June 25, 2007

Prescription for Canada's Ailing Pension System

Today, the Canadian Institute of Actuaries (CIA) unveiled a prescription for the country's ailing pension system at the non-profit Economic Club of Toronto. The 6 page report is quite readable and part of the Institute's desire to help guide public policy in Canada.

The prescription only addresses defined benefit pension plans.

Defined Benefit or Defined Contribution?
Fulltime employees in large companies usually get a pension through their employer. There are two common ways to convert savings into retirement income.
  • defined benefit: employer bears the financial risk of providing the benefits (e.g., 2% of your final average earnings per year of service)
  • defined contribution: employees bear the financial risks (the employer makes a contribution as you would with an RRSP and your pension depends on the growth of the savings)
Guess which type employers favour? Statscan reports that the portion of private sector workers covered by defined benefit plans has dropped from 29% in 1992 to 21% in 2003.

The Disadvantages
Defined benefit plans are not perfect. Employer funding requirements fluctuate, which makes corporate financial results more volatile. As a plan member, what happens if you change employers or are self-employed? Portability is a problem. If you leave employers during the first two years, your pension benefits for that period are lost (don't vest). Plans can still fail. Plan assets can be used for purposes you don't support, such as offering incentives to others for early retirement.

Asymmetry of Risks and Rewards
With defined benefit plans, the employer bears the risks and the employees get the rewards. If investment returns are poor, the employer must increase contributions. So if returns are favourable, shouldn't the employer be entitled to withdraw some of the surplus? If an employer tries, there's often an outcry. Hardly fair. Hardly an incentive for employers.

Where's the Outcry for Defined Benefit Plans?
There isn't one. Employees don't understand how much they lose. With defined contribution,
  • plan members bear the risk of poor investment returns
  • employers reduce their costs by 2% of payroll (which means costs have been shifted to plan members)
  • returns drop because of higher administration costs, less investment expertise and higher management fees than institutional investors
At retirement, plan members find that their retirement savings buy less of an indexed annuity than they expected. At this point, what can they do?

What's Next?
It wasn't clear what happens next. How will business owners react? Will politicians see a need to do anything? Do Canadians care? Are there other prescriptions that could help improve the defined contribution plans which predominate?


June 24, 2007

Further Down The Path We're Already On

I suggest that the only books that influence us are those for which we are ready, and which have gone a little further down our particular path than we have gone ourselves.
--- E.M. Forster

The quote above has had me thinking for days. It's so true. When I started reading personal finance blogs a few months ago, I tried many different ones because they were novel. Now, I'm finding there are only a few I revisit. Time is scarce, after all. My preferred sites feel more comfortable, perhaps because I'm on a similar path already. Do you find the same yourself?

For exposure to new ideas, we might read publications we'd otherwise skip or talk to folks we'd otherwise avoid. Even so, when it comes to being influenced, we're more likely to follow someone on our own path.
Two roads diverged in a wood, and I -- I took the one less traveled by, and that has made all the difference. --- Robert Frost
So rather than taking the road less travelled, we follow a tad further down a path we've already selected. Followers, not pathfinders. Maybe you feel the same?

June 17, 2007

Huh? The Risk Of Using a 407 ETR Transponder In A Rental

Q: What do you get when you cross a lawyer with the Godfather?

A: An offer you can't understand.
Huh?!? Sometimes a well-meaning message raises more questions than it answers. Here's an example.

The 407 Express Toll Route in the Toronto area can be a fast(er) way to get around ... for a price. I got a transponder to avoid the $7.10 video toll charges added to each round trip plus a monthly fee of $2.35 (see charges). The insert with this month's bill has an importance notice to help car renters save money.
"We do not recommend using your transponder in rental vehicles as tolls, video toll charges and administrative fees will be billed to the rental company if your transponder is not read.

If you choose to use your transponder in a rental vehicle, any tolls, video toll charges and administrative fees charged by the rental company as the responsibility of the renter."
What Does It Mean?
This well intentioned message is creating anxiety. Why wouldn't the transponder work in any vehicle? We have two vehicles and one transponder. I thought we could move the transponder between them, if required.

Here's the unanswered question: What should you do when renting a vehicle?

Without a transponder, won't you face the surcharges for for video toll and administration? Is there a special arrangement for rental companies? Maybe rental cars come with transponders already? Won't the rental company warn you if there's a better solution? Maybe they'll rent you a transponder?

I'm sure there are answers somewhere, but why not in the important notice itself?

The overall result is increased anxiety. Messages from other companies have the same unfortunate effect.

I hope I don't need to rent a car anytime soon.

June 10, 2007

The Unexpected Costs of Home Ownership

"I care. But not t-h-a-t much."
-- Herb Cohen, negotiator
There's an interesting post about Managing the Cost of Home Maintenance and Repair on A Canadian and her Money. The idea is to setup a reserve fund for predictable and unpredictable expenses. This works well for condominiums because predicting is easier when there are many units. For one home, the statistical approach is less meaningful.

Let's consider a simple example: death from an injury. The chances are 1 in 1,755 in a year and 1 in 23 during a lifetime, according to US statistics. How does knowing that help us as individuals? We're digital. Dead or alive.

Similarly, our fridge works or it doesn't. Our roof leaks or it doesn't. The furnace breaks down or it doesn't. Each of these items has an expected lifetime, but how long they last for us can be much longer or shorter. So how to we plan? If the furnace is expected to last 15 years, and it's still working well, do we still replace it? Chances are we'll wait and perhaps get many more trouble-free years of service.

Some expenses can be scheduled. If the roof needs replacing, you might be able to wait another year to free up money for "squeakier wheels".

Budgeting Is Boring
Saving is important, but budgeting is boring. Much like dieting. Many of us start, quickly lose motivation, quit and feel guilty. Worse off than when we started.
It's clearly a budget. It's got a lot of numbers in it.
--- George W Bush
An Easier Approach
An easier approach is to save money automatically by "paying yourself first" through automatic transfers from your bank account. This money can be used for savings and emergencies. In essence, we're self-insuring. So we're prepared for emergencies.

If we're faced with unexpected expenses and don't like borrowing to spend, we'll feel out of our financial comfort zone. So we'll likely reduce other discretionary expenses until we're comfortable again. So even if we dip into our savings, we'll work to restore them.

Does this make sense? Or should I leave the psychology of human behavior to others :)

June 4, 2007


If your out-go exceeds your in-come,
your upkeep will be your downfall.
— Unknown

Here are three practical (i.e., boring) ways to increase your net worth.
  1. Save More (Spend Less)
  2. Earn More
  3. Invest Better
Save More
The best technique is to "pay yourself first". Have a portion of your pay (e.g., 10%) deposited into a savings vehicle from which withdrawals are more difficult. You're less likely to spend money you don't see. Similarly, you can save a salary increase (or a portion of it) instead of spending it.

For those who don't payoff their credit card balances each month, an idea to pay for everything with cash. You keep one credit card for emergencies and cut up the rest. Put this credit card in a metal can, add water and freeze. Why? If you're tempted to make a purchase, you'll have to wait until your card thaws. By then, the urge to spend may be over. Why the metal can? So you can't use your microwave oven to reduce the wait time.

Earn More
You can increase your income by learning more and applying what you learn. I listen while driving in my 'university on wheels'. Traffic jams are no longer annoyances. They're an opportunity to listen longer ;)

Learning is also a strategy for remaining employable in the uncertain days ahead. Learning doesn't have to be in a classroom setting. You can learn plenty online for free using your favourite search engine. Blogs are an excellent --- and interactive --- tool.

Invest Better
Investing is a contentious topic. Who doesn't have an opinion or two? Relying on the advice of others over the years, I've lost money in shares, mutual funds, warrants, etc. Our current focus is paying off our mortgage while getting better educated about investing.

These ideas are related. Saving more and learning more help in investing better. Learning more is a form of investment. You can can the increase in your earnings from the increase in your learning.

Do you have other practical tips?