RRSP Limits Need Increasing
While 93% of Canadians have the ability to contribute to an RRSP, Statistics Canada data reveals that only 26% made a contribution in 2010, a slight decline of 0.2% from 2009. In 2010, just under six million tax filers contributed a total of $33.9-billion to their RRSPs, representing about 5.1% of the $665-billion of total RRSP room available to eligible tax filers. This unused room, at first glance, seems like a staggering number.
But if we dig behind this number, most of the unused contribution room is likely held by low-income Canadians who simply can’t afford to set aside 18% of their pre-tax income in an RRSP. Someone earning under $40,000 or so annually would generally be better off saving through Tax Free Savings Accounts than RRSPs to avoid losing various income-tested government benefits such as the Guaranteed Income Supplement, which is clawed back based on net income, including RRSP or RRIF withdrawals. TFSA withdrawals are not considered income and thus do not affect income-tested benefits.
The fact is for higher income Canadians, the RRSP limit, which is based on 18% of the prior year’s earned income (generally employment income) less any pension adjustment, and capped at $22,450 for 2011 ($22,970 in 2012), is not high enough. High income earners are most likely already maximizing their RRSP contributions and, in fact, would benefit from higher annual, or as some have suggested lifetime, contribution limits.
Of course the very concept of raising the RRSP limits for the wealthiest of Canadians to allow them to save adequately for retirement is not a message that resonates with elected parliamentarians. Any why would it? After all, the MPs’ pension plans are perhaps the most lavish of all retirement programs in Canada, providing MPs the ability to accrue indexed pension benefits at a rate of 3% annually, to a maximum of 75% of their best five years of pay, and available after only six years of service.
As Bill Robson, president and CEO of the C.D. Howe Institute, points out in his recent study, Fixing MP Pensions, “The pension plan for federal Members of Parliament offers benefits vastly greater than other Canadians can achieve…Pension reform in Canada must start at the top.”
The study, which is subtitled, “Parliamentarians Must Lead Canada’s Move to Fairer And Better-Funded Retirements,” states that any non-federal employee earning the equivalent of an MP’s salary, who wants an equivalent inflation-indexed benefit backed by the federal government, would need to buy federal real-return bonds – to the tune of about 70% of income.
Robson suggests a number of simple measures that, if adopted by Parliament, would help both RRSP savers and defined contribution plan participants accumulate appropriate pension savings levels. These include increasing contribution limits, increasing the age at which you can continue to contribute (beyond age 71) as well as lowering the mandatory annual RRIF withdrawals.
As Robson writes, “(These) would have already occurred if the rulemakers had shared the pain now being felt by most of their compatriots.”