Q&A: RRSP savings

Background: When I first started contributing to an RRSP in the 80s the maximum was $3,500 minus any contributions you made to a pension plan (or $7,000 if you didn’t belong to a pension plan). I belonged to a pension plan but didn’t have to make any contributions so I contributed the entire $3,500. There was no percentage maximum that I was aware of.

Sometime later, in the early 90s I think, they moved to an 18% maximum (with a dollar limit that I can’t recall now) minus a pension adjustment factor if you were a member of a pension plan. In the early days it worked out to about the same $3,500 for me. Later the maximum dollar limits were raised, carry forward added, and the severance rollover eliminated but the 18% maximum remained.

I really had no idea how much I “needed” to save but 18% seemed as good a number as any. I assumed someone had done the work to figure out what a reasonable amount should be to save and came up with the 18%. I always just saved whatever they would allow me to, it seemed like it had all been thought through somehow. Contribute the maximum allowed to your RRSP, pay down your mortgage, live your life — a simple formula to follow.

My question:
Did in fact someone do the work to figure out what a reasonable RRSP limit should be so people could have a decent retirement and come up with the 18%? If the RRSP limit had been say 21% I would have saved that amount so it would have made a difference, perhaps even a significant difference. Hopefully 18% wasn’t just a random number issued by a government bureaucrat but I don’t really know. Why 18% and not 15% or 20% or whatever? – David D., Oakville ON

Gordon Pape answers: The 18% did indeed come from a government bureaucrat — or, more precisely, a team of bureaucrats. It was part of a package of sweeping changes to the retirement savings system that was passed by Parliament in 1990 and took effect on Jan. 1, 1991. Among the changes was a reduction in the maximum percentage of net income that could be contributed and the introduction of the pension adjustment concept.

Prior to 1991, the allowable RRSP contribution was 20% of earned income to a maximum dollar amount. The rationale for the lower percentage was that 18% would most closely approximate the retirement savings of a pension plan member so the change to the RRSP rules was made to supposedly level the playing field.

At the time, Ottawa claimed the new system would end the unfairness of people in varying employment situations receiving different levels of tax assistance in their retirement savings. The mandarins also believed the revisions would put an end to excesses in the old system that enabled a few well-off people to obtain unacceptably high levels of tax-assisted retirement funding.

However, the practical result was to reduce the contribution room for lower income people. For example, a person who had $35,000 income in 1990 and no pension plan could have contributed up to $7,000 to an RRSP. In 1991, that limit dropped to $6,300. While someone in that income group probably would not have been able to save that much anyway, the difference could have been carried forward and perhaps made up later. Over the years, it would have added up to a lot of money, at least in theory.

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