Seniors’ Financial Literacy: New Consultation

The Federal government through FCAC, the Financial Consumer Agency of Canada.  has launched a new consultation on seniors’ financial literacy. A new consultation paper is available  Toward a National Strategy for Financial Literacy – Phase 1: Strengthening Seniors’ Financial Literacy  .  The new Financial Literacy Leader, Jane Rooney is in charge of the consultation process.  The deadline for submissions is July 15, 2014 . More on the consultation process is available at:

CPP reform good for seniors and economy

CPP reform good for seniors, economy in long run: Finance Canada

Harper cabinet ministers had claimed pension changes could cost thousands of jobs, but that analysis deeply flawed, economist says


OTTAWA – The B.C. government should support efforts to improve Canada Pension Plan benefits in light of federal documents showing that would boost Canada’s economy in the long run, a pension expert said Friday.

The Harper government insisted at a conference in December that a CPP premium hike for workers and employers to pay for higher benefits would be a job-killer. It cited internal Finance Department research suggesting two proposals – one from the federal New Democrats, the other from the Prince Edward Island government – would kill between 17,000 and 70,000 jobs.

But Finance Department documents made public this week show that department officials weren’t nearly as negative as their political masters, then-finance minister Jim Flaherty and the minister of state for finance, Kevin Sorenson.

B.C. Finance Minister Mike de Jong, while less hard-line than his federal counterparts, had backed Ottawa’s position that it was too risky to introduce higher premiums in a period of economic uncertainty.

“Now is not the time,” de Jong said after the federal-provincial meeting in December.

One briefing note circulating in the days before the conference, at a time when two journalists were pestering the department to justify its grim forecast of major job losses, actually offered a rosy long-term forecast.

“In the long run, expanding the CPP would bring economic benefits,” stated the Dec. 10 briefing note that was obtained and made public this week by the Canadian Labour Congress.

“Higher savings will lead to higher income in the future and higher consumption possibilities for seniors.”

The department briefing notes also said that if CPP reform “is implemented at a time of robust economic growth, as was the case during the late 1990s … the (short-term negative) impact would be outweighed by the underlying strength of the economy.”

A B.C. expert on pensions and payroll taxes said the provincial government should join provinces Ontario and Prince Edward Island in aggressively pushing Ottawa to back a CPP overhaul.

“Now that we know that the federal finance department itself recognizes the long-term benefits of expanding the CPP, the B.C. government should band with the other provinces to renew the push for an expanded CPP despite the opposition from the small business lobby,” said economist Rhys Kesselman, who holds the Canada Research Chair in Public Finance at Simon Fraser University’s School of Public Policy.

Kesselman said the federal government’s calculation of huge job losses caused by higher premiums was deeply flawed.

The various proposals on the table would have given companies several years’ notice before they were to be implemented, and they would be phased in over several more years, according to Kesselman.

One of them, PEI’s, would increase annual contributions that are split equally between employees and employers from $2,356.20 to $4,681.20.

The proposal, to be implemented gradually over three years starting in 2016, would boost the maximum benefit to $23,400 from $12,150.

Yet the Finance Department’s calculations, used as a basis for warning of job losses, were based on the assumption that the higher premiums would be imposed without warning and within a single year.

“Finance Canada used the most unrealistic assumptions to generate forecasts of significant job losses,” Kesselman told The Vancouver Sun.

A spokeswoman for Sorenson defended the government’s position in December, saying Ottawa has “always been very clear. Given the fragility of the current economy, now is not the time for increased costs on business which would deter business investment, decrease wages, and kill jobs.”

The B.C. Finance Ministry said in a statement that Victoria recognizes the need for both Ottawa and the provinces to deal with “the under-savings problem” as Canadians who won’t have enough retirement income.

The statement endorsed a “modest” CPP expansion – but only “when economic conditions permit.”

New Democrat MP and pension spokesman Murray Rankin said the internal documents show the government “withheld critical information” from Canadians.

“It is a very disturbing situation when the government withholds and misuses information in an attempt to mislead the public, particularly on an issue such an important as retirement security.”

One of the journalists who asked the Finance Department in December to provide data to back up Sorenson’s claims blogged about the matter this week.

John Geddes, Maclean’s magazine’s Ottawa bureau chief and a respected public policy writer, zeroed in on the Dec. 10 reference in the internal document citing positive long-term benefits.

“Nothing like that positive message, nothing approaching it, was hinted at in the answers I got that very week from the finance department,” Geddes wrote.

Canadians at risk of outliving savings


Withdrawal rules put retired Canadians at risk of outliving savings, report says

Retired Canadians trying to balance their need for current income against the risk of outliving their savings face serious erosion in the purchasing power of tax-deferred savings, says a new report.

Rules set down 22 years ago that require mandatory minimum withdrawals from registered retirement income funds (RRIFs) and similar accounts have failed to keep pace with longer Canadian life expectancies, according to the C.D. Howe Institute analysis.

The age-related formula requires that RRIF holders withdraw annual amounts that rise; they stop rising at the 20 per cent mark.

The pension policy was instituted in 1992, when the federal government was deficit-ridden and in dire need of cash. But now that it is closer to running a surplus, the timing of the receipt of those RRIF taxes matters less, said authors William Robson and Alexandre Laurin.

“To the RRIF holder, however, the minimums pose a threat. They oblige the holder to run tax-deferred assets down rapidly. Today, people can expect to live much longer after retirement, and real returns on investments that provide secure incomes are much lower.

“RRIF holders now face serious erosion in the purchasing power of tax-deferred savings in their later years.”

The government should make the minimum withdrawals from RRIFs and similar vehicles considerably smaller, or even scrap them outright, says the report.

Another policy response would be to raise the ages at which minimum drawdowns from RRIFs and similar vehicles must begin, it says.

“Governments impatient for revenue should not force these Canadians to run their tax-deferred assets down prematurely. Reforming the withdrawal rules for RRIFs and similar accounts would help retirees enjoy the post-retirement security they are striving to achieve,” the authors say.

A RRIF is an account registered with the federal government that provides a steady income in retirement; when retirees turn 71, they must shift their existing registered retirement savings plan into an annuity or RRIF. A RRIF has a mandatory minimum withdrawal of 7.48 per cent from the account annually at 72, which rises to 19.92 per cent by the age of 93.

Statistics Canada’s latest life tables, from 2009-2011, put the average life expectancy of a 71-year-old man at 14.4 years, and of a 71-year-old woman at 16.9 years, compared with 11.2 and 14.6 years – respectively – in 1992.

In 1992, the expected compound real (after inflation) return on a 71-year-old man or woman’s bond portfolio over 30 years was about 5.7 per cent annually, the authors calculate.

That compares with an expected compound annual real return of 0.25 per cent at the beginning of 2014.

A 71-year-old man or woman in 2014 with $100,000 in a RRIF invested in Canada bonds will see the value of this nest egg drop to below $50,000 by the end of 2023, when the pensioner turns 80.

By the end of 2030, at age 87, the RRIF balance will drop below $25,000. At age 94, in 2037, the balance will fall below $10,000 – a 90 per cent erosion of its real value, according to the study.

The life tables give odds of a 71-year-old man reaching the age of 80 – when the RRIF’s value would have dropped by half – at about three in four; for a 71-year-old woman, it is better than four in five.

A man who reaches 80 can expect to live, on average, nine more years, while a woman who makes it to 80 has an average further life expectancy of 11 years.

“Good or bad, when combined with out-dated drawdown rules, modern longevity and investment returns spell trouble for holders of RRIFs and similar accounts,” said the authors.

The 71-year-old man in 1992 could expect to deplete 25 per cent of his initial balance’s real value upon reaching his life expectancy, the study concludes.

Today, the senior can anticipate seeing his initial balance drop about 70 per cent, and he has a one-in-seven chance that its real value will fall more than 90 per cent.

The numbers for a 71-year-old woman in 1992 and 2014 are 40 per cent and 80 per cent, with a one-in-four chance of seeing its real value drop more than 90 per cent.

Even if retirees today were to invest their tax-deferred savings in more growth-oriented assets, rather than Canada bonds, the outcomes would be uncertain and the time frame too long, the authors contend.

“Even if it is true that such a portfolio can reliably earn a premium over safer investments in the very long run – and both theory and evidence are mixed on that point – the time frame over which an investor can count on such a premium is longer than is relevant even for today’s longer-lived seniors,” they said.