The Shocking Truth about the Ontario Debt

The government’s mismanagement of public money is not something that’s new. What is new is that the Ontario debt profile is not as healthy as many people think or can even fathom. Just because it’s not front page news, doesn’t mean it’s not an issue. I predict that Ontario’s debt problems will be more widely talked about in the near future when the debt is no longer contained or when the interest rates are too high to service it meaningfully. It’s coming home to roost and all Ontarians better take heed.

Greece, California, Cyprus, Iceland, Italy, Spain, Ireland, Portugal. The one common theme of these countries/jurisdictions is that they have been on the front page news about their massive debts. You can now add Ontario to that list.

Comparing Apples to Apples

The shocking truth about Ontario’s Debt, is not just simply that Ontario is joining the ranks of that laundry list of indebted countries around the world, but that Ontario has joined the ranks. The way to look at it is by comparing the debt numbers with the same metric. In this case, let’s take a look at debt per capita (or amount of public debt owing per person).

Asides from the all the noise that’s out there about total debt and how big the debt is the size of the massive debt, comparing the debt per capita is the best measure. This means that if the debt had to be collected right now, single one of us is are on the hook for this amount.

Debt per capita serves as a great measuring stick. It can more accurately measure each jurisdiction regardless of the total number of residents. For example, a 5 million people region should probably have less debt than say a country with 30 million people. More mouths to feed, more debt.

When we compare debt per capita, the total amount of debt is no longer relative as an arbitrary amount of people who used the money, it’s dividing it out evenly for exactly the amount of people living there.

Ontario's Debt Per Capita

Below is Ontario's public debt profile:

Ontario’s debt per capita:

$17,625 [1]

Now think about this for a second. This public debt means that everyone single person that lives there owes $17,625. Right off the bat, you own $17,625! Just think that you are poorly by 17,625. That’s a good chunk of money that could’ve gone for a down payment or a good part of a decent car.

Check out the Ontario Budget when you get a chance!

Now, let’s compared the debt per capita of Ontario and California.

Debt Watch: Ontario versus California

Let’s start by comparing Ontario and California because they are roughly similar in that they are both a jurisdiction of a country.

California’s debt per capita:

$3,182 [2]

Rub your eyes again and look at those numbers. It’s not a typo, it’s not a miscalculation as these numbers are taken directly from the financial statements their own finance departments produced. That means that Ontario’s public debt per capita is roughly 5 times more than California’s! When put in this context, we can see how grossly indebted Ontario is.

Debt Watch: Ontario versus Countries

Entire countries are a little different insofar that it has far more expenses than any one jurisdiction such as Ontario or California. Below was what I was able to find their debt profiles:

Greece’s public debt per capita:	$38,000
Spain’s public debt per capita:	$17,000
Portugal’s public debt per capita:	$16,000
Iceland’s public debt per capita:	$43,000
Ireland’s public debt per capita:	$35,000
Italy’s public debt per capita:	$38,000
U.S. Public debt per capita:	$38,000

[3]

Debt management amongst the worst of the lot happen to be Iceland, Greece, Italy, Ireland and the United States. That’s who I would call the top tier debt profile countries with debts per capita over $30,000. The second tier include Spain and Portugal. And this is the group that Ontario belongs to. The reality is that it doesn’t take much to graduate to the next tier. All it takes are two things:

1. Run a deficit year over year
2. Interest Rates rise

Ontario is already set to run a deficit for the next 5 years. Interest rates are to going to rise sometime in the next few years. Currently it already costs taxpayers 10 billion dollars to service the debt. That means we are paying 10 billion just in interest.

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Should You Convert From a Traditional IRA to a Roth IRA?

I’ve spent a lot of time recently considering retirement options, and one of the ideas I’ve been investigating is converting regular IRA money to a Roth IRA. It’s a confusing topic with lots of caveats, but I think I’ve boiled it down to the most basic ideas. These may not apply if you have a lot of money, but the average person, like me, might find some of these explanations useful.

Definitions

Let’s define the basic terms first so we’re all on the same page.[1]
Traditional IRA. Independent retirement account. This is usually an account that a person sets up with their bank or financial institution. You deposit money, and, for the most part, you don’t pay any tax on this money. There are exceptions, but we’ll keep this simple. This is a nice arrangement for retirement because you get to:

Lower your tax bill each year that you contribute.
Earn money (interest) on that cash that would have otherwise gone to Uncle Sam.

The price for getting this monetary niceness is that you can’t use any of that money until you turn 59 ½. Well, you can, but normally there’s a penalty for doing so, plus you have to immediately pay taxes on it. Better to just leave it there.
When you turn 59 ½, you can take out the money without penalty but you still have to pay the tax on it.
Roth IRA. Still a retirement plan that you can’t access without penalties until you come of age. This one is filled with after-tax money; money that you have already paid the taxes on. When you withdraw from this account during retirement there are no taxes due on your cash.

Which one is better?

The rational for choosing one plan over another is complicated and depends almost entirely on personal circumstances. A person may want to save more than is allowed in their traditional IRA and so have both a traditional and a Roth account. Someone with an income that varies from year to year might contribute to a Roth during low-earning years when their tax burden is lowest and a traditional account when their income (and tax bracket) is high.
Ah, taxes. That’s really what it all comes down to. The Roth is tax-free in the future, the traditional IRA is tax-free now. This, then, is the reason many people consider transferring from a traditional IRA to a Roth.
First I need to say that you can do this conversion without a penalty. The IRS doesn’t consider it a withdrawal from your retirement funds, just a movement. You will, however, have to pay the taxes on any money you move. It’s OK, it’s not confusing; Roth is after-tax money regardless of the source of that money. When you withdraw from a traditional IRA, you pay the taxes so you now have after-tax money for the Roth.
Also, you can convert money every year, but only once a year. This is important because the money you are converting counts towards your income when it comes to calculating your taxes. If your income is $10,000 and you convert $50,000, you are now in the tax bracket for $60,000.

Finally we can get to the question:

Why would you do this?

Taxes

Lower taxes now. If you’ve had a steady working history and have consistently saved money for your retirement, you may find that withdrawing savings in your golden years puts you in a higher tax bracket than you are now. If you expect to be in a higher tax bracket when you retire, converting at least some of the money in your traditional IRA to a Roth usually makes sense. You’ll need to have enough cash available to pay the extra taxes on the money you convert. Don’t plan on paying that tax with some of the money that you’re moving because that is considered a withdrawal and you’ll incur penalties.
Lower taxes later. Because the Roth money is after-tax, it doesn’t count as income when you withdraw it during retirement. If you’ll be withdrawing from a retirement account, receiving social security[2] and possibly having a small income from a hobby, you can manage your taxes by using the Roth distributions to supplement your living expenses without raising your taxes.
Saving it up. You aren’t required to use the money at a certain age. Traditional IRAs require that you begin taking distributions at age 70. A person that wants to leave assets to a spouse or a child can leave the funds in the Roth IRA untouched for as long as they want.

Why wouldn’t you do this?

Well, taxes

If you expect to have a lower income during retirement, and therefore be in a lower tax bracket, converting wouldn’t make sense. You’ll pay extra taxes on your money.
If your tax bracket will be the same, it’s probably not worth the hassle of converting. You may get a slight monetary advantage if you switch over a lot of money, but for most people it’s a wash. If you know you’ll have an income during retirement the question becomes a little more complicated. You might want to consult a financial planner for that one.
If you don’t have money to pay the taxes during a conversion you risk losing any advantage. It’s possible you could still come out ahead, but you’ll want to try the scenario on a lot of calculators, or run it by a financial planner before you do it.
This is just the most basic outline of what you need to know when considering a simple conversion from a traditional IRA to a Roth.[3] There are many more complicating factors such as inheritance and converting taxed IRA monies. If you convert monies you may have a five year waiting period before you can access the money.

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