What Does GM Pension Deal Mean for Real Estate?
In the “give and take” of labour negotiations, the Union gave up on the “defined benefit pension plan” for new employees. That deal was struck 20 September 2016.
What did the Union get in exchange? Job security, the Oshawa plant will stay open and the St. Catherines plant will manufacture engines that are now made in Mexico.
All in all, that means that the Union has “bought” some jobs in Canada for the next few years. Auto manufacturing is a worldwide competitive industry. It takes a great deal of investment to set up a plant. Once it’s gone, it’s gone!
A luxury in the global marketplace had been the defined benefit pension plan.
There are two types of plans:
1) Defined Benefit, and
2) Defined Contribution.
Defined Benefit Plans
Naturally, these are the best types. Both the employer and the employee contribute, but when the employee retires, the employer guarantees that the employee will receive in retirement a fixed percentage (ie. 70%) of their annual compensation until they die.
Defined Contribution Plans
In this case, there is no guarantee. Both the employer and the employee contribute, but when the employee retires, the employee receives an annuity for a lifetime. The payout is based upon market factors, and the funds that have been contributed for that particular employee buys what it buys. There’s no guarantee. There is no minimum.
Governments, Government Agencies, Large Corporations
These are only the employers who can afford the defined benefit plans. They are being eroded in the private sector. The only surviving location as time goes by is likely to be the public sector. These plans are simply unaffordable (although laudable) in most cases.
The GM Deal
Until 2012, all employees had a defined benefit plan. After 2012, new employees had a hybrid plan. Now, going forward, all new GM employees will receive a defined contribution pension plan. It is what it is. It buys what it buys. There will be no “unfunded liabilities” on the balance sheet as there might have been with the defined benefit plan.
What Does this Mean for Retirement?
In most cases, this will add an element of uncertainty and insecurity. Essentially, that means that the “retiree” should have their own alternative investments in addition to their fixed payment annuity.
Real Estate as an Investment Choice
An excellent investment opportunity is real estate. It can be purchased using other people’s money by way of mortgage financing at the lowest interest rates that we have seen in the last 50 years. There’s a shortage of real estate, and there is an increased demand. That means over time, it’s going up in price. Unless you are in the business of buying and selling real estate, the gain is likely to be treated as a capital gain, meaning that the profit is taxed only on 50%, and if the property happens to be a principal residence, then the gain is fully exempt.
Real estate makes good sense! The more you have, the better off financially you will be!
Brian Madigan LL.B., Broker