How to reform retirement savings

Investment and savings fund planning for future retirement

RRSP season may be over again for another year, but the ongoing debate about how we can modify the retirement savings system so Canadians have more money to spend in retirement is heating up again, in anticipation of the federal budget which will likely be tabled within the next few months.

Recently the Globe and Mail published a series of four editorials on how the alphabet soup of tax-assisted and government plans should be reformed. I include links to these articles below and my comments regarding the individual recommendations and the full package.

Reforming Retirement (1): How the TFSA turned into Godzilla

In the 2011 budget, the government promised to double the contribution level for TFSAs to $10,000, but it appears that the government may be backing off from this proposal.

In late February, both the Broadbent Institute and the Parliamentary Budget Officer said that the TFSA program is growing dramatically and before long it will take a huge bite out of provincial and federal revenues. They also note that the benefits of TFSAs are going overwhelmingly to higher income Canadians.

The G+M acknowledges a tax break that encourages Canadians to save more for retirement thereby costing government some hoped-for revenue, even a lot of revenue is not necessarily a bad idea. But they do not agree that doubling TFSA contribution limits is the best way for Ottawa to go about boosting retirement savings.

My Comments
I can’t help but agree with Jason Kirby’s conclusions in his recent article Higher TFSA limits are not the enemy published in Maclean’s. He says:

“…some of the TFSA’s biggest supporters, such as tax policy expert Jack Mintz, see the need for technical tweaks to the system. (He believes income that retirees build up within their TFSAs should be calculated and used to claw back Old Age Security benefits to prevent program costs spiralling out of control.) Others argue Canada should continue to shift more of its tax base away from savings and onto consumption—a move that might entail jacking the GST back up. Still others believe a lifetime TFSA limit with no annual contribution cap is the answer. So there are options. But Ottawa should never lose sight of the value of having people take ownership of their own futures by rewarding them for saving.”

I also agree with these comments from Jonathan Chevreau on the Financial Independence Hub.

 “If the government believes RRSPs are good for Canadians they should have the same view of TFSAs. Even though the government will miss out on tax revenue, the savings in future GIS and welfare payments will outweigh some if not all of the missing tax revenue short term.

Human nature dictates that if someone “feels” richer, they are more likely to spend money on products and services. If Canadians start to feel better about their financial situation and spend more money (which they will have through their TFSAs) then the government will see an increase in consumption taxes such as GST, HST etc.

Reforming Retirement (2): Getting Ottawa’s mitts off your RRIF

The second G+M editorial in the series discusses the 1992 cash grab when the federal government imposed a withdrawal schedule beginning at age 71 which requires seniors to annually withdraw and pay income tax on a set % of their RRIF savings.

At age 71 the withdrawal rate is 7.38% rising to nine percent by age 80, over 10% by age 85 and 20% a year at age 94 and beyond. With increasing longevity and mandatory withdrawal rates that exceed investment returns, the C.D. Howe Institute reports a growing number of Canadians will outlive their retirement savings.

The G+M argues that RRIF mandatory withdrawal rules should be completely eliminated so seniors can take money out at their own pace. They note that all funds in a tax-sheltered RRIF eventually become taxable so Ottawa will get their money eventually.

My Comments

I’m all for getting rid of the RRIF withdrawal rules because about one-third of our retirement savings is currently in RRSPs. But I’d be happy if at least the schedule was at least modified to require smaller withdrawals at later ages.

Realistically, I can’t see the federal government giving up this staggered and somewhat predictable source of revenue. I know if we didn’t have to withdraw specific amounts from our RRSPs we would likely draw on other unregistered funds first and let our children worry about paying taxes on the amount left after our deaths.

 Also, if we did not have to take money out of our RRIFs we might continue to be eligible for all or part of OAS payments for many more years than if our income for OAS purposes was inflated by RRIF withdrawals.

Reforming Retirement (3): More RRSP, not more TFSA, please

In the third editorial in the series, the G+M explains that in 2015, you can contribute up to 18% of your earned income to an RRSP – but only to a maximum income of $138,500. That means the maximum annual contribution for someone $138,500 is $24,930. Additional contributions cannot be tax-sheltered in an RRSP. Company pension plans are constrained by the same rule.

They advocate for higher RRSP contribution limits instead of upping permissible TFSA contribution levels. Their rationale is that all of the funds eventually withdrawn from RRSPs are taxable, whereas earnings on TFSA contributions (which are not tax deductible) can be withdrawn tax free.

My Comments

Why does it have to be an either/or proposition? RRSP contributions should be increased but doubling TFSA contributions will also give middle class Canadians more options.

In a recent blog on the Financial Independence Hub, Ermos Erotocritou gives five good reasons why Canadians should consider investing in their TFSA instead of an RRSP. For example, not everybody should be contributing the maximum to an RRSP because they may ultimately pay higher taxes if their earnings are higher after retirement.

There will always be high earners who will max out every tax-sheltered savings opportunity available. But the majority of Canadians will spread their money around and put a little in each place. Young people in particular love TFSAs because they can withdraw savings as required and replace them in the next year.

Reforming Retirement (4): Canada needs to ramp up CPP, ASAP

In the final segment, the G+M acknowledges that:

“Abandoning TFSA expansion will benefit future taxpayers, but it won’t do anything for retirees. Raising RRSP and pension contribution limits will only help higher earners. And giving seniors the freedom to decide when to withdraw money from their RRIFs will offer them flexibility in managing their retirement savings – but it won’t do anything to ensure they have enough savings.”

Instead they strongly endorsed an enhanced Canada Pension Plan gradually increasing CPP savings and CPP benefits, by raising the income ceiling and contribution rates. They note that this will also reduce OAS payments that expanding savings through CPP would have another enormous consequence: It would lower the price of the OAS program, which currently costs Ottawa $46-billion a year, and climbing rapidly.

My Comments

 I fully agree that CPP (and QPP) improvements should be phased in. Wynne’s Ontario government has committed to implementing a similar Ontario Retirement Pension Plan and are working out the kinks through an ongoing consultation process.

CPP has been globally acknowledged as a well-run defined benefit plan that can deliver the benefits it promises. All Canadians deserve fully portable benefits that are professionally managed at low cost.

 The big picture

I support:

  •  Higher TFSA contribution levels, possibly with a lifetime maximum on contributions.
  • Modified RRIF withdrawal rule.
  • Increases in RRSP contribution levels.
  • Phased in CPP enhancements.

Nevertheless, I also fully recognize that the economic implications of these changes must be fully mapped and analysed before any changes are made. The ongoing problem we have trying to reform retirement savings is that because there are so many “moving pieces,” any changes to one cog in the wheel could result in unexpected results in another part of the system.




  1. I have a real concern from a public policy point of view of expanding TFSA limits. Earnings generated inside of TFSAs are not subject to taxation and the limits continue to expand with time.

    This means billions of dollars forming part of our tax base are being eroded by the TFSA regime. The tax burden of paying for our schools, army, police and other services will fall on those who derive their income from employment. The government won’t be able to look to this increasing pool of tax exempt monies and will have to tax elsewhere.

    To be in a TFSA, by nature you need more after tax income (the source of the TFSA contributions). If people whose main income is employment income must pay more tax because of the pressure applied by the growing TFSA room, one wonders whether they will also benefit from the TFSA regime.

  2. Your comment about wanting lower RRIF withdrawal rates so that your children can worry about the tax and so you won’t have as much OAS clawed back illustrates why we need mandatory RRIF withdrawals. We shouldn’t be taxing working people to provide a benefit to seniors so they can leave bigger estates to their children. Where is the public policy in that?

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