A recent C. D. Howe report titled, Cutting Through Pension Complexity: Easy Steps Forward for the 2010 Federal Budget, recommends that the Federal Government raise the contribution limit for RRSPs from 18 percent to 34 percent of earned income (and correspondingly, the maximum dollar amount from $22,000 to $42,000) in the upcoming budget. Recommendations such as this makes you wonder which planet the C. D. Howe Institute inhabits. On Planet Earth, contribution room isn’t an issue at all but using up already available contribution room is.

According to Statistics Canada, a mere 31% of eligible tax payers actually made a contribution for the 2007 tax year. The average contribution to a RRSP was $5,412 but the median contribution was only $2,780. The contributions used up just 6.0% of total contribution room available. The data suggests that the vast majority of Canadians have accumulated vast amounts of RRSP contribution room. Only a tiny fraction of Canadians have used up all their contribution room and would benefit from any boost in RRSP limits.

The C. D. Howe report is silent on the fact that the introduction of the Tax-Free Savings Account has already essentially boosted contribution limits to a tax deferred retirement savings account. Joe Canadian, an Ontario resident who earned $80,000 in 2008 would have a 2009 RRSP contribution room of $14,400. Joe can save another $5,000 for his retirement in his TFSA. While the TFSA contribution does not result in a tax deduction, it has roughly the same as effect as contributing another $8,833 to Joe’s RRSP account. If Joe maxes out both his RRSP and TFSA, he is in effect saving 29% of his earned income. The Joes of the world already have plenty of retirement savings room. But boosting contribution room will achieve little in addressing the savings problem of the vast majority of Canadians.

This article has 40 comments

  1. I think you’re right in that the TFSA really offers Canadians another effective way at planning for retirement. Boosting the allowable contribution limit to the extent prescribed in the study seems downright pointless for reasons you clearly outlined; however, I would be in support of an increase despite the fact that many Canadians’ would probably not avail of the additional room.

  2. Good call, CC. The C.D. Howe institute has a long history of defending a policy direction that primarily if not exclusively serves to benefit the upper crust. A more reasonable and impactful solution to the savings problem would seem to be the creation of an alternative to the CPP. I haven’t been following the discussion too closely, but I believe the scheme under consideration would be voluntary in nature and would allow Canadians to benefit from the advantages of institutional money management (i.e. the CPPIB). There’s a large body of evidence to show that most DIY investors do not come close to matching the returns of large institutional investors (e.g. CPPIB, OPSEU, etc.) over any reasonable time period.

  3. Great post. I laughed when I saw the summary of their report. I was annoyed a few years ago when rrsp limits were raised because it was that much harder to max them out. 🙂

    Increasing limits from where they are now only benefits very high income earners ie family income of $200k+ or super savers. The other 98% of population just feels a bit worse for not maxing their RRSP.

    @DM I don’t believe that most diyers can’t match the returns of CPP etc. With this issue as well, the problem is lack of contributions, not asset management.

  4. I wonder if this is a diversionary tactic to actually retain the status quo. Perhaps CD Howe got word that Flarerty was thinking about reducing contributions, or as Garth Turner would have you believe, turn RRSPs into a tax credit instead of a deduction. By making noise about increasing limits, getting the National Post on side, and creating this aspirational idea that it is possible for everyone to max out both the current and the proposed RRSP contribution levels, CD Howe is attempting mobilize wealthy, voting boomers – a large and valuable constituency for the conservatives. Thus, a sledgehammer is loaded over the Conservatives collective heads if they even consider tinkering with RRSPs.

  5. I’m glad that Flaherty introduced the TFSA as an alternative or in addition to the RRSP. The RRSP isn’t the best way for people who will have a nice pension (civil servants, teachers, police officers). They cap your eligible RRSP contribution because of the pension. I’m glad that there’s at least an option. I personally am contributing to my RRSP until I reach the $25,000 for the home buyer’s plan… after that, I’m unsure still.

  6. Well said, CC. Aiming tax breaks at the wealthy is not what is needed right now.

  7. The only people who have 34% of their income to contribute to anything are young folks, who believe they will never get old.

    Happy Shrove Tuesday!

  8. I agree CC, and I’d take it a step further. Not only are most Canadians unable to max out their existing RRSP room, but most are carrying so much debt that they cannot (or should not) even contribute to RRSPs at all. David Chilton (in a recent video interview on the Globe’s site) is right on the money. He says that debt is the single biggest problem in personal finance (and I would add global finance) at the moment.

  9. Canadian Capitalist

    @The Rat: Yes, I think I’d personally like a monster RRSP contribution as well. But that doesn’t change my opinion that the proposal here would fix the problem we do have.

    @DM: It seems reasonable to me to have a supplementary CPP with optional opt out. But it also seems to me that many proponents of an enhanced CPP (such as CARP) are hoping that those who opted not to save can still get top ups to their existing payouts. I think that would be a mistake.

    @Four Pillars: I think DM is not saying that DIY investors cannot match market returns. Instead he is saying that most DIY investors do not match the market averages. I think he is right — so many studies consistently show that investors badly trail market returns.

    @anon: Garth Turner is suggesting making RRSP contributions a tax credit? Do you know why?

    @Big Canadian Man: I’d think that even among young Canadians with a lot of disposable income, saving anywhere near 30% of their pre-tax income would be quite uncommon.

    @2 cents: While I think we have a saving problem, I’m not convinced that a majority of Canadians have a debt problem. Yes, a significant portion are deep in debt but the vast majority seem to be rather responsible with debt. Still, I totally agree that those Canadians deep in debt should make debt repayment, not RRSP contributions, a top priority.

  10. Turner is by no means suggesting it: he is `forecasting`that the Conservatives may consider a package of measures to raise revenues and reduce expenditures as ways measure to reduce the deficit. This package includes: making RRSP contributions a credit rather than a deduction, increasing taxes and fees, and reducing transfer payments to the provinces.

    I seem to recall that he has mentioned this option several times, but below is the only blog entry I could find:

    http://www.greaterfool.ca/2010/01/13/blessed/

    CD Howe`s move is nice example of game theory at work – a la Tom Flanagan…I`m just not sure what game. (Setting up a straw man to momentarily divert the government`s attention away from an anticpated goal in order to maintain the status quo – what’s that called?)

  11. With the majority of Canadians needing to assume a huge mortgage due to the inflated prices of homes within the urban/suburban areas, it becomes nearly impossible for young people to invest in RRSPs… nor, as 2 Cents points out, is it the best idea necessarily during the lower income and higher debt stages of life. It’s a classic case of the richer getting richer and the poorer falling behind…

  12. Increasing that rrsp contribution room makes no sense, very small fraction of people actually max out, I can easly and never do as I’m not a fan of the RRSP. Like mentioned, savings is the problem, and that will never get fixed as we are taught and encouraged to shop our brains out.

  13. Split the difference. I have a group rrsp which I only contribute enough for the company match. Then I decide I can afford to save $X. Take half for the tfsa and the rest for the rrsp. Any tax refund goes into either, depending on my needs. If you have a massive amount of debt, by all means, pay it off. If the debt can be paid off in a timeframe you’re comfortable with, save a bit to your tfsa for the emergency fund.

    I have never been able to max out my rrsp, but I know I’m saving enough.

  14. I agree that raising the RRSP limit isn’t going to help because most people aren’t maxing out their RRSP anyway.

    However, the disparity between the RRSP and pension plans is the big problem here. When pension plans lose money, sponsors can (and must) make additional contributions. Would it not be fair to implement the same sort of policy for RRSPs?

    It might be possible to keep track of capital losses in the RRSP and allow them to be claimed as additional space for future contributions. There would be problems, such as the need to differentiating between long term capital losses and trading losses (otherwise the traders would have essentially unlimited RRSP space), but this seems to be a sensible way to let people rebuild their retirement savings when the market underperforms.

  15. @ Big Canadian Man — Are you serious? “Young folks” like me are trying to pay off student debt, buy homes and raise families. We aren’t old enough or experienced enough to be making the big salaries either, and we don’t have many of the advantages boomers did (like company pensions).

    Oh, and thanks to the economy many of us haven’t had a raise or promotion in the past two years. (Though we’re grateful to still have jobs).

    Contribution room isn’t a problem for me because I’ll come nowhere the limit for either the RRSP or TFSA – let alone both!

  16. While I personally would love to see my RRSP limit increased, I find it unnecessary, and certainly do not believe for a second it would benefit most Canadians.

    The altruistic side of me does wish that more efforts were made to help low income families prepare for retirement – poor seniors unable to work do not help anyone except fraudsters.

  17. @Canadian Capitalist: Of course you would, and so do I! If I recall, I seem to have agreed with your findings. I didn’t realize you expected a solution to this issue.

    If I were to state my own preferences, despite the fact that it will not change what the study recommends, my position would be to rather see allowable TFSA limit increases (even though it’s a fairly new program) and federally endorsed support for the provinces for tuition freezes or at least support for post-secondary students in some shape or form. Provinces such as NL and QC are leaders in this regard.

  18. @Sampson: You’re right. Just think of how many seniors were impacted by the Fed’s decisions on income trusts!

  19. After a quick read of that report, it seems that one of CD Howe’s main points is allowing for more investor choice, in a way. With all the loss of wealth in company pensions, underfunded pensions, and bankrupt companies whose pensions are done or in danger, it looks to me that the report is suggesting for a balance.

    As far as I am concerned, whether I can max out or not is of less importance than having the possibility to do so. Having excess contribution room is much better than being snagged with over contribution penalties.

    And though it may be a taboo subject, it seems to me that having contribution room could be a benifit in the case of inherritance (not to mention other unseen or exceptional income).

    So even if it can’t be used now, isn’t there an argument for having the space to make use of at a later date?

  20. Myke: If we just focus on one individual, then you’re better off having more RRSP room than less (or at least not worse off). But what effect does it have on you if everyone else has more RRSP room? The government collects less tax, mostly from wealthier people. Then the government has to run up more debt, cut some programs, or raise other taxes. Having more RRSP room won’t seem so good if it means raisng the GST by a few percentage points.

  21. Michael James: Good point, and point taken. You are absolutely right.

    I tend to think from my own vantage point.

    p.s. glad to hear the fitness club situation was resolved favourably.

  22. I have maxed out both my RRSP and TFSA room. My wife works in the public sector, and as the CD Howe report documents, I may need to save more than 18%p.a. to match her pension. I’m not “rich”. We both live well below our means in order to save a lot any pay down debt quicker. Perhaps I don’t live on planet Earth, but I don’t see why increasing the 18% limit is such a terrible suggestion. I won’t frown at a suggestion that gives people more opportunity to help them save for retirement.

    I recognize that increasing RRSP limits will not solve the problem of persistently low personal savings rates amongst most Canadians. But, I don’t see that their suggestion was intended to solve that problem. That’s a separate and different problem, requiring a separate and different solution.

    I’m a bit disappointed to see other comments almost accusing CD Howe of ulterior motives. There’s other blogs for making that type of unnecessary commentary. Play the ball, not the man.

  23. @ Micheal James

    If the distribution of wealth across society is the concern, then let’s do that directly through the tax system. That’s what it was designed for.

    I agree the gov’t should be doing more than raising RRSP limits, and there are bigger problems/priorities to attack first. But, that doesn’t make a suggestion to raise RRSP limits a bad idea.

  24. Nick: I’m not sure how to interpret your comment. Isn’t RRSP policy part of the tax system? Other taxes would have to be raised to make up for lost revenues if RRSP limits are raised. This means that raising RRSP limits would shift some of the tax burden from wealthy people to the middle class. I don’t think this is what we need right now.

  25. Michael: Agreed, total national RRSP contributions do have an impact on government revenues/expenditures. But, I’d prefer gov’t view RRSPs as they were intended; as a long-terms savings instruments, not as national tax policy instruments.

    In my opinion, the more gov’ts view every lever at their disposal for it’s tax implications, the more they use it for short-term revenue planning, to the detriment of the programs originally intended goals.

    If gov’t revenues fall short, gov’t has options: cut expenditures, or raise taxes (on income, savings, or consumption). Personally, I’d prefer an increase in consumption taxes (GST) over the other options. [Low incomes will continue to get the GST rebate]. The alternative is a tax on income, or on savings. Taxes on savings are a disincentive to savings – at all income brackets – not what we’re trying to accomplish.

    As for increasing savings rates amongst most (non-upper income bracket) Canadians, I’d prefer more TFSA room over CD Howe’s RRSP room suggestion, as I think this would give greater opportunities to more Canadians. But, I’m still not going to turn away more RRSP room if some one suggests it.

  26. Canadian Capitalist

    @Nick: My spouse works in the public sector and I work in the private sector, so I get to see both sides as well. The C. D. Howe is absolutely right in saying that a public sector employee essentially gets to contribute 30% or so to retirement savings but RRSP contributions are limited to just 18%.

    But it is far too simplistic to say that both should contribute exactly the same percentage. For one thing, most public sector pensions are integrated with the CPP. You can’t collect a public sector pension and CPP. A private sector employee can draw benefits from a RRSP/RRIF and the CPP. If you also add employee and employer contributions to CPP as retirement savings, the retirement savings limit for a private sector employee is much greater than 18%. How much greater depends on your salary. For someone making $50,000, the limit is closer to 28%. For someone else making $100,000, it’s more like 23%.

    There is another consideration. Fairness is an issue only if employees in both the public sector and the private sector make the same salary for the same job. Typically, the public sector employee earns less (or at least should) to reflect their generous pension plan. The pension benefits in the public sector are a percentage of the lower pay. What I’m trying to get at is that the C. D. Howe is not making an apples-to-apples comparison even if you think that their demand for equality is a fair one.

  27. @CC: Thank you for the thoughtful response.

    I better understand your argument. If CD Howe’s argument that increasing the 18% limits under the criteria of “fairness” isn’t well supported, then I’ll share that critcism of their approach.

    That aside, my understanding is that increasing the 18% limit would apply both to public and private sector workers. My wife maxs out her RRSP even quicker, due to the Penion Adjustment. Now, you could argue we really don’t need more RRSP room (especially with her guaranteed D.B plan). But, she may not stay with her gov’t job for the rest of her career, and thus it would be nice to have more private retirements savings options. Maybe our preference for savings is just unsuallly high!

    As I’ve stated, increasing RRSP limits isn’t bad (in fact, it would be good), but much better ideas are still out there for consideration.

  28. I would love to have more RRSP contribution room. Currently I am the sole income earner in my family which is unlikley to change any time soon. I make a good income and would like to have as much as possible protected from tax.

    Something to consider: Many folks in the private sector are now in Group RRSP’s with companies matching or contributing $$ to them. This means less RRSP room is available for individuals to protect from the taxman

  29. I agree with the concept that more saving is required to improve one’s financial standing. RRSP alone is not going to make a big enough difference.

  30. I agree with most of the posts here, raising the RRSP contribution limit is not going to help Jack or Jill Canadian. Not only are most Canadians unable to max-out existing RRSP room, I strongly agree with an earlier post: many Canadians are carrying so much debt they cannot even contribute to an RRSP.

    I recall a recent article that said the average Canadian household is near or over $90,000 in debt. That may not seem like a great deal, until you consider the median family income in Canada is hovering around $75,000 (to be generous). On average, we owe more than we earn. Certainly there is “good debt” and “bad debt” but the reality is, families are becoming more debt and house-poor all the time.

    If the government is bent on increasing contribution room(s) to promote savings, why don’t they make TFSAs’ contribution room retroactive, say $100,000 worth? That would be a much better move for everyone at all income levels as any savings (big or small) would be immediately tax-sheltered instead of tax-deferred.

  31. @CC ‘But boosting contribution room will achieve little in addressing the savings problem of the vast majority of Canadians.’
    You are right, but why not give people the opportunity to save even more, if they want and can. Due to Pension Adjustment I will have lower RRSP contribution room.

    They call it Defined Benefit, defined might be but it is not for sure at all as I work for a private company and we know what could happen.
    It does not matter whether the company is old, big, famous, etc. they all can go bankrupt.

  32. CC’s comparison of private vs. public sector, DB vs. RRSP + CPP is an interesting one. Seems to me a better way to help people without DB plans is to increase CPP contribution amounts.

    One giant national Ponzi scheme to equal the PSPP Ponzi scheme 😉

  33. Pingback: Finanical Ramblings

  34. What seems to be missing from this discussion is that RRSPs are not necessary in order to save for retirement. They are just one leg of a balanced retirement strategy.

    If you are consistently maxing out your RRSP, you have the discipline necessary to be able to save outside of the RRSP as well. You may well have retirement income in the same tax bracket as the majority of your earning years. In other words, there is no tax advantage to deferring your income once you have too much money in the RRSP.

    You might as well use after tax income for saving then. The TFSA makes more sense, as do other investments where your gains are taxed at a lower rate than straight income.

  35. Neil Hampshire

    This TFSA for poor people to benefit by sheltering capital gains on savings is bullshit. It is more for wealthy and the well to do to be able to luxuriously save $5000 a year. How is someone making $12.00 an hour supposed to pony up $200 per biweekly cheque? You know, that is 25% of earnings, and it might not seem like much, but when you only have $800 biweekly after taxes, that is a huge chunk to cut off. Id much rather have a cheque for $500 a year mailed to me by the government in lieu to having a $5000 TFSA room.

  36. Neil, you are so right. How is someone making 12.00 an hour supposed to even max out a TFSA? At that income, you would be lucky not to have to fall on credit card debts as black swan events may hit you when you least expect it.

  37. I want to tell you that I only make 12 dollars an hour and I am able to save $720.00 out of my $800 biweekly cheque at the very least. I want to teach you something that many of you Canadians born and raised here have no idea how lucky you are. New immigrants will out save you in every turn.

    1) Do NOT buy tissues and toilet papers. McDonalds and Starbucks offers you free napkins, and you take that home.

    2) Wendy’s provides free plastic forks, spoons and knives. Do not spend money on cutlery.

    3) Free food is offered daily all day called Langar at various Sikh Temples.

    4) Do NOT buy tea, you can get free teabags at banks and car dealerships and you get hot water from McDonalds. Their cups are durable and then you can get a refill as a coffee or a tea for free.

    5) Clothes, you can get free clothes on craigslist or get free used clothes at Salvation Army and ask them for the ones that they could not sell. You got it, not only are you going to get used, you are going to cut corners to the point you are getting them for free.

    6) Make friends with hipsters and couch surf. Avoid paying rent. Try to couch surf at several friends homes so that you do not overstay your welcome. Hipsters do not mind, and if you actually offered to clean and do everyone’s dishes paying in labour as opposed to money, they will not consider you a mooch. These hipsters do not know what poverty really is, although they think they do. They should go live in Uttar Pradesh and see what poverty is really like. You can even sell your free stuff you get from craigslist and resell it to them, or give it as gifts in exchange for staying over.

  38. Kumar, Really?

    1) Steal

    2) Steal

    3) Take advantage

    4) Steal

    5) Mooch

    6) Mooch

    That’s not living frugal . . .that’s being scum.

  39. Even C.D. Howe experts don’t seem to know RRSP basics– the difference between contributing savings for tax refund (tax shelter) and income deferral resulting in less tax deducted from pay. But they argue about the merits of contributing anyway. And get diddled out of their sox when they do.

    Example: Employee J. Doe in a 40% tax bracket could have submitted form T1213 to “defer” $5,000 income and have a total of $2,000 less tax deducted from pay. Instead s/he contributed $5,000 savings, for $2,000 tax refund.

    The tax benefits are equivalent but the costs are not. Doe used $8,333 hard-earned income, taxed $3,333 (40%), to have $5,000 savings to contribute.

    Joe could have used that $3,333 wasted income. After $1,333 (40%) tax it would have left an extra $2000 in pocket. His/her only consolation is s/he has millions of Canadians for company.

  40. David J. Heinrich

    Although I’m a US-citizen, the 401(k) plans in the US are somewhat similar to the RRSP’s in Canada, except that in the US the contribution limit is just a flat $18,000 for everyone. So a teenager or young adult who made $18k while living with their parents could contribute their entire salary. (There is also a flat $5500 contribution-limit for Roth IRAs, which are similar to the TFSA). However, there is no “carrying forward” contribution limits — it is use it or lose it every year. The TFSA is clearly better in that way.

    It seems far more fair to allow the same contribution limit for all, irrelevant of income. That way, those who make less money can still contribute the same amount as those who make more, by being more frugal (within limits).

    For the RRSP’s, raising the contribution limit would help people “catch up” when older and making more money. However, the reality is that due do compounding of market returns at say 8% per year, it takes a lot to “catch up” or “make up” for lower contribution rates earlier in life.