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FINA Committee Report

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CHAPTER THREE: VOLUNTARY
TAX-ASSISTED RETIREMENT SAVING

Witnesses provided the Committee with their views about the primary mechanism by which many Canadians voluntarily save for their retirement in a tax-assisted manner—RRSPs—as well as about new mechanisms that might be implemented to enhance voluntary retirement saving. With voluntary measures, Canadians often make their own investment decisions, and better decisions are typically made when the level of financial literacy is high; witnesses also provided their views on literacy.

Figure 3: Total Contributions and Total Contributors to Registered Retirement
Savings Plans, by Income Category, 2008 Taxation Year (%)

Figure 3: Total Contributions and Total Contributors to
    Registered Retirement Savings Plans, by Income Category, 2008 Taxation Year (%)

Source: Canada Revenue Agency, Income Statistics 2010—2008 tax year, http://www.cra-arc.gc.ca/gncy/stts/gb08/pst/ntrm/pdf/table2-eng.pdf.

THE CONTRIBUTION LIMIT FOR REGISTERED RETIREMENT SAVINGS PLANS

The BMO Financial Group’s Ms. Tina Di Vito told the Committee that, in 2005, Canadians saved 1.2% of personal income, a figure that had risen to 4.8% in 2008. She also indicated, however, that Canadians are living longer, healthier lives, thereby giving rise to a need for more saving to sustain them in what was characterized by her as a long and active retirement. Ms. Di Vito also commented that: about 38% of Canadians participate in an occupational pension plan, some of which are defined contribution plans that involve a relatively greater burden for individuals in terms of adequacy of saving and management of the investments; the costs of care-giving are rising rapidly, giving rise to additional saving requirements to meet their own needs as well as those of their parents; households headed by baby boomers have more household debt than previous generations, with a record-high level of household debt-to-income of about 145%; and the lifestyle expectations of retirees are likely to exceed those of previous generations, giving rise to a need for more retirement saving.

Ms. Di Vito also supported an increase in the maximum contribution limit to RRSPs, questioning whether the current annual limit is reasonable under the circumstances. She noted that, if RRSP investments perform less well than expected, there is no ability to make additional contributions to ensure that retirement is funded to the desired level. In her opinion, the current limit also favours households, with a dual-earner couple earning $75,000 each, for $150,000 in total, being able to contribute $27,000 to their RRSPs and a single person earning $150,000 being permitted to contribute $22,000. She argued for a contribution limit similar to that of defined benefit pension plans.

Carleton University’s Mr. Ian Lee, who appeared on his own behalf, identified annual limits on retirement saving as an issue, and advocated a “levelling of the pension playing field” through the creation of a common set of pension rules and replacement of the annual contribution limit with an accumulated target, such as $1 million. Similarly wishing to support equity, Mr. Scott Perkin, of the Association of Canadian Pension Management, and Mr. Leslie Herr, of the Empire Life Insurance Company, urged the adoption of a lifetime contribution limit in order to ensure greater parity between those who save exclusively through an RRSP and those who are occupational pension plan members. Mr. Terry Campbell, of the Canadian Bankers Association, noted that while it is possible to carry forward unused RRSP contribution room, it is tied to employment income; when you are younger, the contribution room is lower. In Ms. Di Vito’s opinion, the ability to carry forward unused contribution room is akin to a lifetime maximum contribution limit.

The annual RRSP contribution limit is based on earned income, and Mr. Dean Connor, of the Canadian Life and Health Insurance Association, advocated an expanded definition of “earned income” to include such income sources as royalties and active business income. In his view, such an expansion would benefit self-employed persons.

Figure 4: Earners with Unused Registered Retirement Savings Plan Contribution
Room (%) and Average Amount of Unused Registered Retirement Savings Plan
Contribution Room, by Income Category, 2006

Figure 3: Total Contributions and Total Contributors to
    Registered Retirement Savings Plans, by Income Category, 2008 Taxation Year (%)

Source: Submission by the Department of Finance to the Standing Senate Committee on Banking, Trade and Commerce, March 31, 2010.

Mr. Lee identified the trade-off that occurs between retirement saving and other purchases, with specific mention made of home ownership. In his view, the single largest asset for many Canadians is their home, rather than their retirement saving. In Ms. Di Vito’s opinion, however, Canadians are relatively reluctant to move out of their home in old age; moreover, the amount of equity associated with the downsizing of a home is often less than anticipated.

CONVERSIONS TO REGISTERED RETIREMENT INCOME FUNDS

Some witnesses who commented on RRSPs also spoke about registered retirement income funds (RRIFs), since contributions to RRSPs must cease at age 71, and contributions and accumulated returns must be used to purchase annuities or converted to RRIFs. For example, in recognizing that Canadians live, work and save longer, and in implicitly supporting an end to the practice whereby contributions to RRSPs must cease at age 71, Ms. Di Vito also advocated flexibility for Canadians that would allow them to choose when to begin withdrawing funds from their RRSPs.

In Ms. Di Vito’s view, flexibility should also be given in respect of the mandatory minimum withdrawal rates from RRIFs. In particular, she argued that the current prescribed withdrawal rates may deplete RRIF funds too quickly, and advocated a reduction in the rate at which funds must be withdrawn, which will extend the life of an RRIF. She commented that withdrawal rates of 4% or 5% may be more sustainable.

Mr. Campbell, Mr. Herr and Mr. Connor supported an increase in the age of conversion, with specific mention made of an increase from 71 years to 73 years in order to allow those who are still working to continue to save.

OTHER ISSUES

Witnesses also provided their views about a range of other RRSP-related issues. For example, Ms. Di Vito suggested that while RRSP contributions should be taxed as deferred employment income, the investment returns generated by RRSP contributions should be taxed at a rate that mimics the tax rate that would have been paid had the investments been held outside a registered savings plan. For example, the investment returns would be taxed as dividends and as capital gains, with preferential tax treatment, rather than as interest income. In her view, the loss of preferred tax status for dividend income and capital gains held in an RRSP affects investment behaviour and may induce people to hold interest-bearing securities, even if interest rates are relatively low.

Ms. Di Vito also commented that any balances in RRSPs or RRIFs when individuals die should be permitted to be rolled over, on a tax-free basis, into the next generation’s RRSP or RRIF. In her view, ideally this rollover would be available in addition to any unused RRSP contribution room. She also argued for a review of the 1995 Income Tax Act amendment that ended the ability to roll over a certain amount of severance payments to an RRSP on a tax-free basis.

A CANADA SUPPLEMENTARY PENSION PLAN

Neither Mr. Connor, nor Mr. John Farrell of Federally Regulated Employers—Transportation and Communications (FETCO), supported increases to OAS or GIS benefits; nor did they support increases to the Canada/Quebec Pension Plan (C/QPP). Rather, they each endorsed some form of a voluntary defined contribution supplement to the CPP. However, FETCO’s Mr. Ian Markham warned that a voluntary CPP supplement, which would be on a defined contribution basis, would redirect money that would otherwise have been contributed to an RRSP. However, since RRSP investments are often made in relatively high-cost investment vehicles, a voluntary supplement to the CPP could theoretically be administered at a lower cost.

The Rotman International Centre for Pension Management’s Mr. Keith Ambachtsheer, who appeared on his own behalf, shared his view that Canadians do not, and probably will not, voluntarily accumulate sufficient retirement saving; consequently, policy intervention is needed. However, he had concerns about increasing mandatory contributions, and referred to his proposal—discussed in the 2008 C.D. House Institute report The Canada Supplementary Pension Plan—for a voluntary defined contribution Canada Supplementary Pension Plan (CSPP); according to this proposal, individuals would be automatically enrolled with pre-set contribution rates and a target pension equivalent to a 60% post-employment earnings replacement rate. The proposal included the ability to opt out, a number of annuitization choices, and the ability to transfer RRSP assets into their CSPP personal retirement savings account.

FINANCIAL LITERACY

Mr. Connor was among the witnesses who spoke to the Committee about the need for financial literacy. For example, he said that education could improve the retirement savings habits of Canadians, and advocated opportunities to enhance communication about the importance of retirement saving, especially for younger Canadians who can establish lifetime strategies that will ideally result in a financially secure future. Mr. Campbell identified a need for enhanced financial literacy in respect of savings and retirement planning, while Mr. Markham commented that many Canadians do not understand how to invest their RRSPs, with the result that they tend to invest in fairly high-cost vehicles and may make the wrong decisions. Mr. Herr noted that Canadian consumers need to have easy access to accurate, timely and understandable information designed to help them with their financial planning needs. Finally, Mr. Ambachtsheer, argued that the average Canadian is not well-versed in investment theory.