Hot Off the Web- December 24, 2012

Contents: Inflation fighting in retirement, U.S. tax-net snares Canadian residents, Canadian house prices off 0.4% past month, Canadian house sales forecast revised downward, pension reform prospects: expanded-CPP up while PRPP down, Coyne: expanded-CPP with a twist, compulsion (and nudge) the only way to achieve higher wealth accumulation for retirement, Supreme Court of Canada rules against public servant’s right to pension surplus, real wage increases vs. dropping relative living standard of retirees, Fed’s money printing puts U.S. dollar at risk .

Personal Finance and Investments

In Daily Finance’s “5 sensible way to combat inflation in retirement” among David Ning’s suggestions on some ways to mitigate inflation in retirement are: buy a home (perhaps true for Americans who can lock in 30 year mortgages), find cheaper alternatives for your pleasures, skip some expenses, and minimize lifestyle inflation.

In the Globe and Mail’s “US tax crackdown hits Canadian residents” Roma Luciw discusses how Americans and green-card holder living in Canada are getting caught in IRS’s net trying to catch Americans not paying taxes on foreign accounts. “U.S. requires its citizens to file annual tax returns based on their worldwide income, regardless of where they live…Starting in 2013, the IRS will require financial institutions outside the United States to disclose all accounts held by current and former U.S. citizens and green-card holders…They will likely have to file years of U.S. tax returns and detailed annual account disclosure.”  The article indicates that even children “…who have never had a U.S. address or earned a penny there but have dual Canadian and American citizenship, will have to file U.S. tax returns on accounts they hold in Canada and may face penalties.”  Fines for non-compliance can be steep. Article includes tips for compliance and suggests that those affected should pay attention. (Don’t be surprised if many will just dispense with their American citizenships.)

Real Estate

Canada’s Teranet-National Bank House Price Index for the month of November was up 3.3% over previous year and down -0.4% from previous month. The 12-month price changes were: Toronto +6.3%, Calgary +5.7%, Montreal 2.8%, Ottawa +2.2% and Vancouver -1.4%. Annual price changes have been decelerating for the past 12 months. The changes over the previous month were: Toronto -0.3%, Calgary +0.4%, Montreal -0.4%, Ottawa -0.5% and Vancouver -0.6%.

In the Financial Post’s“Canada’s housing market forecast cut after mortgage rules bite” Craig Wong reports that “The Canadian Real Estate Association cut its sales forecast for this year and next on Monday as it reported slower sales for November in the wake of tighter lending rules that came into force in summer.”   CREA dropped its 2012 sales forecast from 1.9% rise (September) to a -0.5% drop (December). Furthermore the 2013 forecast is a 2% drop compared to 2012. CREA says that “Annual sales in 2012 reflect a stronger profile prior to recent mortgage rule changes followed by weaker activity following their implementation…”Average prices in 2012 are expected to be up 0.3%, as compared to a 0.6% forecast in September: for 2013 the CREA forecast is 0.3% gain in prices. Other sources referred to in the article are more pessimistic with their numbers, suggesting a decline of 25% over the next couple of years.


Canada’s federal and provincial finance ministers spent the last weekend discussing pension reform. The good news is that the PRPP appears to have generated sufficient resistance that it might end up still-born; the bad news is that the government is still just talking rather than doing something about pension reform.

Before the weekend some voices raised expectations that as the Globe and Mail’s “CPP reform back on national agenda” indicated, “A calmer economy, continued concerns over lack of savings and new leadership in Alberta and Quebec appear to have changed the political dynamic that had pushed CPP reform onto the back burner of the national agenda.” The article also mentions a 10-10-10 plan which would increase CPP: pensionable earnings by $10,000 to $60,000, maximum benefits by 10% to 35%, and it would take 10 years to phase-in the changes. (As I’ve indicated before, this would be far superior to the currently proposed PRPP, though not my preferred solution.) Keith Ambachtsheer in the Globe and Mail’s “Ministers have golden opportunity to break pension reform deadlock”suggests that a compromise to break the logjam between provinces favoring the expanded-CPP vs. the PRPP, might be to agree on some combination o the two proposals and proceed to the critical implementation phase before actual pension reform will happen. Ambachtsheer adds that without a decision to proceed now “middle-income private sector Canadian workers will continue to be exposed to the risk of materially lower post-work living standards in the decades ahead.” By the end o the two-day finance ministers’ pension get-together the Financial Post’s “Flaherty, finance ministers cautious on reforms amid shaky economic climate” reports that while changes to the CPP were discussed (hopefully would mean that the PRPP is likely to be at least de-emphasized, if not killed), federal finance minister Flaherty wanted consensus on CPP changes (even though currently only 2/3 of the provinces with 2/3 of Canada’s population would be required to approve CPP changes) but agreed that “officials would craft definitions of a “modest increase and economics triggers” that could be used to determine the future of the program” to be discussed at next June’s Finance ministers’ get-together.

Pro expanded-CPP voices, such as Jonathan Rhys Kesselman in the Globe and Mail’s“No reason for further delay: Expand the Canada pension Plan”argue that concerns over premium increases (for both employees and employers) are unfounded since between 1997 and 2003 a 70% increase in premiums had little or no economic impact and voluntary savings (a la PRPP) would be ineffective. (Not sure if in the current economic context the impact would be the same.)

But the most refreshing proposal came from Andrew Coyne in the Financial Post’s“Beyond expanding the CPP, the challenge of population aging presents an opportunity to reform it”in which he argues that since today’s demographics have precluded pay-as-you-go and DB plans for private sector employees “More of the burden will have to be borne by pre-funding, that is out of beneficiaries’ own savings” yet Canadians still haven’t got the message.” He further argues that, despite protestations to the contrary, the CPP while actuarially sound in the short-to-medium term is $800B underfunded, and there are too many eggs in the one CPP basket exposing all Canadians to the same risk factors (market, government, etc). To solve two obvious problems of (1) inadequate savings and (2) the 2-3% “waste” associated with mutual fund investments, he proposes: (1) a compulsory increase of CPP premiums but “instead of going into the regular CPP (investment) pot, the funds would accumulate in the contributor’s own personal fund” and (2) “To avoid wasting money on management fees, funds would be invested strictly passively” with age-dependent asset allocations (like target-date funds). (This at least tries to address two of my four criteria for pension reform: adequate savings and low cost investment vehicles; however it doesn’t address the other two requirements: low cost (pure) longevity insurance and protection of already earned private sector DB plan benefits which likely require CCAA changes to raise priority of pension plan shortfalls in case of employer bankruptcy. See for example my “PRPP: An agreement to kick the can down the road and deliver more fees to Canada’s financial industry” blog)

In a new Harvard study entitled “Active vs. passive decisions and crowd-out in retirement savings accounts: Evidence from Denmark” the authors conclude “…a policy’s impact on total savings depends critically on whether it changes savings rates by active or passive choice. Tax subsidies, which rely upon individuals to take an action to raise savings, have small impacts on total wealth…. each $1 of tax expenditure on subsidies increases total saving by 1 cent. In contrast, policies that raise savings automatically even if individuals take no action – such as employer-provided pensions or automatic contributions to retirement accounts – increase wealth accumulation substantially. Price subsidies only affect the behavior of active savers who respond to incentives, whereas automatic contributions increase savings of passive individuals who do not re-optimize. We estimate that 85% of individuals are passive savers…broader implication of our findings is that changing quantities directly through defaults or regulation may be more effective than providing incentives to change behaviors of interest…” (Thanks to MK for recommending. Very interesting results which perhaps: (1) explain at least in part why so much of RRSP/TFSA contribution room remains unused (85% are passive savers so do not respond to incentives), and (2) suggests that voluntary retirement saving is ineffective for 85% of the population a compulsory/regulated saving approach is more effective, or at least an auto-enrollment with automatic increase in contribution rates is required.)

The Ottawa Citizen’s “PS unions not entitled to pension surplus: Supreme Court” reports that “The Supreme Court of Canada ruled federal workers are not entitled to a share of the $28-billion surplus in their pension plans that the government used to help pay down the deficit more than a dozen years ago. In an unanimous decision, the high court rejected federal unions and retirees claims to at least a portion of the surplus, which they wanted the government to return to the pension accounts of federal public servants, the military and RCMP.”

Things to Ponder

In the Financial Post’s “Have your wages kept up with inflation?” Jason Heath reports that according to Stats Canada real “wages increased by 14% in the 30 years between 1981 and 2011. The biggest rise came from 1998 to 2011, when average wages increased by about 38%, while inflation pushed up the cost of living by about 28% — a 10% net increase.” Heath notes that “the 14% inflation-adjusted wage increase since 1981 is great, as it suggests our standard of living has been increasing because incomes are rising by more than the cost of basic goods and services” but Canadian’s spending has grown even faster when you consider the record high debt-to-income ratio of 165%! (What the article does not discuss is the erosion of retirees’ purchasing power or standard of living compared to working Canadians especially since 1998. Given the 10% increase in real wages, the fortunate few, mostly public service retirees who have pensions indexed to the CPI have lost 10% of relative standard of living compared to working Canadians. The next fortunate, though less so compared to public service retirees, group is private sector retiree group which has un-indexed DB pensions, they have lost 28% of real buying power since 1998 and 38% relative standard of living compared to the average worker. Of course with GIC/CD rates being in the 0-2.5% range as a result of the quantitative easing (QE) programs in the developed world, retirees are further seriously disadvantaged by these low returns are and forced to dig deeply into their savings to minimize not just their relative but also absolute standard of living.)

And finally, in Investment News’“Rob Arnott: Death of the dollar” Rob Arnott has a quick look at “…what must happen with the budget and entitlements — and what will happen if the markets lose confidence in U.S. currency.” Arnott writes that with the Fed’s extension of bond purchases, it is now printing $1T per year just to buy bonds to cover $1T of US spending in excess of what it produces. He argues that this only works until suddenly it doesn’t, because “when the markets lose confidence in our currency, it happens very fast. When confidence in the world’s dominant currency plunges, the consequences can be very disruptive to every business and consumer around the globe. The coming decade will be a doozy.”


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