RRSP contributions are declining, and in order to prevent this trend from continuing, Canadians must be encouraged to save more, according to RBC Economics Research.

A new RBC Economics Research report finds that RRSP contributions as a share of income have declined over the past 11 years after steadily rising to a peak in 1997. The proportion of RRSP contributions relative to personal disposable income grew from 0.3% in the late 1960’s to 5% in the late 1990’s. This trend reversed after 1997, with the proportion falling to just 3.5% in 2008.

This downward trend is mainly being driven by demographics, with baby boomers aging and reducing their RRSP contributions, according to Paul Ferley, assistant chief economist at RBC Economics.

“As individuals start getting to 55-plus, their average contribution starts falling off,” he explains. “They’ve maybe come to the conclusion that they have saved enough, and therefore have opted to cut back in terms of their RRSP contribution.”

Individuals aged 34 and under are the least likely to make RRSP contributions, according to the report. The biggest increase in contributions occurs when people move into the 35-44 age group followed by a smaller rise in the 45-55 bracket.

Unless the post-boom generation begins to save more money at a younger age than their parents did, this downward trend in contributions will continue over the next decade, Ferley says.

“If saving behaviour holds constant, there will be less savings put aside for RRSPs,” he says.

Lower overall savings could be harmful for the economy, leaving fewer funds available domestically to finance investment activity, the report notes.

The financial services industry can play a role in reducing the downward trend in contributions. Ferley says advisors should convey to clients the importance of saving as much as possible for retirement.

“They can make clear to individuals the advantages of increasing savings, and having a larger nest egg to drop on once individual households move into retirement,” he says.

The 35-54 age group likely needs the most help from advisors when it comes to saving for retirement, according to Lee Anne Davies, head of retirement strategies at RBC.

“They’re raising families, buying homes and saving for children’s education, but this time is also critical for building a secure retirement future,” Davies says. “Planning wisely can make it possible to meet the many competing financial priorities while also saving for retirement.”

Policymakers could also take certain actions to temper the decline in savings. For instance, RBC suggests enhancing the current RRSP program by raising contribution limits or extending the age by which RRSPs need to be cashed out.

“There are suggestions that certain households, certain individuals are hitting limits in terms of RRSP contributions,” Ferley says. “If those limits were raised, it could then limit the downward trend.”

The report also suggests enhancing other savings vehicles, such as raising the annual contribution limits of the newly introduced tax-free savings accounts.

IE