Monday, July 27, 2009

Tales from the other side of the aging catastrophe

A recent article entitled Gray Menace - Why Japan's aging, shrinking population is bad for the United States was written about the impact of an aging population base in Japan.

The article provides a good overview of the implication of Japans aging society.
Japan is the grayest country in the world, with 21.5 percent of its population 65 or over. Not only is the Japanese population aging, it's also shrinking, from 127 million today to a projected 89 million by 2055
Older workers are less innovative; older, more "mature" markets attract less investment. Older populations live off savings, rather than generating new capital. And, as the number of working-age citizens diminishes, pension funds will be exhausted and tax revenues and government budgets will be squeezed.

Canada is one the verge of suffering the same effects that Japan has suffered as a result of an aging population. However the frightening thing is that it could be much more serious here in Canada than it has been in Japan.

The impact of an aging population been devastating in Japan. In order to look at what has happened check out the the Japanese stock market performance over the past 20 years. Nikkei Index stock chart. The 20 year rate of return on the Japanese market is a negative 75%. The 10 year rate of return is a negative 50%. In 1990 the index was at 38,916 and in 2000 it was at 20,337 and recently touched a low of 7568.

It is important to compare Canadas aging population relative to that of Japan. Japan 10 years ago had a population pyramid that looked like this:

Ten years later Canada has a population pyramid that looks like this:

In the year 2000 the largest age group in Japan was those aged 50 to 54 and in Canada 10 years later the largest age group is those aged 45 to 49. It is quite likely that what happened to the Japanese economy over the past 10 years will repeat itself in Canada.

Look at the band of those aged 25 to 29 in Japan. Canada does not have this band and cannot benefit from the buffer it provided for Japan.

Harry S Dent - The Great Depression Ahead

I was first alerted to the trend of Japan in a book written by Harry S Dent called The Great Depression Ahead. Dent has been a hero of mine since I first came across one of his books several years ago called The Roaring 2000s. One of my brothers made a very successful real estate investment based on the understanding Dent has into real estate markets and how they relate to demographic trends.

The Roaring 2000s accurately predicted the huge run up in stock values that we have seen on North American markets during the past decade. He based this on demographics and the baby boom generation we have heard so much about. There are several concepts in the book that still make The Roaring 2000's worth reading today.

Both of Dents books are filled with charts and graphs that describe the baby boomer spending habits and social trends. The most important fact though is that North American peak spending occurs at around age 48. After that spending decreases at a fairly dramatic rate. Look again at the population pyramid. Where are we now?

Where do we go from here?

Over the past 20 years Canadian have started to invest for their retirement. Much of this money went into mutual funds in the private sector and of course gold-plated pensions in the public sector. In 1987 there were about $40Billion in mutual fund holdings in Canada. That grew until where we have been for the past several years, around $400Billion.

During the time these holdings were increasing the financial services industry was selling based on the Baby Boomers trend. We had such classic books as Boom, Bust and Echo and the Pig and the Python. Everyone was talking Baby Boomer.
The growth in the North American economy over the past was fueled by Baby Boomers. First as they moved into homes and then as they bought mutual funds for their retirement. Both these bubbles ended last year.

Shallow men believe in luck. Strong men believe in cause and effect. - Emerson
Spending the last 20 years in financial services I have paid attention to the experts. These experts predict the trends the future of our economy. I always listened to that class of experts who made money from selling mutual funds and other investments.

Last year I was lucky when I started to take heed of a class of financial commentators who do not receive much press. These are commentators who go against the "common wisdom". They work as advisors to those who have already accumulated their fortunes and want to preserve them.

Last year they were telling a story much different than those who make money selling investments.

Tales from the other side
Many of these commentators are telling the story that we may be in for a long period of very slow economic growth. That the most important thing during this period will be the preservation on capital.

Here is a video by one of those commentators. You may not enjoy what he has to say but I hope you will take some heed in his perspective.

Of course we all hope he is terribly wrong. But remember the Return of your Capital is more Important than the Return on your Capital.
Bill Bonner: Son Of Stimulus

Wednesday, July 22, 2009

Public Sector Pension Club get annual pensions in excess of $100,000

In Canada and the US thousands of public sector employees are retiring with pensions in excess of $100,000 per year. These plans will never fail, because they're backstopped by the taxpayers.

These pensions cost taxpayers Billions and have started a financial crisis for governments at all levels on both sides of the border. Jack Dean of the Pension Tsunami recently went to court to obtain the release the names of pensions over $100K. It has been a cause of Jack to protect taxpayers for over 5 years.

In a recent radio interview Jack discussed the crisis these pensions have created and the challenge he has had to make all taxpayers aware of the crisis. The radio interview begins at about 10 minutes. Jack’s radio interview

The problem in Canada continues to run its reckless course. Recently Bill Robson of the CD Howe Institute estimated the shortfalls in public sector pensions to be in excess of $422Billion. As Margaret Wente reports in her article about the pension crisis… Luckily for us, we don't riot in the streets. We just phone talk shows and sound off.

The issue of $100,000 pension is one that needs to be discussed. Are they fair? should taxpayers be the ones funding them? The Wall Street Journal covered the issue recently in Group Shines Light

Do we need a Sunshine List of pensions in Canada?

Sunday, July 12, 2009

The great public-sector pension rip-off

The Economist published an article that reported on public sector pensions.

It is called The great public-sector pension rip-off. It is a short article but highlights the key points about what is wrong with our public sector pensions. Although it is written from the UK it perfectly describes Canadian pensions as well.

JOIN a private-sector company these days and you will be very lucky if you get a pension linked to your final salary. In Britain almost three out of four companies that retain such schemes have closed them to new employees. The cost of paying such benefits, which are partly linked to inflation and offer payouts to surviving spouses, is simply too high now that many retirees are surviving into their 80s.

Yet most new public-sector employees in Britain and America continue to benefit from pensions linked to their salaries. The pension costs facing the public sector are roughly the same as those facing the private sector; their employees are likely to live just as long. But because of the presumed largesse of future taxpayers, governments seem under much less pressure to reduce their pension costs. In 2005 a reform package in Britain raised the retirement age for new state employees, but still left existing employees able to retire at 60.

Note: In Canada the retirement age begins as early as 50 for some public sector workers and most are eligible for retirement beginning at age 55 for full pensions. Many workers in the public sector will spend more time in retirement than they did working. For many the pension income will be far greater than their working income ever was.

Perhaps the real reason why public-sector pension costs have not been tackled is that the full bill has never been revealed to taxpayers. Calculating the cost of a pension scheme depends on two key assumptions. The first is the potential longevity of the employees; the second is the discount rate applied to future benefits. The higher the discount rate, the smaller the liability appears to be. There is a lot of debate about the right discount rate to use, but the conservative approach is to take the cost of government borrowing. Use that rate, and the liability of American state and municipal pension schemes may be $3 trillion—three times the value of all the authorities’ existing debts. In Britain the liability adds up to 85% of GDP.

Even if that figure overstates the problem, there is little doubt that governments are understating their pensions liabilities. When workers in Britain are transferred from the public to the private sector, they are entitled to keep their pension rights; employers who take them on find that their pension costs are around double those estimated by the public sector. The fudge seems likely to continue. A consultation document sent out by the British government suggested that, rather than raising taxes or cutting spending, local authorities should fall short of fully funding their pension liabilities in the short term.

Note: A recent blog of mine called The need for transparency in public sector pensions addressed this issue of the real pension shortfalls that exist.
Public affluence, private penury

There may be an argument for giving some public-sector workers, such as the police or the armed services, higher pay and benefits in the form of pensions. But the cost should be fully accounted for. Today’s opaque pensions system is unfair to private-sector workers, who suffer a triple whammy. First, most are now enrolled in riskier defined contribution (DC) pension schemes, where payouts depend on investment performance. Second, employers make smaller contributions to DC schemes than to final-salary plans, so pensions are likely to be lower. And third, as well as shouldering more of the burden for their own retirement, private-sector workers pay for public-sector pensions via their taxes. There is, in effect, a hidden transfer from private-sector workers to their public-sector peers. In Britain it may amount to as much as 30% of pay.

When the full costs become apparent, taxpayers may demand reform. Cutting costs is not easy: the bulk relate to promises already made. But raising the retirement age for public-sector workers in order to reflect increased life expectancy would be a start. Moving to DC pensions for new entitlements, or to a cheaper version of a defined benefit scheme (such as an average- rather than a final-salary pension) would also help. The greying of the American and British populations will inevitably involve some costs. It would be unfair if the burden was borne disproportionately by private-sector workers.

Here is another excellent article printed earlier this year by the Economist detailing the Pension Predicament. Pension Apartheid

Friday, July 10, 2009

Pension Problems in Nova Scotia

There was an interesting article about the pensions with city unions being renegotiated. Cities want to negotiate pensions

It will be a very tough challenge. Once given these things are hard to take back. They create a large financial burden on taxpayers and are very generous pensions indeed. This pension plan is in serious financial trouble. Lets hope that the cities will be able to negotiate some reasonable concessions for taxpayers.

At last report the pension fund was short $1.65 Billion to cover the cost of the commitments it had made. This is despite the fact that since its inception it had accumulated more than $2.9 Billion of taxpayers and members money. How long will it take to accumulate this extra $1.65Billion.

The government and pension managers have been aware of his problem for many years. In an attempt to cover the shortfall they have doubled annual contributions into the plan from $75Million in 2004 to $140Million last year and it has not made a dent in the plan's funding.

The plan is hemorrhaging cash very quickly now. There are almost as many on pensions (11,646) than paying into the plan (16,629). There are only 1.42 paying members for every pensioner.

Most members are paying only 8.48% of income into the plan. The taxpayer matches this for a total contribution of 16.96% of income. The CD Howe has estimated that the true cost of these types of pensions is 30% of income. This means contributions are short 13.04% every year. It is a ponzi scheme that has to end one day!

Retirees receive pensions based on the 80 rule. This makes an employee who started employment at age 20 eligible for pension at age 50. Many go on to other jobs while collecting pensions (double dipping). Many of these jobs will be with the same government employer.

As well the taxpayer is on the hook for the Teachers Pension Plan that had $1.5Billion of unfunded liabilities at the end of 2008. Even worse they only had 1.23 working teacher for each pensioner. The taxpayer funded $61Million into this plan last year.
These plans can be seen at: Nova Scotia Pension Agency

Last year taxpayers funded over $70Million into the plan. It is still almost $2Billion short.

The plundering of taxpayer dollars has got to stop

Tuesday, July 7, 2009

Comment from public sector worker about this Blog

After the series of CBC interviews I received a comment post on the blog. It was from a public sector employee who was upset with some of my remarks on the radio interviews. One of those 11 interviews across Canada can be found here from CBC Edmonton. In the rest of Canada that same interview was done by Catherine Swift

Monique did respond with some very legitimate comments. There are some members of our society that new to be protected.

For example, my mother a single mother sacrificed much to raise me and my three brothers. I am very thankful that she has a partial federal government pension.

We know that the group most at risk to poverty is senior women.

Some of the comments were as follows:
It is true that *some* individuals at the highest levels of management in municipal governments receive compensations of 6-figure salaries, along with their pensions and various benefits packages. However, if you would first do, and then share, thorough research with your readers you would find that many, if not all, of those managers are in union-exempt positions. This is certainly true of my own employer.

The vast majority of employees in my workplace do not make enough to even be included on the annual compensation disclosure list (whose cut-off is 50 K, annually). I am one of those employees not on that list.

Yes, if I am lucky enough to not lose my job to cutbacks in the next 20-some years (I am a newer employee) I will retire with a pension that will allow me to not starve, keep a roof over my head and access sound health care in my retirement years. How dare I expect this?!!

Until that time though, I will take my $44, 000 per year (plus - maybe - an annual cost of living increase and, yes, benefits: I'm having my teeth cleaned this Wednesday, and tonight I will file to get maximum - $200 - reimbursement for the $500 prescription eye glass lenses I had to buy last month). I'll take that 44 K and the promise of a dignified retirement and do my darndest to serve the people of my city - putting to use my 6 years of post-secondary education (a graduate degree is the minimum professional qualification for my position - you may be interested to know mine came from a faculty of management) to try to figure out a way to offer my particular type of public service city-wide with a staff of 2.

In my opinion we live in one of the best countries in the world. There are many challenges ahead for us and our society. I think we can all come together and find the solutions that will allow for fairness and dignity for all Canadians.

I hope that we can achieve for all Canadians what Monique outlines in her comments.

Thanks for your comments Monique

Sunday, July 5, 2009

Canada's Public Sector Unions at War with Canadian Taxpayers

I was recently asked to do a series of interviews with the CBC Radio. They asked me to be interviewed on public sector pensions in Canada.

The CBC has been sensing a rise in animosity between the private sector and the public sector. They wanted me to discuss this across Canada in several morning call in shows.

It was important to be prepared and I wanted to do some research. The CBC was speaking about the "private sector vs the public sector".

In my blog I was seeing a rising sense of hostility towards the public sector by taxpayers.

Several situations have pushed this issue to the forefront. Strikes in Ontario in the cities of Toronto and Windsor. The release of Sunshine Lists across Canada and the resulting outrage. As well there have been several media articles discussing the gap between public sector and private sector compensation levels.

One media interview I found to be quite interesting. It was an interview on CBC's The Current between Catherine Swift and the President of CUPE. The link to it can be found here Labour Concessions - CUPE

Several articles have come out questioning the intentions and motivations of the public sector unions.
Notable: * Political Garbage in the Ottawa Citizen
* Globe and Mail's - Unions Living in Dreamland
* McParland: The shared greed of fat cats and public sector unions

As I investigated the connection between unions and what is happening I looked to Statscan and the numbers behind unions. Union Membership in Canada — 2007 There is indeed a correlation between the unions and gold-plated pensions. It appears they are symbiotic.

The Statscan union analysis hows that most of the unions in existence today are in the public sector. The public sector ones are monsters indeed, in terms of size and membership.

Check out the CUPE web site. Here are some of the words they use to describe the works they do on behalf of members.
our Strategic Directions 2007 – 2009 policy paper is a multi-million dollar commitment to fight privatization in all of its forms, wherever it arises across the country. Privatization is our biggest threat and we must always fight to protect public sector jobs and services.

we resource all strikes and we fight back against all regressive government attacks on members. This is the history of our union, a history of which we are all proud.

During this time we have waged and won important battles on the picket line. Some of our strikes were large; some were small.

All of this meant we were able to make contract improvements, fight concessions and stand tough against employers and governments

So-so-so-Solidarité Reminiscent of the chant many non-Quebeckers first heard at protests against the Free Trade Area of the Americas in Quebec City

CUPE’s National Defence Fund provides support to locals who are mobilizing to defend members’ jobs, rights and collective agreements and to promote quality public services.

Those challenges include longer, bigger and costlier strikes and many fightback campaigns

“Strikes,” said Genereux, “are about holding out for as long as you can, until you win.”

Convention created a new National Strike Fund, agreeing that six per cent of per capita would be set aside for strike pay and benefits,

Resolutions were also passed to extend the Defence Fund Levy and the Solidarity Levy in order to assure support for an increasing number of longer strikes.

It sounds like a union at war. They have amassed a huge war chest and they are read for battle. Who are they battling with?

Canadian taxpayers.