Bolster RRSPs, C.D. Howe paper suggests

As politicians look at forcing Canadians to save more for their retirement by supplementing forced pension programs, a paper published by the C.D. Howe Institute, a Toronto-based think-tank, says the solution is right in front of us: the venerable RRSP.

In a paper released in mid-September, Alexandre Laurin, associate director of research with the C.D. Howe Institute, argues that governments have failed to improve RRSPs in an effort to tempt people to save more. That’s because government officials mistakenly believe that the RRSP is a flawed savings vehicle, given that usage “is low because of high aggregate unused contribution room and low RRSP participation in the general population.”

Calling RRSPs “the overlooked option,” the paper argues that “fairly good” take-up rates among higher-income Canadians weakens the case for more forced pension plans and suggests that Ottawa should boost RRSP contribution limits before adopting other measures.

It’s an argument that is likely to garner broad appeal within the financial services community. In fact, the Investment Industry Association of Canada (IIAC) already endorses the concept.

Digging into the numbers, Laurin discovered that low-income Canadians have skewed the numbers and created the pessimism surrounding RRSP usage.

RRSPs are “most beneficial” to those who make $50,000 or more a year and aren’t covered by a workplace plan. Among that group, usage is high: almost one in two tax filers made an RRSP contribution last year; as well, 75% of tax filers earning more than $50,000 participated in either a workplace pension plan, an RRSP or both.

Among lower-income Canadians, about 15% of those earning less than $25,000 and half of those earning $25,000-$50,000 participated in either a workplace pension plan, an RRSP or both. But low RRSP contribution rates among lower-income Canadians makes sense, the report says, because this group is fairly well covered by government programs in retirement.

The paper argues that RRSPs should better reflect Canadians’ earnings and savings during their adult lives and that contribution limits should include tailored adjustments, such as a “lifetime contribution limit” for those who got a late start because of low earnings, employment setbacks or little savings early on.

Higher than recognized RRSP savings by those people who need them the most means that the need for more forced retirement savings by expanding the Canada Pension Plan (CPP) or by Ontario’s proposed pension plan “is weaker than widely assumed,” the report concludes.

That’s a stance shared by the IIAC, which is against both expanding the CPP or rolling out any new provincial plans. Instead, the IIAC suggests that governments boost annual contribution limits for RRSPs and tax-free savings accounts, provide payroll deductions for employer contributions to group RRSPs, and eliminate mandated annual withdrawals from registered retirement income funds.

“The need or requirement for pension savings is not as great as some would lead you to believe,” says Ian Russell, president and CEO of the IIAC. “When we look at the adequacy of retirement savings, as C.D. Howe points out, for lower-income people, it is fine; and for middle-income Canadians, it is better than a lot of people think.”

Dropping savings rates also are not the sign of impending retirement disaster that some people believe. Personal savings rates are down to 5% from 11% over the past two decades but mandatory CPP contributions have increased. So, when CPP contributions are factored in, Russell argues, real savings rates are 10%-12%.

Expanding forced retirement savings programs, he warns, has “some pretty serious unintended consequences. If you either expand the CPP or put another one in its place, you have to pay for it.”

Financial advisors should take advantage of the current pension plan vs RRSPs debate, Russell adds, to emphasize the importance of financial planning with their clients.