Historical article note: This article was originally published on 2019-09-19. 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.
Recently, I checked the simulation of my own post-retirement income on the newly redesigned company website. If I retire at 60, the income would be: company pension + CPP $15,158.08 + OAS $9,311.04 = total pension $24,502.12; if I retire at 65, the income would be: company pension + CPP $22,477.97 + OAS $10,406.64 = total pension $32,884.61. I think that without a company pension, retirement life relying only on government CPP and OAS would barely cover a loaf of bread a day, so it’s better to work honestly.
CPP stands for Canada Pension Plan. OAS stands for Old Age Security. If you work in Canada, you have to pay social insurance (CPP), and after retirement, you can receive CPP. The amount of the social insurance is not related to the taxes you pay. Even if you have never worked, once you reach a certain age, you can receive OAS, which is purely unearned income and almost everyone is entitled to it. Without a company pension, retirement life would only have these two sources of income. After Sears department stores went bankrupt, their retired employees could no longer receive the company pension, leaving only CPP and OAS. People who have never been employed by any company with a pension plan, such as the self-employed, do not have a company pension. There is an illustration online showing this scenario vividly: the higher the pre-retirement income, the harder the post-retirement income drops. Someone with a pre-retirement annual income of $15,000 would have 120% of that income after retirement; someone with a pre-retirement annual income of $100,000, if they have no company pension, would have 25% of that income after retirement. Our intuitive feeling is that Canada is not as good as China in this regard. Currently, Chinese retirees sometimes receive pensions even higher than what they earned while working. For Chinese people, their peak income occurs after retirement, while Canadian retirees face a hard landing after retirement.
01. Investment is a tool to balance lifetime income.
Many Chinese Canadians see China's rapid economic development over the past 20-30 years, with people's incomes and wealth increasing significantly, and they are very envious, complaining that Canada's economic development is too slow and opportunities are too few. Is it really that there are few opportunities, or is it that they haven't found them? In terms of total wealth, Canada is higher than China, but China's wealth growth is enormous, leaving the whole world far behind.
However, no matter how high one's current income is, a person's lifetime income cannot automatically balance out. Can the income at 45 be maintained until 75? In Canada, that is impossible. In China, entrepreneurial success stories like Jack Ma might achieve it, but almost no one else can. Retirees in China now have higher incomes than when they were working, but will the people working now have the same situation 20 years from now? It's hard to say. From the perspective of income balance, Chinese people's anxiety is more severe, whereas Chinese Canadians have unique advantages. Investment is a tool for balancing lifelong income. In terms of personal investment environment, Canada is superior to China, but if one does not know how to use the investment tools here, even the most favorable conditions are wasted. Whether you are in Canada or China, to balance lifetime income, you are compelled to invest, generate passive income to replace active income; use the income generated by your own assets to replace dependence on employers; be your own capitalist, be the master of your money, make money work for you instead of working for money all your life.
02. Differences in the stages of economic development between China and Canada
How can we explain the phenomenon that the income of elderly people in China today is higher than what they earned when they were young? Using Professor Zhang Weiying's metaphor, let's briefly review the huge changes that China's recent economic development has brought to people's lives. The 'reorganization of old husband and young wife' is a vivid metaphor by Professor Zhang Weiying to describe China's rapid economic development and the substantial increase in people's income and wealth. Before the reform and opening up, it was stipulated that a 20-year-old young man must marry an elderly woman over 80, and a 20-year-old young woman must marry an elderly man over 80; both couples could not have children. After the reform and opening up, this regulation was abolished, and 20-year-old young men and women voluntarily paired up and had children, thus 'increasing productivity.' The 80-year-old elderly men and women also paired up voluntarily, and thanks to technological advances that resolved the issue of reproduction at old age, they too had children. Due to China's large population, production went from nothing to being enormous, massively releasing productivity, achieving a development speed unmatched globally. This allegory reveals the most important reason for China's rapid economic development since the reform and opening up: the release of institutional dividends, technological dividends, and demographic dividends in the same historical period, which is unprecedented in both history and the world. The elderly people in China who are currently receiving pensions are sharing this largest historical dividend, which explains the strange phenomenon that pensions represent the peak income of life.
The current situation is that institutional reform has hit a brick wall; it cannot be changed anymore. What could be changed has already been changed, and if more changes are made, the color will change, so the institutional dividend is gone. The technological dividend is also disappearing; what could be caught up has already been caught up, and the latecomer advantage brought by purchasing and copying has been exhausted. To have a technological advantage now, independent research and original innovation are required. The demographic dividend has been rapidly lost, as the effects of the family planning policy have become apparent. Currently, 900 million people are supporting 500 million people; in 20 years, 500 million people will be supporting 900 million. Additionally, with the excessive protection of employees by the 2008 New Labor Contract Law, the original advantage of cheap labor has been handed over to other developing countries.
All of the unicorn companies born in China over the past year are technology companies; there are no real estate companies, nor are there township enterprises. In the past year, Canada has basically not produced any unicorn companies. Canada is definitely outdone in terms of incremental wealth, but due to the superiority of the property rights system, its stock of wealth still has a strong advantage.
Discussing China's development is to give readers a point of comparison, allowing them to better understand Canada's economic development situation and the advantages of its property rights system. Canada is a typical developed country, while China is a representative of developing countries. The wealth of people in developing countries mainly comes from increments, whereas the wealth of people in developed countries mainly comes from stock. In a developed country like Canada, one can only achieve a leap in family wealth by sharing in stock wealth; becoming wealthy through entrepreneurship is very difficult.
03. The Canadian property rights system is superior, making it easier to get a share of existing wealth
Taking real estate as an example, let's compare the property rights situation and development stages of the two countries. Chinese developers are blue-chip stocks on the stock market, while in Canada, no developer is a listed company; Greater Toronto is the most active real estate transaction area, with second-hand homes accounting for two-thirds of transactions and new homes only one-third, and second-hand homes represent a stock market; property rights for real estate in China are still incomplete, with a large amount of untradeable small-property housing still in existence, whereas 98% of Canadian real estate is tradable and has complete private property rights; the living conditions of Chinese people still have much room for improvement, with many apartment buildings without elevators still existing, while due to private property, most Canadian homes have high livability and do not require large-scale improvements.
Professor Soto reveals in his book "The Mystery of Capital" that an important reason why the poor in developing countries find it difficult to improve their situation is that assets are hard to convert into capital. Without capital, it is impossible to purchase more assets or invest in productive activities, so the poor always remain in the position of selling their labor to capital. In developed countries, the property rights system is complete, asset transactions are simple, and the ability to extract capital from private assets is strong, making it easy for the poor to improve their situation. For example, small property rights houses in Chinese cities and self-built houses on rural homesteads are difficult to trade and cannot be used as collateral for loans; in Canada, 98% of property is privately owned, can be traded at any time, with simple procedures, transaction costs of about 1.5% of the house price. Mortgaging to a bank allows one to extract cash from the property for other investments. Learning to make good use of this superior property rights system is the biggest lesson for Chinese Canadians, rather than always thinking the grass is greener on the other side and dreaming of returning to China to develop.
76% of Canada's wealth exists in the form of real estate. To get a share of the existing wealth, a shortcut is to take advantage of the superior property rights system and market-oriented mortgage policies, and enter the stock market of real estate, that is, the secondary housing market.
04. A lifetime of balanced income can only rely on investment
Irving Fisher gave the public a definition of investment: Investment is the balancing of consumption over a lifetime. In Fisher's "Theory of Interest," the first sentence is "Income is a series of events." Only with income can there be consumption. Therefore, I put Fisher's two definitions together, and let's see if it means this: Investment is the balancing of income over a lifetime.
Everyone's income is distributed differently throughout their life cycle. Some people achieve success early in life, some have a modest and steady life, and some achieve great things later in life. The elderly in China who are currently receiving pensions, without exception, all achieved success later in life. If one happens to live longer, their lifetime income curve is actually the same as those who succeeded early. Most people's income situation should be considered modest—higher in the middle, lower at both ends—including Chinese people who can only retire after more than 20 years. Early in life, income is low, but parents provide care; after retirement, income is low—relying on the government? I really like Henry Ford's insight: if you hope to receive government protection, take a careful look at the current lifestyle of Native Americans in the United States.
Investment is a risky activity aimed at pursuing passive income. It requires the skills to identify investment value and manage risk. Unfortunately, such skills cannot be inherited genetically and must be learned later. The effort to let passive income replace active income must come from a strong subjective desire to balance income over a lifetime. Because one must delay gratification, use surplus income for risky ventures, which may result in losing savings, and also learn investment skills, no one is naturally inclined to invest. This is what we mean in our topic: to balance income over a lifetime, we are forced to invest.
05. Only by investing in safe asset repositories can value be preserved and increased.
Professor Zhang Wuchang, in his lifelong work 'Economic Explanation,' pioneered a theory of asset repositories. Only by putting savings into a safe asset repository can their value be preserved and increased. 'Economic Explanation' has a total of four volumes and 1,146 pages, and not everyone has the patience to read it. The discussions on asset repositories are scattered across many chapters, and the conclusion is as follows: after thousands of years of testing, there are three safe asset repositories—knowledge, land, and collectibles.
When we talk about real estate investment today, we are referring to urban real estate investment under the conditions of a commodity economy, which is quite different from land investment in a natural economy. Please follow the "" public account and review previous articles about the attributes of urban real estate investment; you will definitely gain something. Reading the articles is like plowing the land; once the land is well plowed, you can plant the seeds of investment at any time, and then slowly wait for them to branch out and bear fruit in spring and autumn.