THE TRUTH ABOUT INCOME TRUSTS #5

RETIREMENT 'HAVES' & 'HAVE NOTS":
THE NEW SOCIAL INEQUALITY

With their irrational attack on the income-trust industry, the current Conservative government (along with their new political friends, the NDP) have signalled their alliance with two key segments of Canada's most privileged elite -- (1) retired executives with hefty defined-benefit pensions and (2) affluent public-service retirees (including Ottawa politicians and bureaucrats) with gold-plated indexed pensions.

Unfortunately, the gilded, guaranteed retirement paradise of these privileged Canadians is no longer available to most other Canadians ("TROUs" -- The Rest Of Us). Instead, in retirement, the rest of us must try and cope with ever-escalating everyday costs of living -- such as heating, electricity, insurance costs, property taxes and automobile costs -- with the returns from accumulated RSP savings.

And retirement life is no longer a picnic when you have to finance it with the very limited income provided by the "safe" investments promoted by Canada's establishment financial institutions -- GICs, bonds, treasury bills, and bond & morgtgage mutual funds.

Although the Ottawa elite still refuses to come to terms with this new socio-economic phenomenon, Canadians are now living in a high-cost/ low-interest-rate economic environment which is likely to continue for decades. And retired TROUs are most negatively affected by this new economic reality.

For example, in the last two years or so, a retiree was lucky if he or she was able to get a 3 1/2% annual return on a five year GIC from a local bank (yes, those Bay Street banking moguls are just too generous to us, all the while they vote themselves ever-grander multi-million-dollar salaries and bonuses).

Factor in the official inflation rate (which is in fact much lower than rising real-life costs), and there's not much left to spend on food, rent, transportation, taxes and perhaps cable TV. Anyone for cat food for dinner tonight -- the diet obviously recommended for financially-starved seniors by today's Conservative Party leadership?

What About The Rest Of Us?

So what was (or is) the average, non-privileged retiree to do, in order to just scrape by and keep his or her head above the inflationary waters? In the past, the answer was quality income trusts, with their high yields and their priority on utilizing profits to generate a generous income stream for investors -- rather than following the corporate stock model encouraged by Jim Flaherty, which is to plow corporate profits into heftier executive salaries, bonuses, stock options, company mergers, and share buyback schemes.

If the current new Flaherty trust tax legislation is passed in Canada's Parliament, then this one steady source of enhanced income for retirees (and other Canadians) will disappear. And (as apparently intended) Canada's financial establishment will once more reign supreme, as the only game in town for investors looking for income -- even though this "game" is totally rigged in favour of Bay Street's banks, mutual funds, and other financial institutions.

That in turn will ensure big profits for a big government-fostered business monopoly. Just the way Jim Flaherty and his Bay Street friends appear to like it.

Which leads us to the point of today's "sermon”: The emergence of a new government-sanctioned inequality among Canada's seniors. A new world of senior "haves" and senior "have nots."

Maintaining The Privileged Status Quo

"Let them eat cat food!" Jim Flaherty and his bureaucratic minions symbolically appear to be exclaiming about TROUs (most of whom need income-trust income to forge a liveable life in today's changing economic environment). Meanwhile, Mr. Flaherty and his privileged public-service and big-business allies can happily celebrate their impending retirements -- and the prospect of living the good life on gold-plated pension plans.

Can you say privilege and social inequality in today's senior years, boys and girls? Well that's the divisive new socio-economic trend emerging in Canada today. And no-one seems to want to do anything about it.

But where are the journalistic social progressives of the Globe and Mail and the Toronto Star on this issue? Where are the protest voices of the socially-progressive NDP politicians on this issue? And where are all the other champions of social justice dedicated to protecting the "little people" from the forces of privilege, affluence and the social status quo?

Imagine that. They're all supporting the conservative government of Stephen Harper. And unintentionally they are also supporting the vested interests of Mr. Harper's puppet masters within the Bay Street financial establishment.

Of course, Canada's 'reformer chic' class talks a good game; but when their comfortable journalistic, bureaucratic or political careers are at stake, they readily become the enablers of privilege and the status quo if necessary.

Isn't it sad how power and privilege always seem to win out in this country, one way or the other?

We will be back in February to bring you more revealing truths about the war on Canada's income trusts and on income-trust investors.

In the meantime, we include a homework reading assignment below. To get a better idea of one aspect of the social inequality that's emerging in retirement life these days, please read the Financial Post article below:

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PRIVATE SECTOR LOSING GROUND AS PENSION GAP GROWS

Jacqueline Thorpe
Financial Post
January 18, 2007

Canada is on its way to a two-tier retirement system, where public sector workers will be assured of gold-plated, fully-indexed pension plans and many private-sector workers will be lucky to have a pension at all, a report from the Canadian Federation of Independent Business said yesterday.

The CFIB says huge underfunded liabilities among public sector pension plans could lead to future tax increases, dragging down the economy, productivity and prosperity while the growing gap with less generous private sector plans could lead to greater income and social inequity.
"In researching this issue, it became obvious that those of us who work in the private sector will not have the same means to retire as our counterparts in the public sector, and to add insult to injury, we are subsidizing their retirement lifestyles," Catherine Swift, CFIB president, said in a statement released with the report. "It's very inequitable."
CFIB said the public sector has driven the early retirement trend that started in the 1980s. In 2005, roughly 56% of public sector retirees had retired early, compared with 33% in the private- sector and only 20% of self employed individuals.

Furthermore, the average age of retirement in the public sector has decreased dramatically to 59 from 64 in the mid-1970s, compared with 62 from 65 for the private sector, while remaining stable at 66 for the self-employed.

CFIB says in 2003, only 27% of people in the private sector belonged to an employer-sponsored pension plan or registered pension plan (RPP) as they are known, down from 35% in 1977. Meanwhile, 87% in the public sector were covered by an RPP.

Many small business owners often have no pension, relying for their retirement income on the $500,000 lifetime capital gains plan, personal savings and assets, RRSPs and proceeds from the sales of their businesses.

What's more, the private sector has been rapidly moving to defined-contribution plans where the contribution may be guaranteed but not the payout, while public-sector pensions remain almost entirely defined benefit plans. Here the payout is fixed, and usually linked to inflation and the employer (i.e. the taxpayer) is entirely responsible for ensuring it is fully funded.

And taxpayers may be paying more because many public-sector plans are under water, although the data are sketchy and it is hard to tell by how much.

A 2004 report from the Certified General Accountants Association of Canada estimated that more than half of DB plans in Canada had a funding deficit, amounting to $160-billion in total at the end of 2003, although that number may have shrunk somewhat as financial markets have rallied in recent years.

The Ontario Teachers' Pension Plan had an estimated $6.1-billion shortfall at the end of 2006, down from $32-billion in 2005, thanks to revised estimates that only added to the confusion in trying to understand shortfalls, CFIB said.

Ms. Swift said Canadian taxpayers are paying for these shortfalls. She was shocked to learn that all the $2-billion transferred to Newfoundland and Labrador from the federal government in the Atlantic Accord went entirely to reducing the unfunded liabilities of the province's teachers' pension plan.

"I think Canadians were maybe okay with that amount of money going to help [Newfoundland] with their standard of living but it's totally going to people who are already making a very good standard of living and already have a very rich pension plan and that's by no means the only example," she said. The Ontario government recently increased contributions rates to the Ontario Teachers' Pension Plan. "We're already paying and we'll just pay more if we don't get a better grip on this issue."

First, governments must take a critical look at the issue to figure out exactly where the liabilities lie.

"Government are going to have to be dragged kicking and screaming to do anything about it because, let's face it, their senior decision-makers are the beneficiaries, so why would they go near it with a 10-foot pole?" she said.

Secondly, when plans go into surplus the knee-jerk reaction should not be to increase benefits and payouts, as happened during the stock-market boom of the late-1990s, only to see their funds disappear in the crash.

CFIB is pushing for capital gains rollers but higher RRSP contributions would likely help only a few. Lower taxes might help.

"Our members have always been supportive of higher RRSP limits but let's face it most people never get to their limits year to year," she said. "Maybe if they weren't forking over so much money in taxes to pay for somebody else's pension they could afford a little bit for themselves.

The overall objective of any pension-policy reform should be to level the playing field between the public and private sector."