Are RRSPs a fraud?

A new report from the C.D. Howe Institute charges that almost a third of Canadians with RRSPs have scrimped and saved for nothing because most or all of the benefits they receive from their plans will be taxed away by governments.

In a hard-hitting document that stands conventional RRSP wisdom on its head, Richard Shillington charges that millions of people who are at or approaching retirement age “are victims of a fraud, however unintentional.”

Bad advice to Canadians
These people “have fallen for the bad advice coming from governments and the financial community: that everyone should save in an RRSP,” he writes. “The primary beneficiary of this saving will be the federal and provincial governments because most of the income from it will be confiscated by income-tested programs and income taxes. To the extent that these households have been misled, they have been defrauded.”

The background paper is titled New Poverty Traps: Means Testing and Modest-Income Seniors. It is one of the most damning indictments ever published of the current retirement savings system in Canada and should be must reading for every older Canadian and for alour politicians. A copy can be downloaded free of charge at the C.D. Howe Institute’s website,

The author, Richard Shillington, holds a doctoral degree in statistics and has been carrying out research into health, social and economic policies for 30 years. So his credentials are of the highest order.

Depends on the level of savings
His report makes a clear distinction about the value of RRSP-saving for higher-income Canadians, who will ultimately benefit from their plans, and lower-income people, who will not. His message is that all those with less than $100,000 in retirement assets are “futile savers.”

“They are likely to be GIS (Guaranteed Income Supplement) recipients, and much, if not all, of the proceeds of their savings will be lost to taxes and the clawback of income-tested benefits,” he writes.

GIS benefits are reduced by $0.50 for every $1 in income received. RRSP or RRIF withdrawals are considered income for this purpose. “After the GIS clawback and income taxes, many of these individuals receive at most 29 per cent of their retirement funds,” he writes. “Overall, lower-income Canadians who use RRSPs receive some tax saving when they make their deductible contributions, but it is totally inadequate compensation for the clawbacks and the loss of income-tested benefits they face during retirement. … One weeps for those Canadians who follow the undifferentiated advice to save in RRSPs. They have scrimped to save modest amounts in RRSPs; only tax experts and the bureaucrats know that the effort will be of almost no value to them.”

Call for action
Shillington calls for action on three levels to deal with the problem.

Government policy-makers are urged to take a close look at this situation and to introduce policies to deal with it as quickly as possible. Specifically, he advocates the creation of tax-prepaid savings plans (TPSPs), similar to those in Britain and the U.S., which would meet the retirement savings needs of lower-income Canadians more effectively. He also suggests that the calculation of the age tax credit be adjusted for GIS recipients to reduce some of the tax burden they face.

The financial community is asked to take a much more active role in guiding people toward retirement savings plans that are suited to their income and needs. Shillington does not condemn RRSPs as such, far from it. But he believes that financial advisers and institutions have a responsibility to make it very clear who should use them, and who should not.

Finally, he wants the media to be a much stronger voice in explaining the reality of retirement savings programs to the general public so that the message gets out. We at 50Plus and will certainly do our best on that count.