Shame on Jonathen Chevreau: “A retirement rule that hurts us all” MoneySense, Feb/2015l

This is another stupid article from MoneySense*. Jonathan Chevreau claims that current regulations requiring seniors to annually withdraw minimum amounts from their registered plans are unfair in this era of low interest rates and longer lifespans. Using simple math he illustrates that the averaged retiree’s registered plan will be reduced to near zero by age 90-95. And he’s right. But it’s not a problem.

It’s not a problem because the hypothetical retiree’s savings are not reduced to near zero. It’s his/her registered savings that are reduced. The non-registered savings are increased as funds are transferred from the registered plans.

The regulations that Chevreau complains about don’t require the retiree to dispose of the funds in the retirement account – the requirement is to withdraw a proportion of funds from the registered account and pay tax on that portion. The after-tax balance still belongs to the retiree.

Chevreau knows better. I’m at a loss to explain why he failed to explain that the “retirement rule” is no more than a phased-in taxation of the amounts that have been tax-sheltered for many years.

* the last stupid article was the one that understated senior’s housing expenses and failed to distinguish between home owners and renters.

Boomers – Behaving Badly in Bulgaria

Quoted in The Week, Nov2/12,

Bulgaria: Why we don’t respect our elders: Today’s young people don’t want to take advice from the generation that endured communism.

posted on October 24, 2012, at 8:47 AM

Ruslan Jordanov

Bulgarians hate old people, said Ruslan Jordanov. I’m not kidding. In the latest Eurobarometer survey, 58 percent of us admitted to disliking the elderly, making them even more reviled than the Roma—quite a feat in Bulgaria. No wonder “nobody ever gets up to give them a seat on the tram.” Long ago, our society revered grandparents as fonts of wisdom. But today’s young people don’t want to take advice from the generation that endured communism. The old are “blamed for enabling the totalitarian system.” More to the point, they are “blamed for the shambles of post-communist reality known as the transition, in which their children and grandchildren struggle to live.” Their pensions are seen as “an onerous burden on the budget” to be paid to people who failed to generate wealth in their own time. That’s partly because there are fewer and fewer young people to pay taxes to fund these pensions—in the past decade, nearly 200,000 young people have moved abroad to chase after “material success and worldly comfort.” In a cohesive society, people would be glad to part with a small sum so that old people would not “be forced to dig through the garbage or fall into starvation.” Ours, though, is a “callous society.”

Why do we spend so little on generations under age 45?

Why do we spend so little on generations under age 45?, asks Dr. Paul Kershaw or readers of The Globe and Mail.

“As a generation of retiring parents risk watching their kids and grandkids fall behind, what do we make of current policy priorities in Canada?…The federal government spends more subsidizing livestock and agriculture than it does subsidizing moms and dads to spend time with a new baby. Provincial governments spend nearly as much subsidizing agriculture as they do child care (other than in Quebec).

“Why do we spend so little on generations under age 45? Part of the answer is that we are spending more elsewhere – including on older generations.”

The author identifies major areas where government spending or taxation favors the Boomers, principally in pensions and health care.  Then he posits that, “Spending on older Canadians doesn’t have to come at the expense of spending on younger generations.”  Well, short of across the board tax increases, Yes it does.  Oh…I see where this is going.

“We now collect 5 per cent less of our economy in taxes than we did in the year 2000. That’s an $80-billion annual tax cut…Data show this massive tax cut hasn’t helped the average young family to bridge the gap between stagnant wages and high housing costs.”  He points out that cutting taxes while increasing payouts to Boomers has walloped  young families.  Hard to argue with that.

But what’s the fiscal solution – restore tax revenues to where they would have been, sans cuts?  Or trim benefits to Boomers by a similar amount and passing the benefits to our kids (in the form of greater incentives for saving, more affordable housing, lower cost student loans, dental care, child care, etc.)? (I need a separate Post to elaborate on this list.)

Neither of those fiscal solutions is going to be very attractive to Boomers, especially those who continue to pay taxes.  Since taxes are legislated and legislators are elected and Boomers are a big part of the electorate and Boomers have traditionally voted in their narrow self-interest, I don’t think either of these “solutions”  is likely to come about within the current mindset.  What’s needed is a new mindset on the part of Boomers who are in a position to make a difference.  I’ll need yet another post to flesh that one out.

Dr. Kershaw is an associate professor of public policy at the University of British Columbia’s Human Early Learning Partnership. His work specializes in “inter-generational inequities” – my kind of guy.  He’s got a blog, A Canada that Works for All Generations,

Defined Benefit Pension Plans – Boomers changed the rules

Defined Benefit Pension plans used to be the norm.  The pension plans were run by the employers and provided employees with specifically defined benefits in retirement.  Working and retired Boomers have benefited from these plans while their employers and former employers struggle to fund the plans.

Defined Contribution Pension plans are now the norm.  It’s the contribution of employees that is defined; the benefit received at retirement will vary according to the market returns on the investments and the costs of administering the plan.

An obvious explanation for the shift from DB to DC is that employers a.) found the DB plans increasingly expensive to manage, and b.) found that younger employees coming in to the work force would accept Defined Contribution plans.  The less obvious explanation is that Boomers changed the regulations regarding employer-provided pension plans.  A summary of these regulatory changes is included in a 2008 Discussion Paper, Large Declines in Defined Benefit Plans Are Not Inevitable: The Experience of Canada, Ireland, the United Kingdom, and the United States, by John A. Turner and Gerard Hughes of The Pension Institute.  The authors posit that regulatory changes (Boomer regulators) have made in increasingly expensive for DB plans.

“While pension legislation has had a number of goals, increasing the likelihood that employers provide defined benefit plans has not been one of them. Regulations have been designed to make defined benefit plans more secure for those participants covered by them, and in the process shifted risks to employers.
“Regulations have been designed to limit the loss in tax revenue to the government Treasury by restricting the amount of funding allowed in defined benefit plans. Regulations affect plan costs, but the effects are not the same for defined benefit plans and defined contribution plans. Regulations could have raised the cost of providing a dollar of benefits through a defined benefit plan relative to a defined contribution plan, and evidence suggests that has occurred.”

  • Compliance Costs
  • Regulatory Disincentives to Funding Plans: Ownership of Surplus Assets
  • Disincentives to Funding Plans: Funding Limits
  • Volatility of Asset Markets
  • Volatility of Contributions
  • Problem of Underfunding
  • Incentives for Terminating Defined Benefit Plans
  • Accounting Rule Changes
  • Early Retirement Subsidies
  • Decline in Real Value of Maximum Pensions for Upper Income Workers
  • Effects on Retirement Age

The working paper includes country-specific analyses for Ireland, the Unites States, the United Kingdom and Canada.

“In all four countries, it appears that unexpectedly large increases in life expectancy have played a role in the decline in defined benefit plans. Defined benefit plans in none of these countries provide benefits that are indexed to increases in life expectancy. Thus, generally the plan sponsor bears the cost of increased life expectancy.
“Regulatory changes could be considered to make it easier for defined benefit plans to deal with the increased cost arising from increases in life expectancy.”

In summary, when working Boomers realized that their Defined Benefit pension plans would be at risk when their kids joined the work force they, changed the rules – closing the door on Defined Benefit plans.