Change retirement saving rules
Fund companies and investment dealers are gearing up to convince us to hand over our retirement savings to them. As RRSP season nears, we’ll be bombarded with images of luxurious retirements, replete with snapshots of happy people relaxing in beautiful surroundings.
Financial service providers are also likely to dole out a healthy dose of fear in the form of “what might happen if you don’t save and your investments don’t perform” scenarios.
The good news is that while we seem to be heeding these warnings (one recent newspaper article proclaimed, “Canadians taking charge of retirement”), ordinary workers find themselves faced with inequitable rules when it comes to saving.
Currently, government officials have a huge advantage over the rest of us.
The latest findings from Statistics Canada show that almost three-quarters of all tax filers now contribute to an RRSP or a company-sponsored pension plan on an annual basis. It’s a positive sign, for sure.
But the data take an ironic twist when we look at some issues underlying our current retirement system.
The mt a Canadian worker can contribute to an RRSP in a given year is $13,500.
The maximum contribution has been frozen at this level since 1996 and is set to increase marginally:
- To $14,500 in 2004
- To $15,500 in 2005.
At the same time, with the passage of Bill C-28 in June, members of parliament voted themselves substantial top-ups, representing increases of some 40 per cent to their pensions and more than 20 per cent to salaries.
Now, $131,400 of a regular MP’s salary is recognized for calculating his or her pension, up from $69,000 previously.
Next page: Saving outside RRSP
Saving outside RRSP
It would seem a simple solution for the rest of us to make up the difference by saving outside an RRSP. But this idea makes no sense given our current tax system.
Consider the fact that each dollar we save and invest is an after-tax dollar. And every dollar we earn in investment income will be taxed a second time.
You can see why it’s almost impossible to save in this way.
Official arguments for keeping contribution limits at these low levels include the immediate tax revenue the government says it can’t afford to give up. That’s plain shortsighted on Ottawa’s part.
Undoubtedly, if we continue on as we are, public programs are going to be stretched by the sheer numbers of retiring baby boomers in coming years. How much better for everyone if we are all more self-reliant in later years!
So, what’s an equitable solution to the vast disparity between our MPs and the rest of us?
One actuarial estimate says that to achieve par with these civil servants, our maximum annual RRSP contributions would have to increase to 18 per cent of $131,400-or $23,652.
Similar calculations for people with pension plans and using various formulas for pension payouts also come up with estimates of almost twice the current levels.
Prepaid tax system
Another fix to the system, proposed by the C.D. Howe Institute, is the tax prepaid savings plan (TPSP). TPSP would complement RRSPs and registered pension plans, and serve the same purpose of encouraging Canadians to save for retirement.
A contribution to a TPSP wouldn’t generate a tax deduction, as an RRSP contribution would, but the money would grow tax-free. Plan holders would also be allowed to make tax-free withdrawals at retirement.
The government gets its tax revenue up front and seniors won’t be taxed in their later non-working years. As with any money we spend during our working lives, say the authors of the C.D. Howe study, what we spend in retirement would be taxed once only.
Change is needed
Sounds like an option worth exploring.
Something has to change – whether it’s an innovation like the TPSP, higher RRSP limits or a combination of both.
For most of us, what we save during our working lives will determine largely the type of retirement we have.
Reducing our reliance on public programs is one way to ensure that they are sustainable. If nothing else, the opportunity to save more would level the playing field in the retirement-planning game.
David Tafler is publisher and editor of CARPNews FiftyPlus and an author and commentator on financial planning.