On February 22, 2018, the Atlantic put out the following article about elderly people living in poverty because they had insufficient retirement savings. It’s one of the saddest articles I’ve ever read.
https://www.theatlantic.com/business/archive/2018/02/pensions-safety-net-california/553970/
The reason why I found this article so sad is because I think it’s terrible that people can work so hard for their whole lives and not have some respite in their final years. Back in the day, employers provided pensions. A pension is a fancy term for retirement monies paid to you by your employer. A pension is a promise from an employer to an employee whereby the employer holds back some of the employee’s earned wages today and agrees to pay those wages to the employee when the employee retires at a pre-determined age. Under a pension agreement, the employer is legally obligated to pay the pension. The employee retires and waits for the monthly pension cheque to come to her for the rest of her life.
For the past few decades, employers have been moving away from the defined-contribution pension system. Instead, there are now two employer camps. In the first camp, employers are giving their employees the option of having a defined-contribution pension. This means that employers are giving employees control over how their pension money is invested. If the investments do well, the employees will have enough money in retirement. If the investment do poorly, then the employees will not.
Do you see the problem with the defined-contribution pension plan system? If not, here it is. Under the defined-contribution system, all of the risk of making good investment decisions over the decades of an employee’s working life rests with the employee. If employees do not know how to make investment decisions that will provide them with a steady stream of pension income in retirement, then the employees may be facing an impoverished old age. The weight of making properly investment decisions used to be the employer’s problem – today, that problem rests entirely on the shoulders of the employees who participate in a defined contribution pension plan.
The second employer camp is comprised of employers who do not offer their employees any kind of pension plan. These employers simply pay their employees their salary. It is entirely on the employee to invest their money in registered plans, such as the RRSP and the TFSA, or to invest in investment account, or to find some other way of investing their money to ensure a comfortable retirement. Other such investments could include rental properties, a small business, Bitcoins, gold, royalties, futures trading, or any other endeavour with the end purpose of earning money. Employers in the second camp take no responsibility for the retirement income needs of their employees.
Today, most people are responsible for creating their own streams of income for retirement, whether through define-contribution pension plans or through other investments. This means that people have to start saving for their retirements as soon as they start working!!! Not only do they have to start saving, they have to start investing their money for growth because money is always under attack from inflation. Money sitting in a bank account at less than 1% interest is not going to be sufficient in retirement when inflation is eroding that money’s purchasing power every single year. Finally, employees are responsible for ensuring that they have the proper asset allocation of their retirement funds so that their investment grows big enough to support them in old age.
Failing to do any one of these things means that a person runs a very real risk of being destitute in old age. Surviving on inadequate social services/benefits from the state is not an appropriate reward after a lifetime of work. Going hungry or refraining from life’s small luxuries isn’t a suitable way for the elders of our society to spend their remaining years. Watching every penny every single day and feeling despondent when those pennies are not enough is a horrible way to live, particularly when time to grow an investment portfolio has long since passed.
It takes years and years to build a retirement portfolio. However, there is no comprehensive system in place to teach people how to do it. Some people will learn on their own. Some people will inherit money. A few lucky souls will have pensions that will be sufficient to satisfy their needs. For everyone else, financial hardship of varying degrees is the reality that they will face sooner or later.