Manitoba Taxpayers hit with triple whammy

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The taxpayers in Manitoba will be paying dearly as a result of an agreement signed with the provinces nurses. Manitoba nurses to take 2-year pay 'pause'

The triple whammy comes as the provincial government gets its election campaign prepared for next year. An elections is scheduled for October 20100.

Public sector unions are always a huge threat to any government at election time and unions use this power to their advantage to negotiate new contracts. Finally, the pressures on heatlhcare spending costs in Canada are huge and increasing at an alarming rate. Workers in healthcare will be able to write their own tickets.

They three factors combined to give Manitoba nurses a pretty sweet deal. A government up for election, a powerful public sector union waiting one year for a contract settlement and third-party taxpayer's money to fund the party.

All this comes at the expense of taxpayers of course.

Gold Plated Pensions 

The nurses have what is  know as a gold-plated pensions. It is based on a formula of final salary. This means that they are ENTITLED to a pension worth 70% of their final salary, based on an average of past 5 working years. It is integrated with CPP so that combined with CPP the income replacement is 70%.

This year a nurse starts at $62,500 per year. A retiring nurse in Manitoba will earn in excess of $100,000 per year. What this means is a pension upwards of $70,000 per year. All guaranteed of course, guaranteed for life, for the life of a spouse, now guaranteed to increase every year (indexed) and best of all guaranteed by taxpayers.

Costly Pensions 

Gold-plated pensions of this nature are estimated to cost 34% of annual salary. Nurses pay about 25% of this cost on an annual basis, the taxpayers match that amount and future taxpayers pick up the shortfall. Because not even the annual costs are covered the HEPP, hospital workers pension plan in Manitoba, has a shortfall of $400 Million. HEPP annual Report - Page 17

So rather than wrestling this issue to the ground the Manitoba government like many before them has refused to deal gold-plated pensions. They have given into the pension demands of a powerful public sector union in hopes that it will bring them victory in the next election. Note: Someone had better check what other public sector contracts are due before October 2011.

Sadly, this process shows the dysfunctional nature of the system. Politicians using taxpayers money to favor a powerful voting block in contract negotiations.

My hope is that one day, somewhere one politician will stand up and say no more taxpayer abuse.

Bill Tufts
http://fairpensionsforall.blogspot.com/

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:

Courtesy Nationmasters.com

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

Forbes Article, Gilt-Edged Pensions - How much are they really worth?

Forbes came out with an article last week about the lucky stiff retiring on a public sector pension. The article tells the story of the stiff retiring four years ago at age 42 with a $65,000 per year pension. The pension is indexed for life, that is guaranteed to increase every year. Forbes places the value of that pension at $2,000,000 and most of that will be funded by taxpayers today and into the future.

In the article Forbes notes that America is "creating a nasty social problem as well. America, in case you hadn't noticed, is dividing into two nations. The 22.5-million-strong public sector (that includes retirees) is growing ever larger, and enjoying ever greater wages and benefits often guaranteed by state constitutions." This nasty little problem is not only occurring the the United States but in Canada and most countries around the world.

I have followed the pension world for the past ten years with a focus on the large gap between public sector plans and those of the average Canadian worker. In the UK (England) they have coined the phrase Pension Apartheid for the two nations that are developing.

The compensation levels of the public sector have been designed to compensate public sector workers based on a need to avoid political confrontation. They have powerful unions and whenever there is an upcoming election they make their voices heard.

Originally the union propaganda was that the public sector was underpaid relative to the private sector. However, Forbes points out:
"In public-sector America things just get better and better. The common presumption is that public servants forgo high wages in exchange for safe jobs and benefits. The reality is they get all three. State and local government workers get paid an average of $25.30 an hour, which is 33% higher than the private sector's $19, according to Bureau of Labor Statistics data. Throw in pensions and other benefits and the gap widens to 42%."

This same analysis holds true in Canada and recently was reinforced by the Wage Watch report released by the CFIB - Canadian Federation of Independent Business.

The real bonus to public sector employment is the pension plan. The pension plan is not based on an accumulation of funds like your plan is, it is based on a continued stream of income into retirement. This stream of income is based on 70% of the wage rates at termination of employment. In the Forbes example, the worker had a pension worth about 72% of his final salary. His ending salary was $90,000 per year and he will receive a $65,000 pension indexed for life.

These type of pensions do not exist in the private sector, except for a few companies, most of which were once public sector and are now "Crown Corporations".

Forbes notes that "four in five public-sector workers have lifetime pensions, versus only one in five in the private sector. The difference shifts huge risks from government to private-sector workers." In Canada those numbers are about the same.

Check out the Forbes article it certainly will create much needed debate around this issue over the next few weeks. Gilt-Edged Pensions