Feds try to quell retirement fears, but winter is coming: Neil Macdonald

The people who craft messages for government say it's wrong to call the Canada Pension Plan expansion a tax.

"This is an investment," one official told me, after requesting the discussion be on background only. "It's about our kids."

Why he insisted his name not be published is mystifying. He was using perfect postmodern government-speak.

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Governments never tax anymore. They raise revenue, which they then "invest."

They "invest in infrastructure," rather than spend money fixing roads and bridges. They "invest in people," rather than spend on social programs or relief for the disadvantaged. They don't spend billions on military hardware, they invest in Canada's security. And so on.

The reason for this vat of marshmallow euphemism is plain: the word "tax" has become a pejorative term, or at least politicians believe it has. As has "spend."

But tax and spend is what governments do. And the new CPP "enhancement" is in fact an expansion financed by a tax, a tax being defined as any involuntary diversion of income or wealth by government, regardless of how noble its purpose.

Raw fear

In this case, the purpose is noble enough: to ensure frightened Canadians a better retirement.

Whether it will make much of a difference, though, is something else altogether.

Retiring into penury, or not being able to retire at all, is becoming a raw fear for millions of Canadians. The reasons are multifold.

Real estate prices, especially in the lunacy of markets like Toronto and Vancouver, are rising at several times the rate of income growth. People are stretching themselves to the point of extreme financial fragility to come up with a down payment and cover the monthly mortgage instalment.

That, of course, is viable only as long as prices keep rising, and as long as interest rates remain so low as to be nearly negative after inflation. But as the Americans can tell us, prices fall eventually. Just as interest rates will inevitably rise.

Add to that the fact that real incomes have been flat for years, that companies struggling to compete in a globalized world are doing away with the albatross of defined-benefit pensions (or any pensions at all), that such jobs as do exist for young people are often part-time or contract positions, and that Canadians are piling up spectacular levels of personal debt, and it's easy to understand the growing insecurity about what will happen on the inevitable day when regular paycheques are no longer arriving.

The question is, how much can government do? The answer, simply put: a little bit. And that is what it has just done.

It has decided to eventually take about $35 more a month from the average Canadian earner, on the promise of a slightly higher CPP payment upon retiring. It's a sort of forced savings, if you accept the government's word that the higher benefit will someday materialize.

But as much as Canadians have come to believe in the power of government to stand between them and the pitiless marketplace, there is precious little it can do to make a home in Vancouver or Toronto more affordable.

Limits to what government can do

There is also a limit, particularly in an age of mobile capital, to what the government can squeeze from businesses. Half of the payroll tax that will fund the CPP expansion will probably be extracted from employers, but those employers will almost certainly try to offset the expense by paying lower salaries, or employing fewer people, or by paying even less in benefits.

And there is one other thing governments cannot do. They cannot manage your money for you.

Canadians, it turns out, feel every bit as entitled to spend as Americans, whether they have the money or not.

As of the fourth quarter of last year, Canadians were carrying a higher per capita level of household debt than Americans were when their financial system cracked and crashed in 2008.

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Aside from historically high mortgage debt of $1.26 trillion — which is at least underpinned by real estate — Canadians were also carrying $573.6 billion in consumer credit debt. That translates to an average load of about $43,000 per household, much of it credit card debt.

But that's actually misleading. Because half of Canadians pay off their credit card every month or carry no debt at all, the average debt load of people who actually carry debt is even higher.

And credit card interest rates, unlike mortgage rates, are punitive. Around 20 per cent. Just servicing that debt, never mind reducing it, is notoriously hard.

Unrepayable lifetime debt has become a business model for credit card companies, with the eager participation of spend-happy consumers.

Self-denial

Now, this may sound like a paleoconservative comment, but there was a generation of people not so long ago who largely believed in living within their means – not buying something unless you had the money to pay for it.

My father, a modestly paid teacher, scorned credit cards, drove Chevrolets instead of Oldsmobiles, paid cash for them, kept them till they fell apart, and to the best of my knowledge, never borrowed a cent in his life.

Putting money aside for retirement was some sort of prime directive. He actually used to read his children the morality tale of the ant and the grasshopper, intoning, as he turned the final page, that you can't count on anyone but yourself.

Really, he was talking about self-denial, something the boomers, and perhaps even more so the millennials, have never really been into.

So, we turn to the government for help, and the government does what it can. Which really isn't very much.

Winter is coming, as that TV series puts it.