Sign up for Dialogue
public policy & economics
Are RRSPs Facing a Mid-life Crisis?
Among those hardest hit by the current economic downturn are pensioners, others on fixed incomes, and those about to retire. The crisis has brought to the fore the question of retirement income adequacy, an issue the federal, provincial and territorial finance ministers will address on December 17 and 18 in Whitehorse. The premiers are also pushing for a national summit early in 2010 on retirement income and saving options for Canadians, with some advocating for a new national pension plan.
In light of these developments, a CGA-Canada Issue in Focus paper bears a second look for its close examination of a key element in Canadians’ retirement planning, Registered Retirement Savings Plans (RRSPs). The paper (51 and Counting – Is It Time to Remodel RRSPs?), released in January, finds that the popularity of RRSPs has been declining over the years, perhaps due to the diminishing ability of the tax incentives to motivate individuals’ financial decisions.
The paper notes that the RRSP contribution rate, the share of RRSP contributions in household disposable income, peaked at 5.2 per cent in 1997 and has been declining ever since. Similarly, the RRSP participation rate, the proportion of RRSP contributors in the total population aged 20 to 69, has been declining since peaking at 32.6 per cent, also in 1997. This comes at a time when aging demographics, a declining trend in occupational pension plans, uncertainty over the sustainability of some defined benefit plans, and general economic unpredictability would all suggest that Canadians should be taking full advantage of the RRSP program.
Rock Lefebvre, FCGA,
Vice-President, Research and Standards, CGA-Canada
“There is only one component of a person’s retirement income that they have direct control over, and that’s the amount of personal savings they are able to accumulate,” says Rock Lefebvre,
CGA-Canada has released research reports in recent years that explore the under-funding of defined benefit pension plans as well as the social and economic impacts of Canada’s aging population. Research in both these areas has shown that Canadians need to take more control of their retirement planning and need to do a better job of saving if they wish to maintain their standard of living into their retirement years. There is a gap between the income that occupational pension plans and the public pension system will provide for most people, and the expectations that those people have for their quality of life after retirement – and that gap is widening.
“Over the past 30 years, we’ve seen a decline in the number of people covered by registered pension plans and, what that really means is that the responsibility for saving for retirement has been shifting gradually over the years from employers to individuals,” says Lefebvre, who co-authored the Issue in Focus paper. “At the same time, people are living longer and, as a result, having more retirement years to enjoy…or perhaps worry about.”
When the RRSP program was introduced in 1957 it was intended to equalize the tax advantages for individuals saving for retirement through personal savings plans with those participating in employer-sponsored pension plans. It enables contributors to defer taxes to their retirement years when their income is lower, thereby reducing the tax burden on savings and increasing the incentive to save.
However the paper shows that, as a result of a number of tax policy changes over the years, the tax incentives for contributing to RRSPs have declined significantly for middle-income Canadians in all parts of the country and for high-income individuals in western Canada. The tax incentives no longer appear strong enough for households to use the RRSP savings vehicle more extensively than non-pension financial assets. That wouldn’t be a problem, says Lefebvre, if Canadians were saving adequately for their retirement needs through other savings programs or investments. However, that doesn’t appear to be the case either.
“Our recent research into household debt and consumption habits shows that Canadians are not saving anywhere near enough to meet their future needs, whether through RRSPs or any other methods,” says Lefebvre. “It raises the question of whether government should take measures that, in effect, force people to save for their future.”
That’s a question raised in the Issue in Focus paper, citing the example of New Zealand which recently introduced a compulsory savings plan known as the KiwiSaver plan. The United Kingdom and Ireland are exploring similar plans, which require mandatory enrolment in a private pension plan with an option to opt out after a specified period of time. It’s the kind of idea that may also feature in upcoming discussions between the federal, provincial and territorial finance ministers.
Nonetheless, RRSPs remain the most important retirement savings vehicles available to most Canadians. But for them to be effective and achieve the desired outcomes, RRSPs may be due for their own mid-life reassessment. It’s a conclusion that others have come to from different perspectives.
“After 50 years of promoting RRSPs, we have to conclude they haven’t turned out as envisioned,” Toronto Dominion chief economist Don Drummond told The Globe and Mail in May. “I don’t know why we don’t just recognize this and make the needed adjustments to the retirement income system.”
In an opinion piece published in June in The Hamilton Spectator, Canadian Labour Congress president Ken Georgetti agreed, saying: “Canada’s
When the finance ministers meet in December, the future of RRSPs and their role in retirement income security should be part of the discussion.
[ TOP ]
