This article was originally published in Maclean's Magazine on October 20, 2008
Will You Ever Be Able to Retire?
For more than a decade, Trish McAuliffe and her husband, Jim, have lived with a financial sword hanging over their heads.
Trish and Jim went to work for General Motors in Windsor, Ont., right around the same time in the early 1980s. It was 1996 when they got their first termination letters - notices that they would be put on "indefinite layoff" within a few months. They had a toddler and a baby at home, and had just bought a house. Jim, who was 31 at the time, came down with shingles, which his doctor attributed to extreme stress.
Their jobs were saved when thousands of older workers accepted voluntary buyouts, cutting down the number of layoffs. But soon, another termination notice arrived, then another, and another. Finally, in 2004, after years of flirting with financial ruin, the McAuliffes decided to move to Oshawa, Ont. GM was cutting back operations in southwestern Ontario, but had just invested $2.2 billion in its Oshawa facilities. They pulled up stakes, said goodbye to family and friends and moved four hours east in search of stability. They were in their new home for a year before the axe fell again, then again and again - three termination notices in about 36 months. Each time they received what amounts to a stay of execution. "We've had these death notices over us for three years now," she says. "We're terminally ill, but we haven't died yet."
But with the global economy now slinking inexorably toward recession and worldwide financial markets lapsing in and out of panic, Trish, now 47, admits she's wondering if and when that next letter might arrive, and what it will mean when it does. She alternates between worry and resignation. Her kids are 13 and 14, and will be off to university soon. She knows that they'll have to rack up significant debt to get a degree. She knows that if she and Jim lose their jobs, "the house will be the first thing to go ... we'll have to downsize."
"It's like a feeling of gut rot that sits in your stomach," she says. "When you get the letter, it feels like people are pitying you. I hate that feeling. My kids hate it."
It's little comfort to know that in the past month, millions of Canadians have come to share her sense of dread. Canada's stock market has plunged and all the latest economic numbers point to recession. This week economists confirmed that they expect Canada's GDP to contract through the remainder of 2008 and the first few months of 2009. That certainly means more job cuts, less consumer spending and no end of anxiety.
What started as a brush fire among heavily indebted U.S. homeowners who bought wildly overpriced homes they couldn't afford has grown and spread into an international conflagration that threatens the stability of the world's biggest lending institutions, and every company that relies on credit to fund its operations. That, combined with the stunning market declines of the past two months, raises frightening scenarios for the millions of Canadians who, over the past 20 years, bought hundreds of billions of dollars in mutual funds, pouring their retirement savings into the stock market in the hope and belief that a generation of steady economic growth would translate into a retirement of beach vacations, summers at the cottage, and a hefty legacy left for the kids. Instead, millions find themselves with decimated retirement funds, declining real estate values and uncertain job prospects - all of it hitting at the very moment that they expected to be cruising toward an easier pace of life.
It used to be that McAuliffe, a third-generation auto worker, worried mainly about the next year's mortgage payments, and whether she could afford to give her kids all the things they wanted. Now her fears are bigger, and more far-reaching. She worries for her job. "You know, I used to say I wouldn't even get out of bed for $10 or $12 an hour. I really used to wonder how people survived on that kind of money," she says. "Now sometimes I think I might just have to." She's desperately hoping she can hang on at GM until her pension kicks in five years from now. Even then, she wonders if GM can weather this storm to pay her retirement benefits.
This much is certain: Canada will survive. The market will stop falling, consumer confidence will return, and the economy will grow again. But how long will it take? How much further will it fall? And what will be left of a nation's retirement dreams by then?
Up until a few weeks ago, the experts said it couldn't happen here. Anyone who raised even the possibility of a Canadian recession was dismissed out of hand. Economists were quick to point out that we don't have ridiculous personal debt levels like they do in the U.S. House prices have risen, but not to the crazy bubble heights that homes in Florida and Arizona had. Most importantly, Canada has oil. As long as people in China, India and the other developing nations kept buying new cars and building new factories, they would need oil, and that would fuel this country's continued prosperity. But growth in the developing world is now sputtering. China's main stock market index, the Shanghai Composite, has dropped by a stunning 60 per cent over the past year, and there have been similar market drops in Brazil and Russia. The entire global economy is gearing down, which means less demand, not only for oil, but for copper, nickel, wood pulp and fertilizer too.
Canada relies on commodities for about half of its export revenue, and the Bank of Canada's Commodity Price Index has lost a quarter of its value since July, as oil has sunk from US$145 a barrel to US$90. The S&P/TSX Composite index has dropped by 35 per cent since mid-June, and respected businesspeople such as Fairfax Financial Holdings chairman Prem Watsa say it could have another 20 percentage points to go. Americans have stopped spending, and domestic manufacturing, which supplies the U.S. with everything from auto parts to airplanes, has hit a wall. "The Canadian economy, which has been only barely above water for nearly a year ... is now expected to post an official recession," a report from UBS warned this week.
This development is even worse than it sounds. Until now, many economists had hoped that the credit crunch might be successfully contained in the financial markets. Yes, the Dow Jones, the S&P 500 and the TSX would fall off a cliff, but it would be a headache mainly for investment bankers and traders. It would have relatively little effect on the lives of most Canadians. But when a purely financial crisis spills over to cause an economic recession, it's another matter altogether. Bank of Nova Scotia chief economist Warren Jestin says that the word "recession" may not even apply to what's happening now, given its unusual underpinnings in the markets. "In the old days, the financial markets were just reacting to the real economy. Now, the financial markets are taking on much more force," he says. "Now we're finding that the financial markets themselves can be the driver of the real economy. In my view, it's unprecedented."
If it used to be bankers and traders who got crushed by market crashes, this disaster is hitting ordinary Canadians right where they live this week, as millions across the country rip open their investment statements for September and gasp in horror. Many will find that they have lost years of growth - even those investors who played it safe and diversified their investments. The losses will hit every investor hard, but it's the 5.7 million boomers who hope to retire over the next 10 years who will suffer the most. Right now, Canada is gearing up for the largest retirement wave in our history. Statistics Canada predicts that the wave will peak in 12 years, and it will mark the first major wave of retirees who have attempted to fund much of their retirement themselves. Previous generations relied overwhelmingly on pension plans and government benefits. The investing was done for them and the benefits were guaranteed. But during the 1980s and 1990s, companies cut back on pensions and boomers flocked to mutual funds. Over the last 20 years, the amount of money invested in Canadian funds has rocketed from $25 billion to $700 billion. Now those boomers are on their own. Their life savings are exposed to the mercurial will of the markets, and no one is guaranteeing them anything.
Those small investors were often told that if they spread their money around, they'd be okay no matter what happened. But over the past several weeks, world markets have entered a rare downward spiral. Everything - housing, Canadian stocks, U.S. stocks, international stocks - it's all going south at once. The impact is already hitting home. A new Angus Reid poll for Maclean's shows that three-quarters of Canadians are concerned that the country is heading into recession, and more than half are worried about their personal debt level.
Carl Anderson, a retired school principal in North York, Ont., is a much better investor than most. He's been shovelling money into his portfolio of blue-chip, high-dividend stocks for more than 20 years, and though he lives a middle-class life on a modest income with his wife, Thelma, he's managed to build up a portfolio of $2.5 million. Despite his investing acumen, his portfolio has been ravaged by the markets. "I've dropped half a million dollars," he says. "A lot of it has been banks. My oil stocks are dropping too. Between the two of them I'm getting crucified."
Anderson, now 77, says he's been through several nasty drops in his life, and this ranks up with the worst of them. He's not too worried about himself, because he can afford to leave the money in his account and live off the dividends, but few are so lucky. "This period we're going through is ugly, I'm not going to sugar-coat it," says Patricia Lovett-Reid, senior vice-president at TD Waterhouse. "It's much more difficult for someone entering into retirement in a bear market than someone who has had some time to see compounding in their portfolio." The timing of the crash will be crippling for some. Because of the way compounding works, a huge portion of a typical Canadian's retirement portfolio depends on those last few critical years. If an investment is growing by eight per cent a year, for instance, then the account will double every nine years. Missing that last doubling can mean the difference between retiring with $1 million and retiring with $500,000. In the current market, an investor who has sweated for 30 years to build up a $500,000 nest egg could now find his portfolio a full third smaller than it would have been.
The standard advice when the market dives like this is to hold tight. Don't panic. Don't sell. Don't even open your statements. Eventually the market will recover, and everything will be alright. But what they don't tell you is that recovery can take years. When the market crashed in 1974, it took four years to recover. When it crashed in 2000, it took almost six. For many Canadians, waiting out this storm will be extraordinarily difficult.
For starters, more Canadians are counting on using the equity in their homes to retire than ever before, and that equity is now in danger. According to StatsCan, three out of 10 families have no RRSPs or corporate pensions, and a high percentage of our wealth is tied up in our homes. Millions planned to tap that wealth by downsizing to a smaller home, and some hoped to inherit family property from their parents. Not a bad plan in a rising market, but a recent report from Merrill Lynch Canada forecasts a "sustained downturn" in the national housing market, with cities such as Regina, Saskatoon, Vancouver and Victoria particularly susceptible to tumbling prices. And historically, housing prices tend to move like oil tankers: once they get going in a particular direction, they're slow to turn around. If we do enter a real national housing slump, some say it could be a decade before house prices recover.
There have already been more than two million residential foreclosures south of the border since the crisis began in 2006. In Canada, it's often said that subprime mortgages never accounted for more than a tiny fraction of the market. But Andrew Bury, one of Vancouver's top insolvency lawyers, says that's misleading. The Canada Mortgage and Housing Corporation recently tightened its rules, but until this month, thousands of Canadians were able to buy homes with no money down and mortgages of up to four decades. "How is that not a subprime loan?" he says. "We tend to poo-poo the Americans and say the subprime mortgage problem was theirs, not ours, but I don't think that's true at all."
That's bad news for everyone, but especially for the banks. So far, Canada's big five have stood out as shining paragons of restraint and solidity, as lesser banks in the U.S., England, France, Germany and even Iceland have collapsed in tangled webs of debt. But cracks are beginning to show here as well. "The U.S. economy is clearly slowing down, and as it does, our economy will slow down too," says Alan White, a professor of finance at the University of Toronto's Rotman School of Management. "That will cause an increase in defaults on loans in Canada, which will hurt the banks' profitability."
Collectively, the banks have written off more than $10 billion in worthless mortgage-backed investments, and there's more to come. As the credit markets tighten, it's getting more and more expensive for the banks to borrow from each other and from the international banking community, so the banks are raising rates on mortgages and lines of credit to pass along those higher costs to customers. And, as Norm Rothery, a chartered financial analyst and founder of StingyInvestor.com, points out, as Canadian home prices decline, there will be many more foreclosures. "That's what killed the U.S. banks, exposure to bad mortgages in their own country," Rothery says. "If I ask myself which Canadian bank is most likely to fall, the best answer I can come up with is that you might want to look at which one is the most exposed to real estate in B.C. and Alberta."
For those close to retirement, the combination of all these factors is deeply depressing. "They've got a triple whammy," says TD's Lovett-Reid. "They've got the bear market, plus they have to take money out, and they have to contend with inflation." There may be only one option, and it won't be a pleasant one: to throw their retirement plans out the window and just keep on working. "I'm hearing people say Freedom 55 has just become Freedom 95," says Lovett-Reid. "I don't think it's that catastrophic, but that's certainly what they're feeling."
Every day, Andrew Bury sees the fallout from the global financial crisis first-hand. As a partner with Gowling Lafleur Henderson in Vancouver, he's had to scramble to keep up with the spate of foreclosures in the city. This past Monday in Room 32 of the B.C. Supreme Court, for instance, Bury had no sooner finished dealing with one all-too-typical foreclosure - a young father and business owner who could no longer keep up with his mortgage payments and was losing his home - when the court prepared to hear the next foreclosure case. Over the last year, the number of files on his desk has doubled, he says, with most of that increase coming in the last six months. "People are finding themselves with a cash flow problem and no way to bail themselves out," says Bury.
As it becomes painfully clear that Canadians will also be caught up in the financial crisis encircling the globe, there's likely to be pressure on government and businesses to rethink many long-held assumptions about retirement and the economy.
If there's any good news in all this, it's that the vast majority of government and company-sponsored retirement plans are well-funded for at least the next decade or two, says Malcolm Hamilton, an actuary with Mercer, an HR consulting firm in Toronto. That means the pension plans have enough assets on hand to cover payments to retirees during that time. Serious problems could arise, though, if the stock market rout deepens or lasts for an extended period of time. Pension plans rely on gains from the stock market to help meet the needs of future retirees. If the plans suffer losses in their portfolios, employers will have to inject cash to shore them up, something companies that are also struggling with a recession may find impossible to do.
Still, those with pensions are likely the lucky ones - most Canadian workers are on their own. According to figures released by StatsCan, only about 38 per cent of Canadian workers are part of a registered pension plan, and that number has been declining. And of those private sector workers who do belong to a pension plan, a growing number are in defined contribution plans. Unlike defined benefit plans, which guarantee a specific amount of money upon retirement, how much you get out of a defined contribution plans depends entirely on how much you put in and how well the markets perform. Which is why Hamilton expects there will be renewed calls for the Canada Pension Plan to be overhauled to include larger payments to retirees. Currently, CPP is paying retirees over 65 an average of $5,800 a year, plus $5,700 more in old age security. "If things get desperate enough there will be pressure on the government to expand the plan," he says. But, he warns, such a move would not be a cure for all the problems facing older workers. If CPP benefits were boosted retroactively, it would create a massive burden for future generations. On the other hand, if changes were made to the plan going forward, they would have very little impact on those retiring any time soon. "The one solution is fiscally responsible but politically unattractive, but the other is an economic non-starter because it gives a huge freebie that will have to be paid for by future generations," he says.
In the meantime, many are simply giving up on their retirement dream. With 40 years in the forestry industry, Jarmo Laine, a Vancouver Island logger, had hoped to be on the road to retirement by now. But after years of hardship in the forestry sector, made worse by the collapse of the U.S. housing market, Laine, 57, has found himself out of work with little in the way of savings. His union pension plan would only provide him with $1,100 a month, and with a sizable mortgage on his home, that just won't cut it. Faced with bleak job prospects on the island, he recently flew up to Alberta's oil boomtown, Fort McMurray, to find work. But even then, several companies told him he is too old to hire. Laine is understandably bitter, both at the treatment workers have received from the forestry companies, and about the prospect of having to pull up roots in Saltair, B.C., and move to another province to find work. "I'd wanted to be retired now, but that isn't going to happen," he says. "I tell people it don't bother me none, but it does."
Maclean's October 20, 2008