The federal government Tuesday made a small gesture toward improving the retirement savings system with a modest increase in RRSP contribution limits in its 2003-04 budget. But it hinted that something more may be in the works.

The government threw a bone to those calling for increased RRSP limits by hiking the current $13,500 limit to $14,500 in 2003, $15,500 in 2004, $16,500 in 2005, and up to $18,000 in 2006. The limit will be indexed to average wage growth from 2007 and out.

While the increase is welcome, it is modest compared to the increases that some in the industry sought. The Investment Funds Institute of Canada, for example, called on the government to double the contribution limit immediately.

Tuesday’s budget delivers just a fraction of the increase that IFIC and others were seeking, and it phases that increase in over four years. Contribution limits have been frozen for the past seven years and the government concedes that the lack of increases leaves the current limit below the real level Canadians enjoyed in 1976.

This hike in contribution limits is also less generous than it might otherwise appear because the government was scheduled to boost the limits in 2004 anyway. Tuesday’s action merely accelerates that plan. Limits had been set to rise to $14,500 in 2004, which only restores the limit to its 1995 level (the limits were dropped to $13,500 in 1996). The previous RRSP contribution limit schedule would have seen the limit hiked again, to $15,500 in 2005, with indexation kicking in after that.

Nevertheless, Jamie Golombek, vice president of tax and estate planning at Toronto‚s AIM Trimark Investments, called the increase a “good start”. He said the hike should certainly come as good news for the fund industry — many investors currently maxed out on their RRSP contributions may well take advantage of the increases.

Overall, the government estimates the increased limits will cost it $25 million in 2003-2004, rising to $105 million the following year and up to $165 million in the year after that.

Meanwhile, there were indications Tuesday that the government is rethinking its whole approach to retirement savings. The budget reveals that it is studying other methods of tax-sheltered saving. While there can be no assurance this study will lead to changes, there are at least hints that these RRSP contribution limit hikes may not be the last word on retirement savings options in Canada.

On Tuesday, Ottawa touted its limit increase as a measure to encourage savings, reduce costs to employers and support small business.