Don’t you remember your motherand father telling you: “you don’t understand today why I’m doing this, but one day, you will be thankful”.
This is exactly why Governments should force the population to save; because we will be thankful one day! Instead, most Governments are currently acting like other parents who may have told you “You just have to do the same with your kids when you have them to get revenge” as spending without looking behind and you can always charge your kids for your own mistakes!
The housing bubble burst in the US between 2007 and 2008. At that point, Americans thought their houses were the biggest ATMs they had ever seen. All they had to do was to sign a few papers at their local bank and walk away with plenty of cash in their pockets. This cash was used to buy useful andbbasic necessities in order to have a decent life such as a second BMW, a 50’’ plasma TV, a heated pool, vacations at Disney and several pairs of shoes. Tell me really, who can live with only two pairs of shoes?
People didn’t care and we all know the end of the story: Americans saw their house values melt by more than 30% within 12 months. Even worse: companies started to cut jobs, increasing the unemployment rate and reducing the State revenues collected in taxes.
After this Tsunami, Americans woke up and started to work hard and spend less. They switched their focus on paying debts above everything else. They went from a household debt-to-income ratio of 125% to nearly 100% in a short period of time. You can clearly see on the following graph what happened:
While I switched my focus on paying down my debts over the past two years, it seems like most Canadians don’t see it this way. As you can see on the above graph, the household debt-to-income ratio in Canada never ceased to increase and we are now showing a 165% ratio. Since January 2000, housing prices surged by 123%. There are more condo towers being built in Toronto than on the entire American East Coast. Are we richer than Americans or Dumber?
Such stats make me think about two very bad scenarios:
#1 There is definitely a housing bubble in Canada (don’t expect to sell your house with profit next year ).
#2 Most Canadians are NOT saving for retirement (which means YOU will have to pay for their retirement).
This is maybe why we should force people to save money.
I’ve heard this train of thought many times recently. In capitalism, most individuals hate seeing Governments telling them what to do. With all the horror stories in our history, I can appreciate this reflex. On the other hand, the same individuals expect Governments to save them from their own crap when they fail.
As a society, we have two options:
#1 We force people to save for retirement. Then we make sure everybody will get a minimum income at retirement. If everybody has made their own pension while they live, they will continue to spend money at retirement instead of being at the expense of the society.
#2 We let people spend their money on TVs and such and we tell poor retirees to starve in the street and die quietly because we don’t want to miss our TV shows. Since the Governments can’t afford to pay a pension to each individual, there are no other ways to let those people die in the street at one point.
Since we live longer and we have few workers to pay taxes, we can’t just imagine that we can afford to pay for everybody. Math in general is pretty simple. If you produce 10 sandwiches per day in your bag and you need to feed 20 people, you either give a sandwich to the first 10 and let 10 people starve or you give half of a sandwich to everybody and we are all a bit hungry. What happens if your production drops to 8 and you have 25 people to feed? This is where we are heading right now. So don’t tell me I can’t tell you what to do with your money since you will be begging for money in a few years from now and we both know the Government can’t handle this demand.
The problem is that most adults are still living like teenagers and think their parents (the Government) will be there to pay for their mistakes.
Let’s call it a FRSP and force each worker to put at least 5% of their income into it. I don’t think the Government should manage this money because it’s not their primary job and this would make the difference between acting as a good father and acting as the godfather ;-).
The FRSP should be quite similar to what we know as a RRSP (Registered Retirement Saving Plan). We should allow people the same flexibility in term of investments but the contributions would be obligatory and directly taken from their paycheck.
Over time, the FRSP could be increased to roughly 10-15% in order to make sure everybody has a good pension to live on. But to start with, I would copy the Australian approach (they started at 3% back in the 90’s and they are expecting to raise it to 12% in 2020).
Just for fun, I calculated my debt to income ratio… I can tell you I’m contributing to the 165% average! As my latest net worth statement, my debt level is at $312K. I’m making roughly $135K per year so it makes a ratio of 231%… yikes!
But… considering I’m 31 with three kids, I’m definitely at the moment of my life where my debt-to-income ratio is at the highest. It’s totally normal. In the next 10 years, I’ll be working on paying off my debts and reduce that ratio significantly. At the same time, I’m saving a lot of money for my retirement. Each year, I contribute $5,000 in my RRSP (which is 3.7% of my salary) combined to a defined pension plan which as an actuarial value of $10,000 per year at least. Therefore, each year, I’m saving 11.11% of my total income for my retirement.
This is why my debt-to-income ratio is not worrying me. The problem is when you have such a ratio and you don’t save for retirement or try to pay down your debts. Therefore, you wake up one day, you are turning 50 and you still have a ratio over 150%. This is where the problem is!
How would you feel if we would force you to save money tomorrow in a FRSP?
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