Notes
1According to the Canadian Institute of Actuaries, an "adequate" level of retirement income means "having 80 percent of employment earnings up to one-third of the average wage, plus 70 percent of employment earnings over one-third of the average wage." A general rule of thumb used to ensure that post-retirement income is adequate to maintain a retiree's standard of living is 75 percent of preretirement income. That is, retirees must be able to provide 75 percent of their employment earnings through a combination of public social-security benefits and private savings.
2There continues to be a great deal of debate over what constitutes "low income"; for a full discussion of the issues and statistics regarding poverty and low income, see Sarlo 1996, 1998; Wolfson and Evans 1990; Statistics Canada 1997a; Oja 1987; Podulik 1968; Statistics Canada 1998; National Council of Welfare 1995; Conference Board of Canada 1996.
3The rates of return included in the government actuarial reports and referred to in this section are Internal Rates of Return.
4The rates presented in table 1 are based on CPP statutory projections of earnings and prices contained in the Seventeenth Annual Actuarial Report on the CPP, and represent gross effective rates of return. The long-term annual rate of inflation is assumed to be 3 percent.
5Information on the yields of Government of Canada issues as well as data on the Bank of Canada are available on the internet at www.bank-banque-canada.ca.
6Pay-as-you-go systems do not accumulate contributions in order to finance benefits at a later time. Rather, pay-as-you-go systems use the contributions of current workers to pay for the benefits of current retirees.
7The focus of an unfunded liabilities analysis is the actuarial valuation. This valuation assesses the ability of a program to finance the stated benefits for a specific time period given the contribution rates, expected investment returns, and specific economic and demographic assumptions. Actuarial valuations are extremely sensitive to their underlying assumptions. The assumptions for most program valuations are: inflation of 3.5 percent; wage growth of 4.5 percent; and an interest rate of 6.0 percent. Changes in these assumptions can cause significant deviations in the results.
8For information on social-security reform, see Association of Canadian Pension Management 1993; Mitchell and O'Quinn 1997; Ferrara, Goodman, and Matthews 1995; Asher 1995. The Social Security Privatization Project headed by the Cato Institute has numerous publications available including Feldstein 1997; Altig and Gokhale 1997; Shirley and Spiegler 1998. See also information on the International Center for Pension Reform at www.pensionreform.org.
9The percentage of pre-retirement income replaced by public benefits varies with income. Obviously, high-income earners will receive substantially less than low-income earners in public benefits as a percentage of total post-retirement income.
10The time horizon may vary. For instance, all fixed-income instruments, except those made in perpetuity, have a specific time schedule over which interest and principal must be paid. Alternatively, stocks never have an expiration date and are assumed to remit dividend payments in perpetuity.
11Financial Post Magazine, (July 1998), Top 50 Companies Report, available on the Internet at www.canoe.com/FP_Top50.
12Information is referenced from the company's 1997 Annual Report.
13Independently verified through communication with Investors Edge (Canadian Imperial Bank of Commerce) and Greenline Securities (Toronto-Dominion Bank).
14It is important to note that derivatives have a multitude of investment purposes, as explained in Appendix C. Derivatives can and, indeed, should be used as a method to manage risk by securing the price of assets for particular periods. Derivatives can also be used as speculative instruments. In this section we discuss the use of derivatives in the provision of a specific product in the mutual fund industry as opposed to discussing the particulars of derivatives.
15Derivatives have a number of purposes including risk management and speculation. The focus on the ability of derivatives to mirror the performance of an underlying asset should be viewed within the confines of the study rather than any particular assessment of the validity and usefulness of derivatives themselves.
16It is interesting to note the lack or absence of parallel product development (one product based on derivatives and the other on the underlying assets) in the United States and Europe.
17Specific data is available for TD mutual funds on the internet at www.tdbank.ca/tdbank/mutual.
18Specific data is available for CIBC mutual funds on the Internet at www. cibc.com/products/investment/mfunds.
19It is instructive to remember that savings are only eligible under RRSPs when the gross income of the individual is less than or equal to $75,000 per annum and the individual saves less than 18 percent of their gross income. An individual making more than $75,000 or saving more than 18 percent of income would be forced to save a portion of the funds outside of tax-sheltered RRSPs due to the limitations placed on contributions.
20The key value for the loss estimates is not the annual average yield but rather the average annual differential between the two rates. Also, the average annual rates of return are stated in Canadian dollars. The yield garnered from the Morgan Stanley Capital Investment fund was translated into Canadian dollars each year. Therefore, any adjustment for inflation over the time period would only affect the two yields; it would not change the differential.
21The study did not undertake to assess the effect of the Foreign Property Rule on MERs in Canada. They are included as an additional factor contributing to the investment losses incurred by Canadians. However, it is entirely plausible that the restrictions inherent in the FPR explain, at least to a certain extent the higher MERs present in the Canadian mutual-fund market. Another possible explanation for the higher MERs in Canada is the difference in regulatory regimes; Canada has multiple regulators while the United States has a much more consolidated regulatory system.
22Figures and estimates provided by the Investment Funds Institute of Canada (IFIC); available on the Internet at www.mutfunds.com/ific.
23It is important to acknowledge again that the estimates are based on a host of assumptions. Any deviation from the assumptions would thus likely increase the size of the losses incurred.
24This particular profile was selected because it is the median example available from the tables included in Appendices D(1) through D(9).
25The average RRSP contribution for all contributors in 1995 was $3,695.
info@fraserinstitute.ca
4th Floor, 1770 Burrard Street, Vancouver, BC, Canada, V6J 3G7
Tel: (604) 688-0221 Fax: (604) 688-8539 Book Orders: 1-800-665-3558 ext. 580
You can contact us at the above email address for any comments or information requests. Please report any dead links or technical problems.