The unfunded

It may be sometime before Christmas when the 16,921 members of the Sears Canada pension plan, mostly retired, discover how scrooged they are. Things don’t look cool. The company’s in liquidation and the dirt-cheap prices shoppers were hoping to vultch in the doomed stores aren’t there. Without big sales, Sears won’t be able to top up its plan. Retirees will have to live on more KD and less Netflix.

The Sears Canada saga isn’t just about online stores whacking physical ones, or a tale of board room incompetence. Why the company’s bankrupt and disgraced is irrelevant to its pensioners. They just want their cheques.

Sears’ plan is in deficit by about $300 million, thus it can pay only about 80% of the benefits people were expecting. Lawyers are trying to get pensioners first-in-line when all assets are liquidated, but may not succeed. The retirees have already lost their benefits – dental, health and life insurance. (By the way, Bill Morneau’s family company – Morneau Shepell – administers the Sears plan, which has been chronically underfunded.)

Here’s the key point: Sears is not unique. Its workers, who believed their defined-benefit pension plan was stable, aren’t alone. Millions are in (potentially) the same boat – if their companies flounder retirement benefits are not guaranteed, since the plans are currently in deficit. Have you checked your employer out lately?

Nortel workers were shocked to learn their supposed gold-plated pensions were Hoovered by a third, then spent eight years waiting for restitution (it didn’t come). And if you have one of those rare defined-benefit pensions (benefits carved in stone and not subject to market fluctuations), don’t be smug. In Ontario alone DB plans have a $37-billion deficit. Over 80% are not fully funded.

Governments don’t care too much, it seems. Ontario companies can let pension plans go 15% into the red before they’re required to put more in. Shockingly, 60% are in that condition – and that’s for healthy employers. Not carcasses like Sears, which can slide much further.

Meanwhile, pensions in general are being erased. In 1977, says Stats Canada, 52% of us has a pension plan (either defined benefit or group RSP) but by 2011 that had shrunk to 37% – and continues to slide. It’s reasonable to conclude today that about 70% of us are not even as fortunate as Sears Canada workers. There’s no safety net for those years after work.

But what about the new, enhanced, rich CPP our finance minister keeps bragging on? Here’s what he had to say a few days ago:

“As joint stewards of the CPP, the Government of Canada and Canada’s provincial governments reached an historic agreement on June 20, 2016 in Vancouver to strengthen the CPP and meaningfully reduce the risk of Canadians not saving enough for retirement. The CPP enhancement is now a reality. The strengthened CPP will increase the maximum CPP retirement benefit by about 50 per cent, providing more money to Canadians when they retire, so that they can worry less about their savings and focus more on enjoying time with their families.”

Do not be deceived. Higher contributions from workers begin in 2019, then benefits will increase slowly starting in 2026. The average worker will receive $4,000 a year more than today, but that maximum will not be reached until 40 years later. Yes, in 2065. If you’re 15 today, you’ll get a little more in about half a century. For the rest of us, well, pfft.

The message of this depressing post is simple. You’re on your own. With the majority of pension plans underfunded, with 70% of us lacking one entirely (that includes me) and with CPP never intended to actually support anyone in retirement, loads of people are going to cease working and enter a financial crunch. Sure, they can sell a house, but if the real estate market’s in a cyclical downturn at the time that strategy could fizzle. Houses get illiquid fast. And you can’t auction off a bedroom to get quick cash to live on.

The best strategy is to start a liquid investment portfolio early, then feed it relentlessly. As mentioned here with nauseating regularity, the TFSA is the place to start. Get a hundred bucks in there every week for three decades and end up with $532,000, which can generate about $35,000 a year in tax-free income. Add that to your CPP and OAS, and you can look forward to living elsewhere than under a bridge.

Of course, if T2 had kept the TFSA limit at $10,000 a year, a diligent saver who is now 30 years old could have $1.063 million at age 60, kicking out about $70,000 a year, tax-free, while retaining the principal.

Seems the politicians would rather have us poor and dependent. Wonder why?