive than a tour in Las Vegas or Disney World, but overall they are not cheap. They wanted $50-60 for a 3-4 hour jungle tour, and $70-80 for a river rafting tour, whereas you can find a room with a private bathroom for two people for as little as $35 per night close to the waterfront. Shop around and your meals will be less than $10 per day, but even going for the finest dining you would be hard pressed to exceed $25 per day.

I do wonder about how the currency is being set and about the rate of inflation as to whether Costa Rica will remain highly attractive for tourism.

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Why Aren't You Saving -- The Death of a Bedrock Belief

The purpose of Low Interest Rates - As Destructive as Usury was to show how much less empowered people have become in their ability to get ahead by paying down debt through two mechanisms:

1. Grossly reduced leverage of benefit of reducing total amount to be paid back from increasing payments.
2. Low interest rates are because theoretically inflation is low, so wage increases are also low further disabling the ability to increase mortgage payments.

A third problem is revealed in Making Less Than Dad. The study points out that American men in their 30s are earning less than their father's generation, a 12% drop.

A significant point in the article states that American families had a 32% increase in income levels between 1964 and 1994. Move that forward by 10 years, from 1974 to 2004 household income growth slowed to 9%.

A "truth" I was repeatedly told when I was growing was that each generation does better than the generation before them, and article suggests the death of this bedrock belief, but I would suggest that belief has been dead a long time, through reduce earning power, as the article above shows and increased taxes that disproportionately burden younger people.

I became highly aware of the degree of the declining buying power when I was involved with the 1997 Census. I was shocked to often see 3 young adults sharing a one bed room apartment out of necessity.

That was not happening with my peer group when I was a young adult. You could afford to share a reasonable 2 bedroom or even a dumpy one bedroom on minimum wage. I worked in a bank so I saw what all occupations were paying and my wage was at the lower end of the wage spectrum. Sharing a two bedroom apartment cost me 15% of my gross income. I could fill my economical car's gas tank with one hour of wages. I had a girlfriend who supported herself in grade 12 renting a basement suite on working 20 hours per week.

I often bring up the declining buying power of minimum wage with students. "When I was a young adult minimum wage was $3.65 and my share of a two bedroom apartment was $112.50," I tell them and I get them to calculate how much minimum wage would have to be today to keep up. They will come up with about $13/hour.

I continue, "A course at Simon Fraser University cost $54 and today it is $453.30," and they calculate $31/hour.

And never mind the grossly reduced buying power, look also at the grossly increasing tax burden.

"You would have to pay $111 per year towards Canada Pension Plan, and you'd be at 57% of the maximum pensionable earning, today those at 57% of the maximum pensionable earnings pay $1066." Minimum wage would have to have gone up to $35 to have the same proportion of wages going to Canada Pension Plan. But, even on another issue, maximum pensionable earnings was 1.73x minimum wage and it is now 2.63 times minimum wage. At the very least, if minimum wage went up as much as the maximum pension amount it would be at $12/hour, but they be taking home way less because of the gross increase in pension contribution for low wage earners.

There is no question making less than dad grossly impacts on ability to work toward financial security, but I question how much the study corrected for how the tax system grossly favours the old over the young.

And they go on and on about the reduced savings rate...

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