U.S. gives seniors a break

The United States has given its seniors a small but welcome break that will reduce their tax exposure and stretch the life of retirement plans.

The U.S. Treasury Department announced in April that it has adopted new life expectancy tables that reduce the minimum annual withdrawals required from retirement accounts.

The tables are based on the latest Census Bureau figures, which show the average lifespan of Americans has increased to 76.9 years. The move is designed to preserve assets in retirement accounts, in accordance with the longer life expectancy of about one year.

The impact isn’t a big one. In a column written for USA Today, money expert Sandra Block said that the effect would be to reduce the minimum annual withdrawal for a 75-year-old with a US$500,000 account to US$21,834, from US$22,936. But that’s certainly a step in the right direction, and one the Canadian government should take note of.

If that same 75-year-old had a RRIF or LIF here, the minimum annual withdrawal under our present rules would be $39,250. This means the capital base of Canadian plans is being eroded at almost twice the rate as retirement accounts in the U.S.

Canada&am;#817;s Association for the Fifty-Plus (CARP) has made recommendations in the past to Finance Minister Paul Martin to change the withdrawal formula for RRIFs and LIFs to take into account the low interest rate environment that has prevailed for several years. The current formula was introduced in 1993, at a time when interest rates were much higher. It sets the minimum withdrawal from a RRIF at age 71 at 7.38% and the percentage moves up steadily from there. By contrast, an American only has to withdraw 3.77% of the value of a retirement account at age 71 under their revised formula.

The announcement by the Treasury Department introduces yet another reason for revisiting the Canadian formula – life expectancy. The lifespan of Canadians is longer than that of Americans by almost two years – Statistics Canada uses a figure of 78.6 years, based on the 1996 Census. So Canadians depend on income from their retirement plans for a longer period than do Americans.

The Finance Department has so far shown no interest in any of these facts. Their official position has been that changing the withdrawal rules would be too complex and would only benefit the very wealthy.

This appears to be nothing more than an excuse. The Department’s real interest seems to be in taxing the retirement savings of seniors to the maximum extent possible, even if that means compromising their financial security as they age.

It’s time Mr. Martin and Company woke up to the reality of the situation and introduced sensible measures to ensure that a social crisis doesn’t erupt in future years. Not everything Washington does is right by any means, but we could certainly learn something from the Americans on this issue.

This article originally appeared in the Internet Wealth Builder, a weekly e-mail investment newsletter that features stock selections and financial commentary from some of Canada’s leading experts.