C. D. Howe on RRSP Limits
Yesterday, the C. D. Howe Institute released a brief estimating how much Canadians at various income levels would need to save, through pension plans or individually, to provide various levels of retirement income.
Since the Canada Pension Plan tops out around the average industrial wage and Old Age Security is clawed back from higher incomes, those who make more money need to save proportionally more to generate a retirement income equal to a given percentage of pre-retirement earnings.
While the brief does not make explicit policy prescriptions, it seems to imply that Registered Retirement Savings Plan (RRSP) contribution limits are too low. One of the three â€œexecutive summaryâ€ bullets misleadingly states, â€œIncome Tax Act limits on tax-recognized savings would prevent many earners from accumulating sufficient RRSP savings over 33 years (by age 63) to securely replace 70 percent or more of their working incomes.â€
True, to reach that level of retirement income by age 63, the top 40% of income earners would need to save a little more than the RRSP limit. However, looking at the â€œnormalâ€ retirement age of 65, the briefâ€™s own numbers indicate that only the richest 10% have to save more than their RRSP contributions.
Indeed, the vast majority of Canadians need to save appreciably less than 18% of earnings (the RRSP contribution limit). A reasonable conclusion would be that RRSPs provide more than enough tax-assisted contribution room. The issue is that most working Canadians do not have sufficient savings to take advantage of it.
For anyone able and willing to save more, there is no barrier to saving outside an RRSP. Indeed, the government also offers a Tax Free Savings Account (TFSA). The Howe brief fails to even mention this vehicle, let alone acknowledge it as a form of â€œtax-recognized savings.â€
In any case, investment income generated on savings outside of an RRSP or TFSA is very lightly taxed. Only half of capital gains are taxable and Canadian dividends are partly sheltered by the dividend tax credit.
The Income Tax Act provides ample assistance to personal savings. There is a shortage of saving, but not of tax incentives to save.