This is part of the Globe and Mail's week-long series on baby boomers and how their spending, investing, health and lifestyle decisions could affect Canada's economy in the next fifteen years. Is Canada ready for the boom?
For more, visit tgam.ca/boomershift and on Twitter at #GlobeBoomers
The greatest generation survived the Depression and fought the Second World War. The luckiest generation, the baby boomers, won the peace.
Boomers have benefited from a huge amount of good fortune, financially speaking. The stock market was good to them and the housing market has been like a lottery win. They've also been favoured like no other generation with access to pension plans.
But seven years after the global financial crisis began, it's starting to look as if the world has reached a prosperity inflection point. The days of big economic growth seem to be over; if so, this will be reflected in the stock and housing markets. Boomers, you lucked out. Now, the country turns to you to share.
We're talking about taxes here. Retired people hate them and we should expect no different from boomers, who began reaching retirement age in the past few years. But to make this country's finances work, we're going to need the boomer generation to pay its fair share of taxes.
Let's start with tax-free savings accounts. Since the Liberal victory in the federal election, some people have been complaining about the impending rollback in the annual TFSA contribution limit to $5,500 from $10,000. The Liberals explained the move by saying only wealthy people are able to take advantage of the $10,000 limit, which is not strictly true.
Many retirees can use a high TFSA limit to shelter money they are annually required to withdraw from their registered retirement income funds, but don't actually need. A better rationale for lowering the limit is that the country needs tax revenue to pay the bills associated with an aging population. Limiting TFSA use helps ensure there's enough money for the rising cost of health care and retirement benefits such as old age security. In a roundabout way, aging boomers will actually benefit from a lower TFSA limit.
The same logic applies to taxes paid on money withdrawn from registered retirement savings plans and RRIFs. It's common to hear people approaching or just in retirement say that contributing to RRSPs was a big mistake for them because of taxes paid on withdrawals.
When you put money in an RRSP, you get a tax deduction on the amount contributed. So it shouldn't come as a shock that withdrawals from these plans are taxed in retirement. Boomers may find that the tax they pay on their RRSP withdrawals in retirement is more than the tax deduction they received when they made contributions years earlier. That can happen when your retirement income is higher than the income you pulled in during your working years.
As galling as this higher tax bill is, it's actually a sign of an individual's financial success. For boomers, this success has been helped along by:
A hot housing market
House prices have increased by an average of 5.8 per cent over the past 30 years, a little more than double the rate of inflation; long term, houses are supposed to rise by the same rate as inflation.
A hot stock market
We've seen good and bad periods for stocks in recent years, but the 1990s were really something; the S&P 500 stock index averaged returns of about 26 per cent annually between 1995 and 1999 in U.S. dollar terms, while the S&P/TSX composite index averaged about 17 per cent.
Boomers had the opportunity to lock in money for the long term in low-risk bonds and guaranteed investment certificates when interest rates were much higher than today; at the beginning of 1995, you could have bought a 10-year Government of Canada bond yielding 9.3 per cent, which compares to 1.7 per cent today.
Boomers got into the work force during the heyday for pensions; recent numbers show that almost 41 per cent of employees were covered by a registered pension plan in 1998, compared to 37.9 per cent in 2013; also, the Canada Pension Plan began in 1966, just in time to be there for the first wave of boomers moving into the work force.
Boomers were born into a period of affluence, and they were industrious in maximizing the opportunity. As much as financial luck defines boomers, so does an appetite for hard work. So let's not complain about the boomers, or begrudge them their success. In the wealth they've built lies the tax dollars that will help pay the bills in the decades ahead.