The federal governement’s recently introduced pooled registered pension plans (PRPPs) may do more harm than good for the retirement funds of lower-income Canadians, according to experts speaking Monday at the 2012 Advocis Regulatory Affairs Symposium in Toronto.
“I don’t mind the structure of the PRPP, the idea that we need a big, national savings plan, said Malcolm Hamilton, a partner with Mercer LLC and a panelist at the symposium. “But we lose the entire advantage when we starting streaming them to the wrong tax structure.”
As part of the discussion on pensions, Hamilton argued that PRPPs will take government benefits, such as old age security and the guaranteed income security, away from low-income Canadians.
For example, Canadians who qualify as the “working poor” — those people making roughly $20,000 per year and $17,500 after tax — currently do not have to save anything from retirement. Instead, the combined income from all government programs and benefits will provide people in that tax bracket who retire at age 65 with $18,100 per year. Similarly, a Canadian worker earning an average salary of $40,000 per year, and a little less than $30,000 after taxes, will have a little more than $25,000 per year in retirement (starting at age 65) from government programs and through saving $1,600 per year in a tax-free savings account. The forced contributions of PRPPs, however, would mean that many of these people will see their guaranteed income supplements clawed back.
This claw back of government benefits may not be coincidental, according to Hamilton.
“I think [the finance department] has told the government that part of making old age security and the guaranteed income supplement sustainable,” he said, “is in extending eligibility for retirement income from 65 to 67 and, two, putting in something like the PRPP…which forces lower income people to save in vehicles that will disqualify them later on from the guaranteed income supplement.”
Susan Eng, vice president, advocacy at CARP, who also spoke as part of the panel, said that a national savings vehicle such as the PRPP, or, preferably, an extension of the CPP should be targeted towards Canadians who make more than $40,000 and who genuinely need help saving for retirement.
Hamilton argued that it would be easy to customize PRPPs to people making more than the average Canadian. The government would only have to say that people making less than $40,000 have a mandatory contribution of zero, he said, and the contribution rate is 18% for rates in excess of $40,000.