Historical article note: This article was originally published on 2019-08-08. Rates, policies, home prices, statistics, product names and qualification standards reflect the environment at that time and may have changed. This archive is for historical record and general education only. It is not mortgage approval, investment, legal or tax advice.
Many people regard winning the lottery as the last straw to solve the problem of insufficient savings after retirement, and some even see it as the only straw, making buying lottery tickets a routine activity. The lottery is also called the 'poor tax' because it satisfies the poor's desire to get rich overnight while not daring to take big risks, as well as their survival situation. Its existence is justified; there are reasonable reasons for the existence of the lottery, and we have no right to judge the mindset of people who buy lottery tickets. But there is one thing that lottery players may not know, which is why they persistently buy tickets with such obsession. The advertised top prize amount is not the present value of the prize but the future value. For example, in the California lottery in the United States, the advertised top prize is $1 million, which is actually paid as $50,000 per year over 20 years. If the winner wants to cash it in immediately, the amount becomes $468,264, assuming a discount rate of 10% and a term of 20 years. Therefore, when we see winners on TV or in newspapers, they are holding up a big card showing the winning amount, not a pile of cash. Winning the lottery is already very difficult, and winning and then living another 20 years while receiving the full amount each year is even harder, because most lottery buyers hope to get rich overnight. If they had patience to accumulate wealth, they would not buy lottery tickets in the first place. The actual amount received immediately by a $1 million prize winner is $468,264, which is not enough to buy even a 500-square-foot apartment in Toronto, let alone for retirement. If the only option for a lifetime wealth dream is winning the lottery, the result is unlikely to be good. The illusion of wealth is harmful, but many people choose to believe in it anyway.
01 Temporary rich people are all poor people
In 2005, a British woman named Wendy Graham won a £1 million prize, and she spent the money in just one year. A year later, she started receiving welfare payments in the UK. The UK conducted a survey tracking lucky people who won £5 million in the lottery, and 70% of the winners had a lower standard of living five years later than before they won.
In the eyes of the poor, consumption assets are the most important, while in the eyes of the rich, income-generating assets are the most important. People have become accustomed to using consumption as a symbol to prove their living status. The poor suppress their consumption for a long time and have nothing to show off, so once they receive unexpected wealth, they can't contain their excitement and spend extravagantly. In the vast crowd, wealthy poor people can be easily recognized at a glance: lottery winners, newly rich, people receiving relocation compensation, mine owners, celebrities... adorned with pearls and jewels, wearing gold and silver, are financially poor. Wealthy rich people, on the other hand, purchase assets that can generate income; these assets are called income-generating assets. For example, Buffett started selling chewing gum and soda at the age of six. Unlike other children, he did not use the money he earned to buy candy to eat but used it as the capital for his next business. At the age of eleven, he bought his first stock.
Buying assets that can generate income, rather than consumable assets, is the mindset of the wealthy. If you give 100,000 yuan to someone with a poor mindset and someone with a wealthy mindset, a year later the wealth gap will become apparent. The wealth gap has never been a matter of distribution, nor is it necessarily a matter of diligence or laziness—it is a matter of mindset. Poverty, in most cases, is not because the poor have no opportunity to make money, but because they never understand the flow of wealth in their lifetime. Buffett understood this principle at the age of six, while some families never understand it for generations. Some people happen to catch a favorable trend when they go out and soar, becoming temporarily wealthy. But since their financial intelligence is still grounded, when the trend stops, they fall. Taleb gave these people a name—"Fooled by Randomness." Wealth gained through luck or deception cannot be duplicated, and eventually, it is spent carelessly, lost, or taken away by another group of tricksters. People are then reduced back to their original state, just as they were before encountering the trend, or even worse. People who are temporarily wealthy but have not purchased assets that generate income, and have not formed asset-based income (also called passive income), are essentially still poor. Their temporary wealth only gives them an illusion of wealth.
02 Labor is glorious, collecting rent is shameful
Among the Chinese living on Earth today, most of them grew up singing the children's song 'Labor is the Most Glorious.' Therefore, even after the reform and opening-up, China still took pride in being the world's factory, resulting in a situation dependent on exports. With this children's song supporting a sense of honor, even earning a meager processing fee was not considered hard or painful. In Apple phones assembled in China, the labor value in the entire phone is only $6.40. An official's statement, 'Make labor the most glorious, the most noble, the greatest, and the most beautiful trend,' was translated as 'foster a social atmosphere in which work is considered great, glorious, and beautiful.' This is a sentence that is difficult to understand in the Western world. If it said 'Capital is considered great, glorious, and beautiful,' it would align with Western understanding, but how can work be something glorious? If 'work' is replaced with 'Labor,' it becomes even more inconceivable. Some corruption in language in Chinese has severely harmed the Chinese people, to the extent that one's own interests are deeply damaged without even realizing it. 'Language corruption' was first proposed by George Orwell in a political philosophy essay, pointing out that for political or economic purposes, words are arbitrarily given meanings, even meanings completely different from the facts, giving evil deeds virtuous names and virtuous deeds evil names, to deceive and manipulate people's minds. When we divide income into the opposing categories of honorable and shameful, prejudices lead to losses. Unpaid labor is all given the honorable name, and our forebears, in the name of honor, unknowingly performed countless fruitless tasks. 'Honor,' how much deception is hidden under this false name?
"Collecting rent" is often criticized as unearned income. Not working and still having income indicates asset income, passive income, which is the goal we strive for our whole lives, the most honorable type of income. Some people regard receiving government welfare as a lifelong goal, considering it the most deserved and honorable income. If I had to choose between two types of unearned income—rent and welfare—I would only choose rent income, because it is the result of my own effort and labor, and it is honorable. Recently, I watched a video made by Taiwanese people, and its viewpoints embarrassed me. They believe that income from doing scientific research or coding is honorable, while collecting rent is disgraceful. Doing research and coding are process-oriented jobs aimed at increasing efficiency, and the purpose of improving efficiency is economic development, and economic development equals city-building. A modern city, that is, urban real estate, is the ultimate goal that all process-based labor aims to achieve. In Canada, 76% of all wealth is real estate, meaning it is the accumulated finished product of wealth, while the remaining 24% is partially completed wealth, still in production. For a modern person to have such a shallow understanding of wealth that they make a video to show their ignorance is truly rare. How is investing in real estate and renting houses to newcomers in the city shameful? I don't know about Taiwan's policies, but in Canada, mortgage interest on investment properties is tax-deductible, property taxes are deductible, and the government encourages real estate investment through tax incentives.
Is earning income honorable or shameful? The illusion it brings to people directly leads to the illusion of wealth. Is owning more than one house honorable or shameful? The answer is determined by your butt. People who don't own even one house think it's shameful, right? If all landlords are considered shameful, please have the honorable tenants stand on the street or wait for government relief.
Here is another example of 'linguistic corruption' to deepen everyone's understanding of this concept. 'Investing in stocks is supporting real industry.' If you are subscribing to new shares, buying a company's IPO, participating in private placements, or engaging in venture capital, that counts as supporting the real economy. But stocks that can be bought on the stock market are traded in the secondary market and have nothing to do with supporting the development of real industry. Those who trade stocks and crown themselves as investors in real industry are the most typical example of linguistic corruption. Real estate is the most tangible industry and the mother of wealth. Whenever a country's economy has problems, it must be due to issues in real estate.
Why is it said that 'all discrimination comes at a cost'? For the reason, everyone go read "Xue Zhaofeng's Economics Lectures." How much of a price do people who look down on real estate investment pay? In Toronto, the average price of a condo in December 2018 was 118% of what it was in December 2008, ten years earlier. If a condo was bought with a 20% down payment ten years ago, the cost of discrimination = down payment amount × 5 × 118%. Some people also look down on condos, saying that rising management fees will affect price increases, and the cost of discrimination is as above.
In high welfare countries, people don’t have to save money for retirement themselves, right?
Canada's high level of welfare is reflected in comprehensive publicly funded healthcare, but there are no special policies for vulnerable groups regarding housing and pensions. For housing, more than 90% is privately owned, so where you live and what kind of house you live in depends on your own financial situation. Public rental housing is government-owned, and you must reach a certain old age or meet specific life misfortune criteria to be eligible. Of course, you only have the right to live there; any increase in property value has nothing to do with the residents. The pension system is even worse. For retirees, the pension received from the government each month is about 1,000 CAD per person, so a couple would get about 2,000 CAD per month. This counts as taxable income, and taxes are also applied at the end of the year. In Canada, at least half of the population does not have a corporate pension. Companies generally do not outlive people, and even those who have pensions may find the company goes bankrupt while they are receiving it, for example, Sears. Self-employed individuals never have corporate pensions. What the government can provide you is 1,000 CAD per person after retirement and free healthcare. Is that enough for a comfortable old age? In China, someone raised the so-called '40-year black hole' issue: if you retire at 60 and live to 100, will there be enough money, or would life become unbearable?
Canada's GDP over the past 20 years has grown at an average annual rate of 1.91%, meaning the country's GDP doubles every 37 years. China's GDP over the past 20 years has grown at an average annual rate of 6.5%, meaning the country's GDP doubles every 11 years. Compared to Canada, young people in China today are earning incremental wealth, and as long as they are not lazy, surpassing their parents' wealth would take at most half a lifetime. In contrast, in Canada, surpassing the wealth of the previous generation would take at least an entire lifetime. Young people who have just immigrated to Canada or those born in Canada who are just entering the workforce have no choice but to focus on the existing stock of wealth and use leverage and capital to acquire wealth if they want to surpass the wealth of the previous generation.
Canada's inflation rate over the past 20 years has averaged 1.83% per year, meaning the purchasing power of the Canadian dollar halves every 40 years. If you are 40 years old this year and have 10,000 CAD in hand, the current purchasing power would become 5,000 CAD by the time you are 80; that is, what you can buy with 5,000 CAD now will require 10,000 CAD in 40 years.
Many people think retirement is far away and that the government will take care of it by then. This is a wealth illusion. The tax bureau collects your taxes today and performs transfer payments today to support today's elderly. When you are old, your pension will be paid by the taxpayers of that time. Why would you assume that the pension will increase then? The Canadian government is a service-oriented government, only responsible for wealth transfer. It has very few state-owned enterprises, is not an investment-oriented government, and does not create wealth. The income tax collected by the federal government now will never be returned to taxpayers because it has already been spent by today's elderly. Most of the property tax collected by local governments is used for education; public schools are entirely supported by property tax. Many people choose to send their children to private schools. Fine, but the property taxes you paid were wasted, spent on other neighbors' children attending public schools.
The misunderstandings of the Chinese community about the Canadian tax system go beyond the above points. There is one language corruption issue that has not been resolved, which is inheritance tax. Canada does not have an inheritance tax, but many assets are considered 'sold' after death and are subject to income tax. Compared with the United States and Japan, Canada does not have as strong an anti-rich mentality; a son inheriting the labor achievements of his father from the previous generation is not regarded as outrageous or as gaining wealth without working. Canada only taxes the assets of living people, and even then, very little, such as property tax. After a person dies, their assets are no longer taxed.
Conclusion: Investing is meant to balance a lifetime of consumption. Before death, no one knows how much a person will consume in their lifetime, nor do they know the inflation rate of the country they live in. To balance a lifetime of consumption, one must create asset-based income, that is, passive income, so that when a person can no longer work, their assets generate the income needed to maintain consumption. The ultimate human asset is real estate; the labor and half-finished assets in the process are not particularly honorable. Canada is a country with light taxation on assets and encourages asset inheritance, so buy and accumulate assets as much as possible while you have the ability. Giving up reliance on welfare and pursuing independence and freedom is the dream of our generation of immigrants. If you rely on the government for everything, you have to endure officials' corruption and obstruction, in which case it would be better not to immigrate. Seeing through wealth fantasies and waking up from the dream of windfall gains is the only way to live more steadily.