Advisors will find themselves across the table from some disappointed clients while the economy shakes itself out, economist Don Drummond told an Investment Industry Association of Canada board luncheon yesterday.
Drummond notes a sustained period of economic growth that boosted western countries out of the 1990s recession isn’t in the cards today.
“The question is, ‘Will we have an economic and fiscal reprieve the way we did in the 1990s?’ And I think the answer is no,” he says. That’s bad news both for investment returns, and for governments which won’t be able to post sufficient revenue gains to fill in current fiscal holes.
If Canada’s overall economic growth rate hovers around 2% for the foreseeable future, a 5%-to-6% rate of return on investments is reasonable. Anything higher will require clients to take on significant risk.
The problem, Drummond said, is that when banks survey investors, they say they want an 8% rate of return from low-risk, fixed-income investments. That’s impossible.
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Advisors have seen this disconnect before with income trusts: clients wanted high returns but didn’t understand the risks associated with the market-linked trusts. As a result, many lost more than they could afford when the investments didn’t perform as expected.
People will work longer
Lackadaisical return rates also will spur older workers to either remain in, or return to, the workforce.
In some respects, this trend flies in the face of many pension plans in which payouts are keyed to an employee’s salary level during their last five years on the job. Such calculations create an incentive to stop working cold turkey, instead of powering down to advisory positions that might be more personally satisfying.
In response, Drummond notes, some companies are now changing those rules, creating an advantage both for older workers who haven’t saved enough, and new workforce entrants who can benefit from the training these older employees can provide.
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Another thing to keep in mind for economic growth going forward, though, is that jobs vacated by older workers won’t necessarily be replaced by positions paying the same wage rates.
Take the auto industry, says Drummond. Facilities that were paying $60-to-$70 per hour have been shut down and the equipment inside them has been sold off. So those jobs aren’t coming back, and the ones that replace them will offer lower salary levels – more like $20-to-$30 per hour. That will impact consumer spending power and reverberate through the economy.
Instead of raising taxes, increasing compliance
Raising taxes isn’t palatable for the electorate, but with tax bases shrinking, governments will need to find the money somewhere. So, Drummond recommends they ensure taxpayers are paying their fair shares.
He’s particularly concerned about industries like food and beverage and construction, which are notorious for accepting funds under the table. And, he points out the infrastructure to catch evasion in those sectors already exists.
Match the number of work permits contractors qualify for with their reported revenues, he says. And, since Ontario bars and restaurants must purchase liquor from a central control board, CRA can simply compare their revenues with the amount they buy.
If those numbers don’t match up, CRA knows who to audit.