Raiding the Coffers

Raiding the Coffers

Hard to make sense of this, but what is described in this article makes my head spin.

It is so backwards and ridiculous that you may need to read this more than once for it to fully sink in:  In many states, governments are actually borrowing from their own pension funds, to make their required annual contributions to the same pension plan!!!   Wow, where do I start?

This is akin to a client telling me “Rob, I do not want to eat cat food in retirement, so we have determined that I need to put $20K into my RSP each year.  This year I don’t have any money.  Fortunately, I have a solution:  Please pull $20K out of my RSP, put it in my chequing account, so I can write you a cheque to put $20K into my RSP.”    Obviously, this is not a solution to anything.

A recurring message I try to get across to clients is my strong belief that:

  1. Governments everywhere (yes, including Canada) have promised far more than can ever be delivered, under the status quo.
  2. Unwinding these unsustainable promises (or raising taxes to sufficiently fund them) will take several years and has, so far, proved to be politically impossible.
  3. Everyone wants changes to affect someone else.

It is not fun to think that the Canadian situation is no better, but we have an opportunity others do not:  That is, we get to watch how Greece/Europe deal with their problem, and see how the USA deals with their problem.  I feel this provides the clearest insight as to how Canada will eventually deal with our problem.  How this all plays out will affect various investment classes greatly.

In my opinion, there is no issue right now that affects your financial future more than this.

Excerpt from the article:

More fundamentally, the use of devices such as loans is a way of deceiving voters about the true cost of pension promises, which are similar to debts incurred by the government (i.e they are promises to make a stream of future payments). Voters may be willing to make those promises but the true costs should be made clear. Disguising the costs only creates the potential for a crisis when a) taxes will have to be raised very sharply, b) other government services will have to be cut or c)pension benefits will have to be reduced, leaving no scope for retirees to cushion themselves.

If you’re interested, this is the New York Times article that the above Economist article is referencing

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