Savings accounts aren’t just futile in Cyprus

Consider the return on Canadian savings accounts and you may feel that the tax being levied in Cyprus—while an order of magnitude more egregious—isn’t all that far removed futility-wise from what we already experience here.



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The big news today and over the weekend is of course the legalized theft of bank savings accounts in Cyprus. Politicians do some pretty outrageous things but this one really takes the cake.

Ayn Rand and looters

Ironically, I was watching Rogers Video-on-Demand on Saturday night, roughly when the story was breaking over social media. It happened I was watching the lukewarmly reviewed movie Atlas Shrugged, based on Ayn Rand’s most famous novel. It’s all about how “looters”—generally government-led legal plunderers of private-sector wealth—enable society’s “have nots” at the expense of those who build wealth and jobs. In the end of the book, the captains of industry effectively go on strike (hence the “Atlas” shrugging) and the wheels of commerce grind quickly to a halt. Literally, in the case of the movie, where one of the final sequences shows trains managed by incompetents imploding in tunnels.

Whether the Cyprus implosion succeeds in reversing the hard-won rise of confidence in Europe this year remains to be seen. The 9.9% tax being levied in Cyprus over a certain threshold of savings (100,000 Euros; the rate is 6.7% below that level) is mind boggling, given the tiny return that most bank savings accounts payout in a year. I don’t know what they pay in Cyprus but as North Americans well know, bank accounts these days pay effectively zero. In fact, the “real return” net of inflation is almost certainly negative. In Canada, at least, even if you manage the princely return of 1% a year, if you’re in the top marginal tax rate, you can kiss goodbye to almost half that meager return.

Outside TFSAs or RRSPs, savings accounts are futile even in Canada

In other words, the combination of rock-bottom yields, inflation and confiscatory taxation has long rendered savings accounts a losing proposition in this country, along with equivalent vehicles like savings bonds, short-term GICs and money market mutual funds.

If one really must “park” some funds in such instruments, it’s best done inside Tax-Free Savings Accounts. But outside RRSPs or TFSAs, it’s certainly a losing game, which is why now-retired actuary and retirement expert Malcolm Hamilton used to regard any savings or investments outside tax shelters as essentially “futile.” He even viewed longer-term fixed income instruments and equities as equally futile.

When you think about it, it’s pretty outrageous how “safe” cash equivalents and bonds are taxed even on this continent. I once wrote an editorial for the Financial Post that made the case for TFSAs. I felt the average consumer is only half aware of how hard it is to build wealth outside tax shelters. Once you do realize it, you may feel that the tax being levied in Cyprus—while an order of magnitude more egregious—isn’t all that far removed futility-wise from what we already experience.

Consider what happens if you want to put $1,000 into some cash vehicle paying 1%. To get that $1,000 capital, someone paying an average tax rate of 33% first has to earn $1,500. About $500 of that goes to income tax, at which point you now “invest” in a “safe” money market fund or equivalent. If it’s not held in an RRSP or a TFSA, each year, that $1,000 investment will spin out the princely return of $10, which at tax time will incur a $4.60 tax liability, leaving you with $5.40 net. If inflation is at 2%, you’re actually losing ground, since your original $1,000 of capital now has enough purchasing power to acquire about $990 worth of goods. And of course if you’re in the top tax bracket with a top marginal tax rate of 46%, the situation is even more dire: as a reader commented below, it would require $1,850 of gross income to generate $1,000 after-tax capital.

Little wonder gold seems to have bottomed

Remember, that’s not Cyprus: that’s right here in Canada. Now if our government were to emulate Cyprus, you’d experience the further outrageous “tax” of $99 from your $1,000, or $67 if you’re a small saver. Anyone in their right mind would prefer to put paper money under the proverbial mattress or better yet, buy gold or silver coins or bullion and put it in a safety deposit box. Maybe that’s why the price of gold has been up since this Cyprus story broke.

6 comments on “Savings accounts aren’t just futile in Cyprus

  1. I think you made a math error in the discussion of how much someone in the top marginal tax rate has to earn to get $1000 after tax. If you're using 46% as the tax rate, then the amount is $1000/(1-0.46) = $1850. The taxes on $1850 of income are 46% of this figure or about $850 leaving $1000. This makes your point even stronger.


    • Good catch, Michael. We've amended it to what I was thinking at the time: an average tax rate of 33%. As you point out, it's much worse in the top tax bracket.


  2. The old adage of "a penny saved is a penny earned" is outdated in this country. It should be "a penny saved is TWO pennies earned."


  3. I am tired of so called financial experts,analysts,commentators giving only part of the all the facts. A retired single person would have to earn about any amount over $120,000 a year net income to pay 46.00% marginal income tax rate. So, a $124,000 net income would mean a $1,000 would be taxed at 46% income tax rate. Most single persons don't have incomes of $70,000 a year where a 36% marginal income tax is close to what you will pay. A person making $55,000 a year would pay a 33% marginal income tax rate.

    This 1.00% interest rate I hear so much is only for savings accounts. ING Bank Canada 1.35%,ICICI Bank of Canada 1.45%, Community Trust Company 1.75%, Canadian Tire Bank 1.50% etc. A smart and prudent investor should have maximum 12 to 24 months in living expenses so it should not be a big portion of one's total portfolio. I would say $25,000 to $50,000 maximum. I am a conservative investor buying mostly fixed income investments. I have GIC's,provincial strip bonds,provincial bonds,Canadian bonds etc.

    Today, you can get about 3.80% for 20 year provincial strip bonds. The highest 5 year GIC's I could find are 2.85%,2.70%,2.50%,2.45% at ICICI Bank(Canada), Home Trust Company, State Bank of India (Canada),Comtech C.U.,Community Trust Company. Well for 3 year GIC's 2.35%,2.25%. So an investor should not get discouraged but look to a combination of savings accounts, cashable GIC's,GIC's laddered 2-5 years,provincial bonds and strip bonds.The problem is people need to ramp up their savings from their income and use the RRSP's,TFSA's,RESP's maximum contribution limits to their advantage.

    I will give some examples. A couple making $66,700 combined annual income. They put the maximum $5,500 TFSA each and maximum $6,000 RRSP each every year and invest in longer term provincial strips which today are a balance between as safe government bonds but paying about 1% higher than Canadian strip bonds. Today, a 3.80% yield is available for 20 year terms or longer. So, $11,000 TFSA's and $12,000 RRSP's. Since they will get back about 25% on their $12,000 RRSP contributions a $3,000 income tax refund will come each year.

    This means they need to save not $23,000 total TFSA's,RRSP's but $20,000 total per year. The $11,000 in TFSA's per year added plus all the interest compounded at 3.80% for say 35 years will be worth $778,391.58. The RRSP's of $12,000 a year added plus all the interest compounded for 35 years at 3.80% will be worth $849,154.46. If you they don't need any of this money for 5 more years the TFSA's would be worth $997,303.14 and the RRSP's would be worth $1,087,967.06. This means no interest rates going up or bond yields going up for 35-40 years. This is impossible.

    These numbers are just to show how even at 3.80% bond yields,interest rates money invested in TFSA's,RRSP's,RESP's to a lesser extent can still grow quite large than most people think is possible.It has been only about 20 months since longer term provincial bond yields went below 4.00%. Here are examples of the following bond yields at their peaks on longer term provincial strip bonds, 1995 9.40%-9.66%,1996 8.35% to 8.45%,1997 6.11%,1998 5.85% to 6.01%,1999 6.125%,2000 6.40% to 6.65%,2001 6.25%,2002 5.90% to 6.02%,2003 5.44%,2004 5.36%,2005 4.89%,2006 5.22%,2007 5.03%,2008 4.67%,2009 5.27%,2010 4.907%,2011 4.71%,2012 4.03%,2013 3.92%. I would say that a 4.25% to 4.35% longer term provincial strip bond yield is coming over the next 2.5 to 4 years. This is just my best hypothesis.


  4. The Cyprus condition is going weird day by day recently- The Cypriot government on Wednesday announced severe restrictions on access to funds held in the country’s banks, hoping to control a rush to withdraw money when the banks open Thursday for the first time in nearly two weeks.


  5. I think if you we are a small saver ,our government were to emulate Cyprus. Cyprus statement is going weird day by day recently.


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