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Category: FYI/Blog

Five things you need to know about your RRSP as this year’s deadline approaches

OTTAWA — Recent volatility on the markets has bruised RRSP investments. As the Feb. 29 deadline for contributions looms, here are five things to know about RRSPs:

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Check your retirement readiness with The Globe’s new calculator

We have got to stop arguing about whether we have a retirement-savings crisis in this country.

It’s a boring, sterile debate that will never conclude with a definitive victory for either side. Most people are somewhere between the extremes of well prepared and unprepared. They need to see where they stand so they know whether to save harder.

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Canada could adopt negative interest rates within the next two years, Citi says

Canada could be among a handful of countries to adopt negative interest rates in the next two years as the European policy experiment gains popularity, says a new report from Citigroup.

The Bank of Japan earlier this year became the fifth central bank to go negative, which means it charges financial institutions to deposit money with it. The idea behind negative rates is that they make it expensive to hold cash, forcing businesses, consumers and banks to start spending.

Citi economists, led by Ebrahim Rahbari, say in the report that Israel is likely to be the next bank to join the negative rate club this year, but Canada, along with a few others, could also introduce such a policy in the next two years.

“In the Czech Republic, Norway and perhaps Canada, a negative policy rate is not part of our central scenario, but the risk of a negative policy rate is material,” write Rahbari and his team in their report.

In the months after the financial crisis, many central banks in the developed world introduced zero interest rate policies, or ZIRP, in an effort to get consumers spending and investing by making borrowing cheap. Not doing so risked accelerating the crisis, as consumers would hoard cash, deflation would set in and aggregate demand would collapse, worsening a recession into a depression.


While zero rates helped return growth to the developed world, some economies have not had stellar results. Deflationary pressures still dog many European economies and growth remains anemic. Disappointing growth led the European Central Bank to adopt negative rates in 2014.

In a way, a negative interest rate is an act of desperation. It punishes savers and rewards risk taking by making borrowing cheap — theoretically, banks could charge money on savings deposits and even return money on loans.

In Europe, interest rates are already going further into negative territory. Sweden’s Riksbank announced Thursday that it is lowering its repo rate from -0.35 per cent to -0.5 per cent. Negative rates have made borrowing for consumers essentially cost-free, while driving down the value of the Swedish krona immensely.

Unfortunately, while the central bank cut rates further, its policymakers have also pressured the Swedish government to introduce new regulations to cool Sweden’s ultra-hot housing market, which Riksbank officials bluntly label a bubble.

Because negative interest rates are uncharted monetary territory, there is still little data about how effective they will be long-term. What Citi does note is that as more central banks deploy them, global monetary becomes a “zero-sum” game.

“The more conventional and common negative policy rates become and, given how pervasive low inflation and weak demand are across countries, the more likely it is that a negative rate in one country will be followed by cuts elsewhere,” write Rahbari and his team in their report.

For Canada, Citi notes that there are still policy options in place before the central bank has to resort to negative rates. The federal government is set to unveil billions in new stimulus spending to prop up the economy. As well, the bank could reintroduce forward guidance, first utilized by former governor Mark Carney in 2009.

Citi notes that until very recently, it was inconceivable that central banks such as the Bank of Canada would even consider negative interest rates. But a continual undershoot of inflation targets, stubbornly weak growth in gross domestic products and a lack of alternate policy options leaves central banks around the world with few alternatives.

“Should these not suffice, the BoC is likely to consider some combination of asset purchases and negative policy rates in due course,” write Rahbari and his team in their note.

– Financial Post
Written by: John Shmuel
Date: February 11, 2016

Many Canadians entering retirement with inadequate savings, study says

06:00 EST Tuesday, Feb 16, 2016

OTTAWA — A large percentage of older, working Canadians are heading into retirement without adequate savings to keep them out of poverty, a new study suggests.
Half of Canadian couples between 55 and 64 have no employer pension between them, and of those, less than 20 per cent of middle-income families have saved enough to adequately supplement government benefits and the Canada/Quebec Pension Plan, says the report, to be released Tuesday by the Broadbent Institute.
“The vast majority of these Canadians retiring without an employer pension plan have totally inadequate retirement savings,” said the report, which was authored by pension consultant Richard Shillington. Among all Canadians ages 55 to 64 without pensions, half have only enough savings to last for one year.
Income trends suggest the percentage of Canadian seniors living in poverty will increase in the coming years, especially for single women who already face a higher than average rate, the report said. The poverty rate for seniors will climb at the same time as a sharply rising number of Canadians hit retirement age in the next two decades; more than 20 per cent of the population will be older than 65 within 10 years.
“This new data on retirement savings and gaps in support makes one thing perfectly clear – we have a retirement-income crisis on our hands that requires urgent government action now,” said Rick Smith, executive director of the Broadbent Institute, an Ottawa-based, left-leaning think tank.
Ontario’s Liberal government is proceeding with its promised Ontario Retirement Pension Plan, while Ottawa has deferred a decision for a year on whether to bolster the CPP/QPP in order to consult with the provinces and territories.
The ORPP would supplement the Canada Pension Plan and apply to people who do not already have a comparable workplace plan. It will be funded by contributions from workers, matched by their employers. For someone earning $45,000 annually, the ORPP would return $6,410 a year in retirement if paid into for an entire working life; for someone earning $90,000 or more, that figure would be $12,815.
But Mr. Smith said a national response is required. “Our new study shows now isn’t the time for Ottawa and the provinces to punt on expanding the CPP,” he said. “In fact, we need federal leadership to make this happen.”
However, critics – including Conservative MPs and Saskatchewan Premier Brad Wall – oppose any major increase in CPP premiums, arguing higher payroll levies would act as a tax on jobs.
The Canada Pension Plan pays out a maximum $12,780 a year. But many retirees don’t qualify for the maximum – the average CPP payment for men last year was $7,626 while the average for women was $5,922. Seniors also collect Old Age Security payments to a maximum of $6,839, while the poorest seniors can collect the Guaranteed Annual Income. Mr. Shillington said the combined plans fall below $20,000 for an individual.
“It’s not what you would want for your mother,” he said in an interview.
Mr. Shillington’s study noted that the existing retirement system has succeeded in keeping Canada’s poverty rate among seniors well below the average for industrialized countries. But the public system’s income replacement for Canadians with average earnings ranks near the bottom of industrialized countries, with mandatory contributions by employees and employers also falling below the international average for rich countries.
Ottawa’s pledge to increase by 10 per cent the guaranteed income supplement – paid out to the poorest seniors – would cost $700-million and remove 85,000 single people – mostly women – from the poverty rolls.
But that would still leave 634,000 seniors living below the poverty line. And that number will grow dramatically in the coming years.

Investors driving yields on Canada bonds to lowest levels on record

14:32 EST Monday, Feb 08, 2016

Spooked by fears of a slowing global economy, investors are rushing to safety, driving yields on benchmark Government of Canada debt to the lowest levels on record.
In early trading, the yield on the 10-year Government of Canada bond slid to 1.04 per cent, before recovering slightly to 1.05 per cent. Those are the most miserly 10-year yields in Bank of Canada data dating back to 1989.
The plunge in Canadian government debt is part of a stampede toward safe government debt by investors around the globe. It has gone hand in hand with weakening stock markets and growing concern about the outlook for the world economy.
As buyers pour money into safe bonds, the prices of those bonds rise and the yields, which move in the opposite direction to price, decline.
The yield on the 10-year Canada bond, which is regarded as a key marker for long-term economic expectations, has tumbled in recent days and stands more than half a percentage point lower than it did in early December. With inflation running higher than the yield, those who buy the bond now appear to be locking themselves into an investment that is unlikely to produce any real return.
The 10-year U.S. Treasury yield also fell on Monday, sliding to 1.76 per cent, its lowest point in a year. Bonds of several European countries, including Germany and Switzerland, are already in negative territory, meaning that investors are paying governments for the privilege of lending them money.
“We’re seeing economic weakness everywhere and negative interest rates are becoming increasingly common, so people seem increasingly content to park their money in safe government debt,” said Jim Giles, the retiring chief investment officer at Foresters, a Toronto-based international fraternal organization with $28-billion in assets under management.
“But all that being said, it is still a remarkable trend considering that the yield you’re getting in Canada right now is lower than the inflation rate.”
The dramatic drop in government bond yields over the past few days has accompanied a dramatic darkening in global expectations.
China’s slowing economy has been casting a pall over the market for months. More recently, widespread weakness in European bank shares sparked by concern about possible credit problems on the continent have cast even deeper shadows over the outlook for the months ahead.
“Layered on all the other concerns for Canada is the weakness in oil prices, which clouds our growth and inflation outlook,” said Mark Chandler, head of fixed-income and currency research for Canada at RBC Capital Markets.
He said the large amount of spare capacity in the global economy has encouraged central banks to use unprecedented manoeuvres such as quantitative easing and negative interest rates in an attempt to boost growth.
The advent of negative yields makes even small positive payouts appear attractive by contrast. Europe’s experiment with negative interest rates has recently been echoed in Japan and Bank of Canada Governor Stephen Poloz has discussed the possibility of negative rates in Canada as well.
Among the continuing buyers of safe government debt are insurance companies and pension funds that are trying to ensure their assets match their future liabilities. Mutual funds that are obligated to maintain portfolios of government bonds are also likely purchasers even at these low yields.
Some buyers may also be speculating that rates will fall even lower, boosting the value of bonds purchased at today’s prices.
A bet on lower yields, however, is a gamble on the Canadian economy weakening in the months ahead. That is far from a sure thing.
“You have to outline a pretty dire scenario to justify where term yields are now,” Mr. Chandler said.
“If you have a longer term horizon … it’s hard to believe these yields are going to remain this low for a long time,” he added
Despite the fears embodied in today’s markets, he thinks a repeat of the financial crisis of a few years ago is unlikely. While debt levels may be high in some sectors, banks around the world have generally done a good job of shoring up their capital and building a bulwark against financial stress.
The problems in Europe have so far not been reflected in any breakdown in interbank lending, he noted. All of that suggests the market may be overreacting.
“It’s really hard to say there’s anything out there that would justify the magnitude” of the recent moves in bond yields, he said.