Warning: Debt Binge a Danger to Financial Health

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The Globe and Mail Jan 31, 2012

It’s time for warning labels on the documents you sign when setting up a line of credit.

Something along the lines of what they now do for cigarettes. “Don’t Poison Your Retirement,” would do the job, or maybe “Borrowing May Cause Poverty in Retirement.”

Stern measures are needed because the stress level over whether people are saving sufficiently for retirement has been kicked up a notch. Prime Minister Stephen Harper has announced plans to reform Canada’s pension system and the likely outcome is that some people will receive less in government retirement benefits in the years ahead.

Talk has focused so far on Old Age Security, which now pays up to $540 per month to people who are 65 and meet requirements for residency in Canada. One idea making the rounds has the government gradually increasing the age at which you can collect OAS to 67. It’s conceivable the feds could also get more aggressive in clawing back OAS benefits paid to higher-income seniors.

What’s certain is that our aging population necessitates action to ensure programs such as health care and public pensions are sustainable. Where there are now four tax-paying workers for every retiree, there will be just two by 2036, said Fred Vettese, chief actuary for the consulting firm Morneau Shepell.

“Something has to be done because of the changing demographics, and one place the government can look is OAS,” he said.

How perfect that the prime minister announced his pension reform plans on the same day last week that the Canadian Imperial Bank of Commerce released a report saying that a growing share of highly indebted Canadians are over 45. As the report says, that’s an age where “accumulating net assets ahead of retirement should be paramount.”

We’ve had infinite warnings about the dangers of debt, but they have mostly focused on the eventual day when interest rates rise from today’s low levels. What’s easily affordable now may become unaffordable then.

The mostly ignored risk is that too much money is going into debt payments at the expense of retirement savings. Sure, some people regularly contribute to their retirement savings and manage their mortgages and credit lines with discipline. But check out this nugget from a Statistics Canada report last month on contributions to registered retirement savings plans: “Almost 93 per cent of tax filers were eligible to contribute to an RRSP for the 2010 tax year, the same proportion as in 2009. Of this group of eligible tax filers, 26 per cent actually made contributions, unchanged from 2009.”

A few of these RRSP-avoiders may have decided that tax-free savings accounts are a better retirement savings vehicle. But it seems safe to say many people are spending at the expense of saving. Neglect of retirement saving is excusable when it results from job loss and related issues. But the CIBC report suggests that, as we look ahead to diminished government support for seniors, debt is swallowing up money that could otherwise be saved for retirement.

Picture this a few years from now: The government has its spending on a sustainable track, while a generation of Canadians hit retirement age with barely enough money to scrape by.

“There certainly is a risk of this turning out badly,” said Bill Robson, president of the C.D. Howe Institute, a public policy think tank. He wonders if the Bank of Canada should raise rates to discourage borrowing and encourage savings. Tricky though it might be to set up, he sees some potential in the idea of providing people with personalized retirement savings assessments that would tell them whether they need to save more for a comfortable retirement.

Starting OAS at age 67 would certainly require people to save more if they wanted to retire at 65. Mr. Robson is among those who see people working around this by staying on the job until 67 or longer, and he’s optimistic that employers will see the benefit of keeping older, more experienced workers around.

But many people will have to get more serious about saving money. They’re the ones who are determined to retire at 65, who have health issues that will prevent them from working longer or whose employer or profession doesn’t offer much opportunity for older workers.

Does the state really need to nag its citizens into saving adequately for retirement? In running investor focus groups on behalf of financial literacy initiatives, Brondesbury Group president Ed Weinstein has built a unique understanding of what people know about money matters. Or, rather, what they don’t know. “I have very little faith in what people understand about saving for retirement,” he said.

Financial literacy may help to boost our retirement savings rate, but we need stronger, quicker action. Let’s start with something like warning labels on lines of credit.

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