Nanny State

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Normally I don’t like getting into politics, but the recent news of the Canadian provinces pushing for reform in the Canadian Pension Plan was an interesting topic.  The provinces claim that the Canadian Pension Plan was not doing its part in taking care of Canadians when they retire.  The argument presented was that the current average, monthly CPP payment amounted to only $602.86.  If you live in a large Canadian city like Toronto or Vancouver this amount would not even cover rent.

The Canadian Pension Plan currently works by taking 9.9% of your gross earnings and having that amount contributed to the pension plan.  The contribution is split between you and your employer.  This means that a portion of your pay goes towards the pension plan and then the employer must match that.  What the employer pays is on top of your normal pay, so essentially companies need to come up with more money to give to the government for every employee they have.  The maximum that is allowed to be contributed to the pension plan on any given year for an individual is $4712.40.  Most people will end up finishing their contributions 3/4 of the way through the year, that’s why your paycheque tends to get bigger at the end of the year.  Didn’t really think your company was giving you an extra bonus now did you?

The provinces want drastic changes to the CPP that would increase the amount returned to Canadians when they retire.  The proposal was to ask employees and employers to pay more towards the Canadian Pension Plan.  Ultimately the Federal Conservative government balked and rejected the proposals by the provincial government.  The feds preferred individuals to make their own decisions, keep money in their own pockets, but come up with new tools such as joint employee, employer pensions that employees can opt into and increasing TFSA contribution limits.   Despite this rejection, the provincial Liberal party in Ontario decided to pursue its own pension plan aimed at Ontario residents.  It seems residents there will have a chance to vote on that mandate in the next election.

Is there a right answer to this?  Should the government be hand holding us into retirement?  I don’t disagree with Kathleene Wynne, the Premier in Ontario, in her argument that individuals are ill equipped to manage their own finances.  It’s one of reason I’m writing this blog, to help educate young individuals to think about their finances and their future.

The fact is, the Canadian population has gorged itself on debt at a time when interest rates are at the lowest.  The debt ratio for Canadians now sits at 163.7% of disposable income.  Most of that arising from people getting mortgages so big that it dwarves their salaries.  Furthermore, non-mortgage debt (credit cards, school loans, payday loans) has risen to an all time high and is expected to reach almost $29k next year.  It seems like the general public doesn’t care.  We’re all deep in debt, but we’re looking good doing it.  Canadians care more about playing video games, taking to the clubs, buying the latest gadgets or finding that dream home.  Very few of us spend even an hour a month thinking or planning our finances.  Perhaps it is necessary that the government takes more of our money so that they can manage it for us because it doesn’t seem like we are capable ourselves.

If you have read my blog, I’ve already mentioned that the best financial managers are not mutual fund managers, nor hedge fund managers, but pension fund managers.  If they are the best, why not have them manage our money?  Take our money please.  We are incompetent.

The other side of me thinks that as a human race, we are progressive and can constantly get better.  Challenge is what gives us passion.  I don’t think all of us need babysitting and that we can make the right choices for ourselves given the right information.   That’s why I write this blog, because I feel that the readers here can learn and make rational decisions on their own without the government telling them what to do with their finances.  The best analogy I like to make is that if you have the patience and try hard enough, you can turn coal into a diamonds.  Each one of you can be a diamond out there.

I write about saving and budgeting because that’s the first step in going in the right direction.  I talk about investing into a diverse portfolio because that’s the only way to become sustainable and financially independent.  Saving and investing.  Both of them need to be done.  Having one without the other is useless.  That’s like having Tom without Jerry, Beavis without Butthead, Rob Ford without a crack pipe, etc… What good is it if you spend your capital gains the moment a new cellphone comes out?  What good is saving if you live 20 years past your retirement and your savings run out?

The Canadian Pension Plan has the right formula.  You might pay upwards of $50k in your lifetime towards the pension, but you’re getting a perpetual payment of almost $7k a year regardless of how long you live.  That’s because they force you to save, and then they invest for you.  The payments to you are generated from the interest that the fund earns on a given year.  What I’m saying is that you can learn and do the same thing.  Take that scale to a larger level, save $500k and maybe you’ll be making yourself $70k a year in interest in retirement.  Having $6000 to spend in a month sure sounds better than $602.86.

To better protect our future, change will have to happen.  Whether the government needs to do more hand holding and tell Canadians what to do or individuals change their habits to better understand their own personal finances, someone has to look after our futures.  Which one do you prefer?

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