(February 27 – 11:10 ET) – Canadians’ options for retirement savings are too narrow, and Ottawa should respond by changing the tax rules to permit a new type of savings vehicle, says a C.D. Howe Institute Commentary published today.

The study proposes the introduction of tax-prepaid savings plan (TPSP), which would allow tax-free accumulation of savings and withdrawals of earnings and principal, but contributions would not be tax deductible.

The study, “A New Option for Retirement Savings: Tax-Prepaid Savings Plans,” was written by Jonathan Kesselman, professor of economics at the University of British Columbia, and Finn Poschmann, senior policy analyst at the C.D. Howe Institute.

The authors argue that, for many low- and moderate-income workers, saving in current pension plans makes little sense, since they will encounter tax rates and benefit clawbacks in retirement that are higher than those they face while working.

They explain that Canadians face a less secure retirement if current plans mean they are saving less than they should and choosing poor retirement saving vehicles.

The authors say that TPSPs would be an attractive addition to the current system of Registered Retirement Savings Plans and employer-sponsored Registered Pension Plans. Since workers would receive no tax deduction for contributions to TPSPs, earnings would accumulate tax free and withdrawals would not be taxed or subject to benefit clawbacks.

Contribution room for TPSPs would be an addition to the current system, allowing higher-income earners who are now limited in the amount they can save out of pre-tax income to do more tax-recognized saving.

Not only would TPSPs be effective retirement vehicles for most workers, say Kesselman and Poschmann, but governments should like them as well.
-IE Staff