RRSPs not the answer for everyone
The column I wrote in August was a bombshell for many of our readers.
The article dealt with a paper written by Dr. Richard Shillington for the C.D. Howe Institute in which he contended that lower-income Canadians should avoid investing in RRSPs because they’ll end up losing most of their retirement savings to taxes and clawbacks.
Since it appeared, we’ve received many letters and e-mails, some of them from angry retirees who feel they have been ripped off. One even went so far as to accuse us of advocating retirees “abdicate their social responsibility in order to steal from their neighbours” by encouraging people to live off government handouts rather than being self-supporting.
Canadians must save for retirement
Nothing could be farther from the truth. No one is suggesting that Canadians should not save for retirement, and that is certainly not my view. On the contrary, we need to put more money aside than ever before. Most people do not have an employer pension plan, and some that do are looking at anncertain future because of underfunding and losses suffered during the stock market crash. For a frightening example, consider the Air Canada pension plan, which is facing a $1.5 billion deficit.
If you read Shillington’s paper, you will find he isn’t advocating people stop saving for retirement. Rather, he is criticizing a system that he says penalizes lower-income Canadians who do put money aside. Mainly, he’s calling on politicians to implement a new option, known as tax-prepaid savings plans (TPSPs), which would work more effectively for lower-income people. You can read the whole document at www.cdhowe.org/pdf/backgrounder_65.pdf.
Government programs provide minimal support. Increasingly, we’re left to our own devices if we want a comfortable retirement.
The problem is the current system isn’t structured to provide incentives for all income groups to save. It works best for higher and middle-income Canadians. According to Shillington’s analysis, the needs of lower-income people are not being met.
Next page: Who’s getting penalized
Let’s understand who we’re talking about here. The main focus of the paper is on people who qualify to receive the Guaranteed Income Supplement (GIS). That means anyone whose annual income, not including Old Age Security (OAS), does not exceed $13,175.99 (fourth quarter 2003). Shillington says this represents about 37 per cent of seniors.
These are people who live close to or below the poverty line, and the fact that the percentage is so high is shocking. But the government penalizes them for trying to improve their situation by saving during their working years through a clawback mechanism that taxes away half of their benefit for every pension or RRIF payment they receive beginning with the very first dollar.
For example, someone who has no income other than OAS, GIS or the Allowance (paid to qualifying people age 60 to 64) would receive $548.53 a month from the GIS. If that same person had annual income from other sources of just $2,000, the monthly payment would drop to $465.53, which works out to a difference of $996 a year.
Something is amiss here!
System needs overhaul
We need a system that does more to encourage people at the lower end of the income scale to prepare financially for retirement, not sock them in the wallet for doing so. TPSPs could do that if the withdrawals were not deemed to be “income” because the plans are funded with after-tax dollars. However, that would mean that all the investment income earned in a TPSP over the years would escape taxation, which would be in direct contradiction to long-established policy. It’s a thorny issue but not an impossible one.
The ultimate goal should be to create a means to give lower-income people a chance at a better retirement lifestyle and to lessen their dependence on government.
Shillington puts it this way: “Only when more Canadians are aware of the perverse treatment of lower-income Canadians’ savings will Ottawa be forced to develop savings mechanisms that reward, rather than punish, those savings efforts.”