As we move toward the end of 2010, it’s worth reviewing what has changed – and what hasn’t – in the economics of retirement. We’ll do that by looking at the performance of the global economy and markets this year, investor perceptions of that performance and the ongoing public policy discussions around retirement income in Canada, as well as the impact that each of these factors might have on those who are saving and investing for retirement.
Let’s start with the economy.
For 2010 as a whole, the International Monetary Fund projects global economic growth of 4.8% – more than a full percentage point over the average of the past 10 years.
We won’t know the final economic growth numbers for 2010 until well into 2011, but we do know that most national economies have been growing. We also know that economic growth rates have been uneven around the world.
The U.S. and Canadian economies have been growing modestly, while Japan and most European economies have been growing rather slowly (and some, such as Greece, not at all). Most Latin American and Asian economies have been expanding quite rapidly.
Markets rarely move in a straight line but equity markets and risk assets in general have been rising. Despite the ongoing market volatility that has characterized much of 2010, the S&P/TSX Composite Total Return Index was up 13% for the year as at the end of November.
While the MSCI EAFE, measured in Canadian dollars, was in slightly negative territory at the end of November, the S&P 500 and MSCI Emerging Markets Index were up about 6 and 9%, respectively, and the Dex Universe Bond Index was up more than 6% for the period. At the other end of the risk spectrum, the Canadian 91-day T-bill Index grew a meager 0.4% in this post-crisis low-rate environment.
So, we have seen some good performances in both the economy and capital markets. Why, then, has it often not seemed like a recovery? Let’s go back to the economy.
There was a good deal of discussion earlier in the year as to whether we would see a ‘double-dip’ – whether the U.S. economy would go back into recession. That hasn’t happened and most forecasters are expecting the recovery to continue. In fact, in late November, there were some indications of a modest pickup in growth, as consumers appeared to drop some of the caution seen earlier in the year. Further improvement in the labour market is crucial to the recovery, because no matter what the other numbers say, if jobs are not seen to be plentiful, consumers aren’t likely to spend.
It is to be hoped that the second round of monetary stimulus by the U.S. Federal Reserve – quantitative easing – will boost economic growth. But, just the fact that the Fed found it necessary added to the feelings of uncertainty.
Furthermore, financial markets are concerned that the government debt of some European nations poses a credit risk, and possibly economic and currency risks. This issue stems from the fact that some European governments with already high debt levels are also running very high annual budget deficits. Greece was the first country to make the headlines, in the spring.
The issues seemed to be under control as the year progressed, but late in the year, concerns around Ireland came to the fore. A support plan, funded by the European Financial Stability Facility (EFSF) and the International Monetary Fund was struck at the end of November.
As this article is being written, speculation is rife that some other European countries, possibly Portugal and Spain might also need assistance in the days and weeks to come.
In the global economy in which we live, almost everything that happens affects something else. Even though Canada doesn’t face the fiscal pressures that some European countries do, Canadian investors still read the news and wonder if the problems in Europe will become more widespread. As a percent of employment, the recession cost Canada only a fraction of the jobs lost in the United States.
In further contrast, the U.S. has so far regained only about 10% of the jobs lost while Canada has regained all of its lost jobs. Yet Canadians often feel more discomfited by the bleaker situation in the United States than positive about the more favourable situation at home. Even the positive year-to-date returns in capital markets have been offset to some extent in some investors’ minds by their choppy behaviour earlier in the year.
In a more rational and less emotional world, investors might spend more time remembering that the current recovery is from a recession caused by financial crises. Recoveries from such recessions are almost always slower and more protracted than recoveries from recessions caused by other factors. Of course, it is not an entirely rational world we live in and investors’ perceptions and emotions matter in the sense that they may at times play a bigger role in saving and investment decisions than the actual performance numbers.
These perceptions translate into action – or more particularly a lack of action – when it comes to saving and investing for retirement. Occasionally, when speaking to groups of advisors across Canada, I’ll ask how many advisors have large numbers of clients still afraid to get back into investment markets. That – and a similar question to investors – reveals some shockingly large numbers. They make one wonder how many Canadians who should be saving and investing for retirement are in fact taking a holiday from doing so.
There has been a good deal of discussion in 2010 – and periodic debate – about the reform of Canada’s retirement income system. These are important discussions to have however they should not deter Canadians who are saving and investing for retirement from making full use of what is presently available. I will elaborate on this topic in the New Year, following the finance ministers’ December meeting on pension reform in Kananaskis, Alberta.
Also on the subject of retirement income, it will be important to remind your non-retired clients that the federal government is implementing new rules for the calculation of Canada Pension Plan benefits starting in January 2011. These changes will result in a greater reduction / increase in CPP benefits if a pension is taken before / after age 65. The time at which one takes CPP is, of course, an important decision in the retirement planning process and your clients will need to factor these new rules into their plans.
So, what has changed in 2010 and what hasn’t?
In terms of the economic underpinnings and market performance, what has changed is fairly decent and consistent performance. What hasn’t changed, or not much, is investor perceptions, formed during the financial crisis and economic recession of 2007-2009.
In terms of the public policy around saving and investing for retirement, not much has changed, except the discussion around an expanded public pension has continued and maybe intensified a little. It will be important to watch these discussions evolve, and inform our clients of any changes that affect their retirement plans, such as those in line for the CPP in 2011.
In terms of what it actually takes to save for retirement, not much if any has changed. Your client still needs to begin the process by envisioning what she/he wants their retirement to be. That will dictate how much they will need/want to live on in retirement.
The emphasis then shifts to the advisor to provide the guidance as to how much to invest and what investments are appropriate for the individual client’s situation. More specifically, what hasn’t changed is that the process takes both effort and time to be successful – sort of like the current recovery.