David Dodge’s Dr. Doom predictions

Click on image to enlarge

I listened to David Dodge’s comments yesterday about how Canadians need to save more for retirement if they expect to maintain a decent standard of living during retirement. These predictions of David Dodge's are only as good as the assumptions upon which they are based., none of which were revealed. Furthermore it is of no use whatsoever to tell someone in their sixties that they should have been saving no less than 11% of their earnings for their entire working life in order to have enough money to comfortably retire on.

The biggest assumption upon which David Dodge’s doomsday predictions are based is the rate of return that people can expect to earn on their savings and the rate of return at which their savings will accumulate. This variable is the single most important variable when making such predictions and the effects of investment return are compounded during the period of savings accumulation and have a direct effect on the amount of income that one earns during the period of payout, ie during retirement itself.

David Dodge played a role in killing income trusts when he flip flopped on that issue under pressure from Jim Flaherty at the point in time when Dodge’s reappointment as Governor of the Bank of Canada was under consideration, and something that Dodge openly stated he was interested in.

By killing income trusts, David Dodge participated directly in destroying (for no good reason) the investment vehicle that had emerged in Canada that was most well suited to saving for retirement and providing for retirement income. The arguments used by Dodge and others to kill income trust were flat out lies. Full stop.

Income trusts are the vehicle most well suited to the task of retirement savings and retirement income for two principal reasons. First because of their attributed of paying out excess earnings in the form of a profit sharing investment vehicle, and second because of their historical risk return attributes. Income trusts have the highest return performance vis a vis risk of any investment asset class. Also when compared with the returns of other equity investment vehicles, income trusts have dramatically outperformed the returns of traditional corporate equities as follows (Source: BMO)

Annualized returns over the last 10 years:

S&P/TSX Income Trusts: 16.13%
BMO NB Small Cap: 9.07%
S&P/TSX: 5.61%
S&P/TSX 60: 5.56%

The above differences in rates of return are stark. They are also very revealing when one considers that income trusts had almost THREE times the return than was experienced by investing in the top 60 companies that comprise the TSX index. And who was it who was behind the killing of income trusts if not the CEOs of Canada’s largest companies?

The way to deal with Canada’s pension crisis is not to make people more reliant on the government for cradle to grave coverage of their needs, nor to fear monger in the way that Dr Doom David Dodge is doing, but rather to expand the investment options that are available to Canadians and allow the Canadian capital markets to function in an unfettered manner and continue on down the nature path of evolution that it was heading down in the years prior to Flaherty’s intervention of October 31, 2006 which was in the process of restructuring itself to align with the needs of the CAPITAL PROVIDERS (ie investors) and not the whims of the self interested CEOs of the capital users, in order that the capital markets could be the solution to this pressing need for retirement income, by flowing all the excess earnings of corporate Canada through the hands of the business OWNERS rather than the business MANAGERS, and have the OWNERS be the ones to deploy that capital back into the Canadian economy in the manner that was optimal for them, knowing that every dollar paid out under the income trust structure would finds itself reinvested in the Canadian economy in one form or another.

David Dodge and his doomsday predictions are only as good as the assumptions upon which they are based, in the same fashion that the income trust policy is only as good as the assumptions upon which it was based, all of whose assumptions have proven to be false. David Dodge’s doomsday predictions about what amount of money it takes to retire comfortably and what percent of a person’s savings are only as good as the assumptions on which he has based those predictions. Is David Dodge assuming that Canadians will remain forever captive to owning simply the TSX 60 with a return of a mere 5.56%, or is he prepared to acknowledge the errors of his and the Government’s killing of income trusts, whose historical returns are almost three times higher?

Which is it Dr. Doom? I prefer to let the facts speak for themselves, rather than making false reliance upon you, given your past flip flop on income trust to curry favour with the powers that be.