Malcolm Hamilton’s Alternate Reality

Bad ideas

Hamilton warns reforms cannot be based on an expansion of CPP that’s funded by intergenerational transfers, as this would compound the severity of existing problems. An expansion of the CPP cannot and may not be funded by intergenerational transfers. Bill C-36 (2007) requires that any amendment to CPP be financed on a fully funded basis, whereby each generation pays in advance for the additional (amended) benefits accruing to it.

“Transferring this burden to the small, not terribly wealthy generation following the boomers is not a viable strategy,” he said. A proposal that the CPP be doubled, with those retiring in seven years getting the full benefit while paying almost none of the cost, is “just an embarrassment.” By virtue of the above-mentioned full funding requirement applying to CPP amendments, any proposed doubling of the CPP can and may fully benefit only to those retiring after at least 40 years, not 7 seven years.

Reforms that would force poor or younger workers to save more should also be avoided, he said. Why? Lack of saving is the problem.

Canada’s working poor often find themselves in better financial shape when they retire, thanks to the Canada Pension Plan, Old Age Security and the Guaranteed Income Supplement. A worker earning less than $25,000 per annum before retirement can expect to replace 120% of that income in retirement.

“For them, retirement is the best of times,” Hamilton said.

Forcing younger workers to save more would also be a mistake, as they should be encouraged to pay down debt. All this does is encourage people to overspend.

The real problem with retirement planning in Canada, he said, is not on the asset side of the spreadsheet, but on liabilities. The 50% income replacement rate will suffice for most retirees, but only if they retire debt free. Carrying a mortgage on 50% of pre-retirement income is a recipe for misery. 50% only works for people earning at least twice the AIW – for the rest it means unders-saving and full dependancy on government benefits.

Boomers benefited from the period of high inflation and interest rates, because it let them buy homes at suppressed values while inflation doubled incomes over ten years. Boomers benefited from the period of high inflation and interest rates, because it let them buy homes at suppressed values while inflation doubled incomes over ten years. The period of high inflation and high interest rates meant that home costs were going up faster than people could save for a down payment. They eventually caught up but at a cost of all other saving. The comment is irrelevant.

By contrast, young Canadians are taking on massive debt loads at extremely low interest rates. Any increase in those rates will eat into their net worth. Meanwhile, the Bank of Canada has an avowed inflation target of just 2%, which means wages are not likely to skyrocket as they did for boomers.

The upshot of this is the danger of retiring with debt is much higher for today’s 30-year-olds. Debt is debt – a retiree who has a mortgage has a greater problem.