June 17, 2013, 6:33 am

Forcing People To Save – The Best Idea a Gov’t Could Never Have

by: The Financial Blogger    Category: Assets and Net Worth,Pay off your Debts
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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!

 

There Is No Money Left in the Till

 

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:

 

debt to income ratio

 

Canadians are Dumber than I Thought

 

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.

 

The Hell With it! The Gov’t ain’t Going To Tell Me What To Do With My 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.

 

The Solution? A Forced Retirement Saving Plan!

 

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).

What’s Your Household Debt-to-Income Ratio? Mine is…

 

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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Comments

by: Traciatim | June 17th, 2013 (9:01 am)

The government already does force a minimum amount of retirement savings and supplies a minimum guaranteed income in the GIS/OAS/CPP. The CPP rate is 4.95%.

Sure you won’t be living like kings on OAS/CPP, but you won’t be eating cabbage stew every night either.

“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.”

So they are acting exactly like the finance sector.

Keep in mind that under current rules you may want to max our your TFSA before your RRSP if you risk OAS clawbacks on your earnings in retirement . . . It’s one hefty tax if you count it like that.

by: Traciatim | June 17th, 2013 (9:18 am)

Oh, also, housing prices ‘surged’ 123% since 2000? Isn’t that like 1.61% a year or so . . . sure seems pretty standard for an inflation tracking asset to me. How do you get OMG BUBBLE RUN FOR YOUR LIVES! from 1.61% a year?

When ppl say an investment went up 123 percent, that means it more than doubled. Not went up 23 percent.

So it’s like a 9 percent return per yr. Well above inflation.

by: The Financial Blogger | June 17th, 2013 (9:41 am)

Hey Traciatim,

good to see you on the blog :-)
We already have a small pension setup, but it’s going to be hard to live on that. I think we should save a lot more money!

I might written it in bad English, but it’s 123% more (not 23%) so it’s over 9% per year. That is scary as the housing market should follow the inflation, not beat the stock market return ;-)

by: Traciatim | June 17th, 2013 (9:52 am)

I actually just came back cause I realized my mistake in the 23% increase vs 123% increase. That’s what I get for doing math that early.

It’s still not unheard of throughout housing history and the current rate is something more like 3-4%year over year (at least the last I read) . . . if anything the government meddling in all these mortgage rule changes was the primary driver of it and reversing some of those has really put a damper on it.

I still don’t get why you think we need another plan to force people to save. Why should the government be responsible to people more than the amount they already have. If you get the average CPP/OAS currently you can live quite a fine life in most of the country. If you have a paid off modest house at the same time you’d actually be fairly comfortable.

by: The Financial Blogger | June 17th, 2013 (12:44 pm)

Traciatim,

how can you live a fine life with roughly $15,000/ year? You are living, but that’s about it! Once your rent and food has been paid, there is not much left to even watch TV ;-)

I think we need to save more because at retirement, people left on CPP/OAS will require more money from the Government. I think it’s a better idea to force people to save right away than taxing workers to finance additional measure in 20 years…

Actually, the CPP and OAS contribution will be increased in a few years so it will all come down to the same thing. I would rather manage my money than giving it to the Government :-)

I agree that we already have enough forced savings in Canada. Your employer also matches the CPP contribution, so it’s almost 10% savings already. (If you’re self-employed, you pay both sides). For a couple, $30k/year from CPP/OAS/GIS is quite doable, especially with no debt and a paid off house. If you want more income, you can always save more, possibly using a RRSP or TFSA.

Although your FRSP would be good for the finance industry, who would get to skim hefty management fees every year. You work for a bank, right? ;)

This Forced Retirement sounds almost like Social Security. Government takes your money now, and in theory, you get it back in the future.

Forced retirement contributions are already here in the US — Social Security. 12.4% of our paychecks (6.2% from employee, 6.2% from employer) is auto-deducted and thrown into the black hole known as “government.” The big mystery is whether those of us under 40 will ever get to see any of our contributions when we retire. It’s kind of like investing in the stock market without getting to see any information on your stock picks. They might be doing great. They might be nearly bankrupt. All you know is you have to keep buying more every two weeks. You don’t get to see the gains/losses until shortly before you retire. Fun!

I would love to see that 12.4% be put into an account that gives me control over the money. It would be sitting nicely in VTSAX along with my Roth IRA contributions.

I like the idea of forced retirement savings. I hear too often from coworkers making pretty decent salaries how they can’t afford to save for retirement right now. First off I know how much they make and they can afford it. Second, I always say you can’t afford NOT to be saving right now. We will all retire one day whether we want to or not. Some will be prepared and some will be forcing the government to take care of them. I say the government gets a head start and starts making people prepare ahead of time. But yes, we must have control of our own money. Here in the US we have social security which is similar to forced savings but unfortunately my generate basically expects to get nothing back once we reach retirement age due to government waste.

I hate to be that way, but I’ve been in favor of a forced retirement savings plan for years. Why not? In America we already pay into Social Security and Medicare. Why not apply a percentage of those earnings towards some type of dedicated plan similar to a 401k that the government can sponsor.

by: The Financial Blogger | June 18th, 2013 (12:18 pm)

Hey JD,

I do work in a bank, I didn’t think about that part when I wrote the article, lol!

More seriously, I’m definiltey more concerned about the middle class than the rich. They have enough money to fund their retirement. The middle class battle all their life and don’t save much before retirement. I really think that CPP and OAS is not enough… especially since they will increase the contribution and postpone the retirement age. Chances are I’ll touch this money when I turn 70!

by: fiscally fit | June 18th, 2013 (2:02 pm)

Simple solution, all employers should make a savings plan available for their employees. If a match is done by the employer, that is their choice. At least it would be better than nothing. That way the gov’t is not managing the actual funds, no one can say that they were not given an avenue to start saving, the they whole pricing/MER/fee agrument is less valid as everything is reduced to volume (example, group rrrsp fee structure). Simple mandate that a plan must be made available by all employers.

“It’s still not unheard of throughout housing history and the current rate is something more like 3-4%year over year (at least the last I read) . . . ”
- You are right there are times it happens and then each time there is a bubble that bursts when it comes to real estate lol

As far as the Force Plan – I wouldn’t care if it were a 401k like plan and not another SS plan which is a black hole that sucks money in and provides a regressive amount out.

by: Traciatim | June 18th, 2013 (7:37 pm)

You claim that most people aren’t saving for retirement, but stats canada claims otherwise. In their table under ” Participation in Private Retirement Savings Plans, 1997 – 2008″ Table 4 shows clearly that the number of people that have a Pension Adjustment or RRSP contribution is more than 50% of the people earning employment income (2008).

Also, the vast majority of the ones that don’t participate are in the bottom two income quintiles (a shade over 65% of the non-participants). You could argue at these income levels (especially the lowest quintile) that in many cases the RRSP plans don’t even make much sense since the new TFSA or even regular taxed plans will end up better in the long run due to GIS clawbacks under current rules in retirement.

Comparing the bottom to top quitiles, they put it at 91% of the lowest quitile have neither a pension adjustment or RRSP, but only 14.5% of people in the top quitile have neither.

Maybe the problem you are seeing isn’t a case of low participation, but simply that of low income.

I too see the people around work who are putting their Iphone in their purse worth as much as the phone while simultaneously complaining about not being able to save, but they have a far different problem and are in the minority.

I think that this would work better then an annuity type system we have now. Yeah I was listening to people at work today talk about how much they hate paying taxes and how they should be lower. None of them happen to mention the programs they would be willing to cut that would affect them though. That’s how it alway goes, people want the government to offer them services, but they want someone else to pick up the tab.

@Traciatim,

the problem is not the contribution to the RRSP but the amount in there. If you contribute $1000 per year, you are part of the 50% but you will only get 50K at best for retirement!

Hey TFB,

I’m really saddened to see that you’ve decided to advocate this idea.

It might be tempting to support these kinds of policies, e.g. let the feds fix our problem. But there are several problems.

1. Carried to its logical extreme these kinds of policies virtually guarantee a dictatorship. Ask anyone who grew up under the east german regime what they think of this. They’ll tell you. This is why Germany opposes the Obama administrations wiretap policies…its because being a slave to a strong powerful state kinda isn’t much fun. These sorts of policies are just the thin edge of the wedge.

2. Why assume that governments can more efficiently allocate savings capital than the general public? Has the Fed done a god job of calling the housing downturn? Has the federal government done a good job of managing the national debt? Do you trust Washington DC politicians to manage such a policy well? Are people in DC angels that they deserve your trust?

3. Its paternalistic. Its morally and ethically the same thing as saying that women or African Americans shouldn’t have the right to vote. Really, I know this might sound extreme, but the principle is the same. Its basically saying that people aren’t worthy of making their own decisions and instead should be relegated to a secondary social status – in the one case being a field laborer or a housewife – in the other a servant of society.

If you truly believe in the American idea of equality and freedom, then you’ll categorically reject these types of policies.