Experts call for higher RRSP limits, and a later date for RRIFs

Writing in the Regina Leader-Post, a trio of financial experts is calling on Ottawa to make it easier for Canadians to save more for retirement — and then, on the back end, starting turning savings into income at a later date.

The opinion piece in the Leader-Post was authored by William Robson and Alexandre Laurin of the C.D. Howe Institute, and Don Drummond, a respected economist who now teaches at the School of Policy Studies at Queen’s University in Kingston, Ont.

Their article makes the point that our current registered retirement savings plan (RRSP) limits need to be changed.

“The current limit on saving in defined-contribution pension plans and RRSPs — 18 per cent of a person’s earned income — dates from 1992,” their article notes. While that 18 per cent figure may have been appropriate 30 years ago, “now, with people living longer and with yields on safe investments having fallen, it is badly out of line with reality,” the authors contend.

They recommend gradually raising the limit to 30 per cent of earned income through a four-year series of three per cent increases, the Leader-Post article notes.

While an RRSP is for saving, its close cousin, the registered retirement income fund (RRIF) is the registered vehicle designed for drawing down savings as retirement income. The trio of experts have some thoughts about RRIF rules as well.

The current RRIF rules compel us to “stop contributing to, and start drawing down, tax deferred savings in the year (Canadians) turn 71,” the authors note. This rule was also established in the early 1990s, they note.

“As returns on safe assets fell and longevity increased, these minimum withdrawals exposed ever more Canadians to a risk of outliving their savings,” the authors explain. They are calling for a reduction of the minimum withdrawal amount by “one percentage point, beginning with the 2023 taxation years, and further reduce them in future years until the risk of the average retiree depleting tax-deferred savings is negligible.”

OK, so we would raise RRSP contribution limits, and lower RRIF withdrawal amounts. What else do the three experts recommend?

They’d like to see it made possible for Tax Free Savings Account (TFSA) holders to buy annuities within their TFSAs.

“When an RRSP-holder buys an annuity with savings in an RRSP, the investment-income portion of the annuity continues to benefit from the tax-deferred accumulation that applied to the RRSP. But TFSA-holders cannot buy annuities inside their TFSAs, which means they end up paying tax on money that is intended to be tax-free. This difference disadvantages people who would be better off saving in TFSAs and discourages a much-needed expansion of the market for annuities in Canada,” they write.

Save with SPP has had the opportunity to hear all three of these gentlemen speak out on retirement-related issues over the years. They’ve put some thought into providing possible approaches to encouraging people to save more, making the savings last, and to make the TFSA into a better long-term income provider. Under new rules, you can now make an annual contribution to SPP up to the amount of your available RRSP room! And if you are transferring funds into SPP from an RRSP, there is no longer a limit on how much you can transfer! Check out SPP today — your retirement future with the plan is now limitless!

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A university professor from Sherbrooke, Quebec is calling for a couple of changes to Canada’s system of registered retirement savings plans (RRSPs) and registered retirement income funds (RRIFs), in light of the fact that people are living longer.

Professor Luc Godbout, Professor, School of Administration at the Université de Sherbrooke, is also Chair in Taxation and Public Finance. He kindly agreed to answer some questions Save with SPP had about his ideas, which were published by the C.D. Howe Institute as an open letter to federal Finance Minister Chrystia Freeland.

His open letter was originally published in French.

The professor’s open letter calls for “simple changes” to the existing rules.

“The first would be adjusting the threshold age at which registered capital accumulation plans – such as the RRSP – must be terminated. The rule now is age 71,” he notes in the letter.

Under the current rules, his letter explains, RRSP holders must “transfer their RRSP or defined-contribution pension plan balances into a RRIF or a life annuity” before the end of the year in which they reach age 71. If they don’t, he explains, “the entire value is added to their taxable income in that year.”

The age limit of 71 was established in 1957, his open letter notes.   “This means that since the creation of the RRSP in 1957, the age limit of 71 has never been raised,” the open letter explains. “Yet, since 1957, the life expectancy of seniors in Canada has improved significantly. 

“Life expectancy at age 65 was 14.5 years during the period 1955-1957. It improved to 20.9 years in 2018-2020. But the RRIF rules have not moved,” he writes.

He remarks that recent changes to Old Age Security (OAS) benefits for those aged 75 and older “provides an opportunity to harmonize other elements around our living 75-year-olds.”

Why not, he asks, consider allowing Canadians to postpone their OAS payments to age 75, rather than the current age 70? And, he asks, why not move the limit for converting an RRSP to a RRIF to 75?

“This type of change would optimize the mechanics of pension plans, and also encourage Canadians to remain in the workforce, which improves health and also helps with Canada’s looming labour shortage,” his open letter concludes.

Save with SPP asked the professor a couple of questions about his open letter.

Q. You mention that moving the “end date” for RRSP contributions (and for DC plans) and RRIF conversion to 75 from the current 71 would encourage more people to stay in the workforce. Do you see the current age 71 rule as something that encourages the opposite – a deadline that encourages retirement?

A. It may not be an important factor, but it cannot play favorably in the heads of those who want to continue in the labour market, for example, a liberal profession.

Q. If your idea on changing the date is adopted, do you think government retirement benefits like the Canada Pension Plan/Quebec Pension Plan and Old Age Security should also be changed?

A. Yes, but it is not an obligation to retire later, only to offer a possibility to delay the time when the pension begins, currently CPP between 60 and 70 years and OAS between 65 and 70 years.

Q. You note that while the RRIF age of 71 has been lowered (to 69) in the past, it has never been raised. Why do you think 71 is still the age, especially considering how things have changed since the rules came in in 1957, and retirement was mandatory at 65!

A. Because the scheme does not provide for the adjustment of this threshold to take account of the increase in life expectancy.

We thank Prof. Godbout for taking the time to answer our questions.

One way that a pension plan can deal with longer life expectancies of its membership is by providing the option of an annuity. The Saskatchewan Pension Plan provides a number of different annuity options for its retiring members – but all of them provide a lifetime monthly pension. Check out SPP today.

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The pros and cons of allowing emergency access to retirement funds

It’s been a grim time for all of us, coping with this pandemic, and Save with SPP and everyone at the Saskatchewan Pension Plan hopes everyone is staying safe.

With businesses closing, and the jobless rate rising, some experts are suggesting that raiding the retirement cookie jar be allowed – penalty-free – to help people access savings during the emergency.

Interviewed by Benefits Canada, noted pension expert and actuary Malcolm Hamilton was asked what he thought about a plan by Australia to allow folks there to withdraw up to $10,000 a year from their superannuation plans this year and next.

““It looks to me very creative and very sensible,” Hamilton, also a senior fellow at the C.D. Howe Institute, told the magazine. The magazine notes that the withdrawal option Down Under is open only to people “who are unemployed or who have had their working hours reduced by 20 per cent or more.”

“Telling people you’ve got to leave your money in your pension plan so you have enough money later, when you don’t have enough money now, is really stupid… who, given a choice, would elect to be hungry now instead of hungry later? You have to deal with the immediate needs first,” Hamilton tells Benefits Canada.

Other experts, the magazine reports, agree. Financial author Fred Vettese also sees the Australian policy as a good idea.

“Why not do this? What they’re doing is simply giving people access to their own money sooner. I don’t see anything wrong than that. And they’re not giving them all their money; it’s fairly limited and it’s also under fairly strict conditions,” he tells the magazine.

Other experts see downsides to allowing an early withdrawal of retirement savings.

Bonnie-Jeanne MacDonald of Ryerson University’s National Institute on Ageing tells the magazine she is concerned that allowing emergency access to retirement funds might be “short-sighted.” (Here’s a link to an earlier Save with SPP interview with her.)

“The idea is that this will pass and, if we can get beyond it without tapping into our nest egg, then that’s the better approach because life will need to go on,” she tells the magazine.

And Hugh O’Reilly, a senior fellow at the C.D. Howe Institute, says people who take their money out now, at the peak of a crisis, will be effectively selling low, and will miss out when markets rebound. “I think it’s going to do it much more rapidly than in a typical bear-market scenario,” he tells Benefits Canada.

There are already a few allowable reasons – making a down payment for a home, or paying for education – where Canadians can tap into their Registered Retirement Savings Plans (RRSPs) early. But in both cases, the money is supposed to be repaid, and those who don’t repay are taxed annually on what they should have repaid. And if you just withdraw RRSP money, there’s a withholding tax followed by a possible second tax hit when you file your income tax.

That all said, we have never seen times like these. Maybe the government will decide to permit withdrawals with some sort of repayment option down the road. Save with SPP worries about people taking money out of their retirement savings for other purposes and then not being able to afford to replace it, because that could lead to hardship when they are older.

One great thing about being a member of the Saskatchewan Pension Plan is that it is an open plan. You can decide how much to put into your account, and when times are tough, you can choose to reduce or even stop contributing until better times return.

Written by Martin Biefer
	Martin Biefer is Senior Pension Writer at Avery & Kerr Communications in Nepean, Ontario. A veteran reporter, editor and pension communicator, he’s now a freelancer. Interests include golf, line dancing, classic rock, and darts. You can follow him on Twitter – his handle is @AveryKerr22

The National Institute on Ageing is a relatively new university-based think tank focused on leading cross-disciplinary research, thought leadership, innovative solutions, policies, and products on ageing.

The NIA brings together thinking not only on the money side of retirement, but the health side as well.

So says the NIA’s Dr. Bonnie-Jeanne MacDonald, PhD and FSA (she is also resident scholar at Eckler Ltd.), who recently took the time to speak with Save with SPP. “A happy, healthy retirement is not just about money,” Dr. MacDonald notes, adding that NIA hopes to tap into university, government and other worldwide research to come up with “better ideas that will help Canadians as they age.”

One aspect that Dr. MacDonald has done much research about is the “decumulation” phase of retirement, the period when savings from the work years are used to finance life after work.

“Retirement planning used to focus on saving up until age 65,” she explains. You would then start spending and travelling, with “the old assumption (being) that you would begin to need less money as you aged, that you wouldn’t be spending as much by age 90.”

However, Dr. MacDonald notes, this type of thinking overlooked the possibility that retirees might eventually need to pay for age-related healthcare costs, including living in a nursing home.

In reality, many retirees in their 60s and even 70s “can still earn money, and can choose to downsize, or reduce spending. Their expenses are flexible,” Dr. MacDonald explains. “Once you are 80 to 85, there is less flexibility, expenses are increasingly less ‘voluntary’ (namely the costs arising from declining health) – so it is at this age when having a steady stream of income becomes much more necessary for financial security.”

What she calls “shifting socioeconomic customs” have driven changes in the way retirement money is spent and the effect it has on individuals and families.

“Society has shifted, women are now working more and are not able to provide elder care without accruing considerable personal expense,” notes Dr. MacDonald. Even still, the majority of caregivers are women. The NIA’s report on working caregivers, authored by Dr. Samir Sinha, a geriatrician and Dr. MacDonald’s colleague at the NIA,  shows that women are not only more likely to be working caregivers, but that they provide much more care to their elderly relatives than do men. What’s more, the typical age at which women provide care overlaps with peak career earning opportunities and with their own family building, which in turn causes a knock-on effect on their lifetime earnings and income potential. Financial independence in older age has significant ripple effects, beyond just the individual.

In the past, it used to be more likely that the family would look after elderly parents, helping to feed them, socialize them, prepare their taxes, transport them, and so on. And while 75 per cent of elder care is still done by the family, increasingly people are finding they have to or want to pay for their own care as they enter their late 80s and 90s. And while family caregivers play an important role in the lives of the elderly, people generally prize their independence. But independence also comes at a cost. “It costs a lot of money to replace (the care provided by family), it has become extremely expensive for nursing home care.,” says Dr. MacDonald.

While some retirees can afford to cover the costs of their own care, those who can’t must be assisted by the government, she explains. “The overall effect of this is that some older people aren’t decumulating their savings as expected. They are holding onto their money; they are concerned about the future,” she adds.

Dr. MacDonald is the author of a recent paper on this topic for the C.D. Howe Institute called “Headed for the Poorhouse: How to Ensure Seniors Don’t Run Out of Cash Before They Run Out of Time.” The paper suggests the creation of a government-sponsored LIFE (Living Income for the Elderly) program that would provide additional life income beginning at 85.

“LIFE would provide longevity insurance to Canadian seniors at their most vulnerable time of life… giving them choice, flexibility and income security at advanced ages,” she writes in the paper.

In an article for the Globe and Mail written last year, she suggests women – who live longer – consider not starting their CPP benefits until they are older. “Starting CPP benefits at the age of 70 instead of 65 will increase a person’s CPP by 42 per cent,” she notes in the article.

NIA is looking at other ways to boost income security for older retirees. One way, says Dr. MacDonald, would be to find ways “for people to stay in their own homes longer.” Another way would be to allow family members providing care to be paid. Currently rules generally allow paid caregiving by strangers, but not by someone’s daughter,” she notes.

We thank Dr. MacDonald for taking the time to talk with us.

Remember as well that before decumulation can occur there needs to be retirement savings. The Saskatchewan Pension Plan offers a flexible savings program for individuals.

Written by Martin Biefer

Martin Biefer is Senior Pension Writer at Avery & Kerr Communications in Nepean, Ontario. After a 35-year career as a reporter, editor and pension communicator, Martin is enjoying life as a freelance writer. He’s a mediocre golfer, hopeful darts player and beginner line dancer who enjoys classic rock and sports, especially football. He and his wife Laura live with their Sheltie, Duncan, and their cat, Toobins. You can follow him on Twitter – his handle is @AveryKerr22

Results from the 2016 census show that there are now 5.9 million Canadian seniors, compared to 5.8 million Canadians age 14 and under. This is due to the historic increase in the number of people over 65 — a jump of 20% since 2011 and a significantly greater increase than the five percent growth experienced by the population as a whole. This rapid pace of aging carries profound implications for everything from pension plans to health care, the labour market and social services.

“The reason is basically that the population has been aging in Canada for a number of years now and the fertility level is fairly low, below replacement levels,” Andre Lebel, a demographer with Statistics Canada told Global News. Lebel also projects that because over the next 16 years, the rest of the baby boom will become senior citizens, the proportion of seniors will rise to 23 per cent.

Therefore, it is not surprising that a new study from the C.D. Howe Institute proposes that the age of eligibility (AOE) for CPP/QPP, Old Age Security (OAS) and Guaranteed Income Supplement (GIS) benefits should be re-visited. The AOE is the earliest age at which an individual is permitted to receive a full (unreduced) pension from the government.

Other countries with aging populations are raising the AOE for social security benefits. These include Finland, Sweden, Norway, Poland and the United Kingdom. In 2012, then Prime Minister Steven Harper announced plans to increase the AOE for OAS and GIS from 65 to 67 between 2023 and 2029. However, Trudeau reversed this very unpopular legislation (leaving the AOE at 65) in the 2016 budget.

In their report Greener Pastures: Resetting the age of eligibility for Social Security based on actuarial science, authors Robert Brown and Shantel Aris say their goal is to introduce an “evidence-based” analysis that can be used impartially to adjust the AOE for Canada’s social security system based on actuarial logic, not political whims.

However, they do not argue that current systems and reform plans are unsustainable. In fact, increasing life expectancy and increasing aged-dependency ratios are consistent with the assumptions behind CPP/QPP actuarial valuations. However, they suggest that if there are relatively painless ways to manage increasing costs to the programs, then they are worthy of public debate.

Their calculations assume that Canadians will spend up to 34% of their life in retirement, resulting in recommendations for a new AOE of 66 (phased-in beginning in 2013 and achieved by 2025) that would then be constant until 2048 when the AOE would shift to age 67 over two years.

Brown and Avis believe these shifts would soften the rate of increase in the Old Age Dependency Ratio, bring lower OAS/GIS costs and lower required contribution rates for the CPP (both in tier 1 and the new tier 2). This, in turn, would result in equity in financing retirement across generations and a higher probability of sustainability of these systems.

However they do acknowledge that there are some important issues that would arise if the proposed AOE framework is adopted. One of these issues is the fact that raising the AOE is regressive. For example, if your life expectancy at retirement is five years, and the AOE is raised by one year, then that is a 20% loss in benefits. If your life expectancy at retirement is 20 years, then the one year shift in the AOE is only a five percent benefit reduction.

People with higher income and wealth tend to live longer, so the impact of raising the AOE will be greater on lower-income workers than on higher-income workers. Access to social assistance benefits would be needed to mitigate this loss. The study suggests that it would be easy to mitigate the small regressive element in the shift of AOS by reforming the OAS/GIS clawback as the AOE starts to rise.

The report concludes that having partial immunization of the OAS/GIS and CPP/QPP from increases in life expectancy is  and logical and would help Canada to achieve five attractive goals with respect to our social security system:

• Increase the probability of it’s sustainability.
• Increase the credibility of this sustainability with the Canadian public.
• Enhance inter-generational equity.
• Lower the overall costs of social security; and
• Create a nudge for workers to stay in the labour force for a little longer .

It remains to be seen if or when the C.D. Howe proposals regarding changes to the AOE for public pension plans will make it on to the “To Do” list of the current or future federal governments.

Written by Sheryl Smolkin
	Sheryl Smolkin LLB., LLM is a retired pension lawyer and President of Sheryl Smolkin & Associates Ltd. For over a decade, she has enjoyed a successful encore career as a freelance writer specializing in retirement, employee benefits and workplace issues. Sheryl and her husband Joel are empty-nesters, residing in Toronto with their cockapoo Rufus.

By Sheryl Smolkin

Low earners stand to gain little from an expanded Canada Pension Plan (CPP), according to a new C.D. Howe Institute report. In “The Pressing Question: Does CPP Expansion Help Low Earners?”, authors Kevin Milligan and Tammy Schirle show the large differences in the net payoff from the expanded CPP for lower and higher earners.

Federal and provincial finance ministers agreed in June to expand the Canada Pension Plan. Under the status quo, CPP offers a 25% replacement rate on earnings up to a cap of $54,900. The expanded CPP will add a new layer that raises the replacement rate to 33.3% up to a new earnings cap of about $82,900 when the program is fully phased in by 2025.

To pay for this, both employer and employee contributions will be raised by one percentage point up to the existing earnings cap, and by four percentage points between the old and new earning caps. This expansion will be phased in during the period 2019 to 2025 for contributions, with benefits being phased in over the next 50 years commensurate to contributions paid.

This reform will substantially raise expected CPP benefits for most young workers now entering the workforce. For lower- and middle-earning workers, the higher replacement rate will lead to an eventual benefit increase of about 33% over existing CPP benefits.

For a high-earning worker, the maximum CPP benefits will increase more than 50% over the status quo. These expansions are large enough to make a noticeable difference for the younger generation of workers as the expanded CPP matures over the coming decades.

However, the C.D. Howe study authors note two important shortcomings of the new package hamper its effectiveness, both related to low earners.

First, low earners are already well covered by the existing suite of public pension benefits – many now receive more income when retired than when working. Why expand coverage where it is not needed? As a contributory pension, the CPP risks worsening the balance of income between working and retirement years for low earners.

Second, the income-tested withdrawal of some government-program benefits wipes out much of the impact of extra CPP benefits for many low-earners. Around one-third of Canadian seniors currently receive the income-tested Guaranteed Income Supplement (GIS), so concerns about interactions with income-tested benefits have a broad base.

In order to be eligible for the GIS in 2016, a single, widowed or divorced pensioner receiving a full OAS pension cannot have over $17,376 individual income. Where a couple each receives a full OAS pension they will not be eligible for the GIS if their combined income exceeds $22,944.

To summarize these issues: expanding CPP for low earners risks making some Canadians pay for pension coverage they don’t need. To make matters worse, extra contributions may reduce the living standards of low earners today for modest net rewards in retirement tomorrow.

The CPP agreement-in-principle reached by the finance ministers may address some of these concerns by offering an improvement to the Working Income Tax Benefit alongside the CPP expansion. It is possible that an expanded WITB could effectively counteract increased CPP contributions by some low earners, but no details of the WITB expansion have been provided to date. Nevertheless, low earners would still face the problem of CPP-GIS interactions that undercut the impact of expanded CPP benefits.

In a Globe and Mail article, authors Janet McFarland and Ian McGugan also note that expanded CPP does not do much to help people who do not collect CPP in the first place. That describes many senior women who spent most of their lives as homemakers and so earned little or nothing in CPP benefits. About 28% of single senior women over 65 live in poverty, according to a study this spring for the Broadbent Institute by statistician Richard Shillington of Tristat Resources.

In addition they say the planned CPP changes will also do only a limited amount to help affluent savers because the maximum amount of income covered by the plan will increase to only about $82,800 by 2025. Therefore, those with six-figure incomes will still have to save on their own if they want a retirement income that will replace a considerable portion of their incomes above the expanded limit.

By Sheryl Smolkin

A new report from the C.D. Howe Institute says that the lower mandatory draw downs from RRIFs and similar vehicles introduced in the 2015 budget are better than the old rules but this file should nevertheless remain open.  If real yields on the types of securities a prudent retiree should hold do not rebound considerably, and if life expectancy continues to rise, authors William B.P. Robson and Alexandre Laurin say the risk of outliving tax-deferred savings will continue to be material.

By the time new withdrawal limits were announced this year, the draw down rules established in 1992 were badly outdated. Lower yields on safe investments and longer lives had put many Canadians at risk of outliving their savings. The new smaller minimums reduce that risk.

With real investment returns of 3%, as assumed in the budget illustrations, C.D. Howe projections suggest relatively constant minimum RRIF draw downs up to age 94, and a lower risk of living to see a badly depleted RRIF account balance. However, real returns on safe investments are currently negative. Re-running the projections with zero real returns suggests that most seniors still face a material risk of outliving their tax-deferred savings.

The motive for forcing holders of RRIFs and other similarly treated tax-deferred assets to draw down their savings is to accelerate the government’s receipt of tax revenue, and likewise bring revenue from income-tested programs such as Old Age Security (OAS) and the Guaranteed Income Supplement (GIS) forward.  These payments will occur eventually – notably on the death of the account holder or her/his spouse or partner – so they amount to an implicit asset on governments’ balance sheets. The draw downs do not affect their present value; they simply make them happen sooner.

The minimum withdrawals are not a serious problem for those who, perhaps because they do not expect to live long, want to draw their tax-deferred savings down fast. Others, willing and able to work and replenish their savings after age 71, will get by. Couples can gear their withdrawals to the younger spouse’s age. High-income seniors whose incremental withdrawals do not trigger OAS and GIS clawbacks will find the burden of paying ordinary income taxes on them tolerable. Higher TFSA limits will also let more seniors reinvest unspent withdrawals in them, avoiding repeated taxation.

For others, however, forced draw downs make no sense: those whose withdrawals – reinvested in TFSAs or not – trigger claw backs; those daunted by tax planning and investing outside RRIFs; those unable to work longer; and those facing sizeable late-in-life expenses such as long-term care. The more future seniors have ample assets to finance such needs as health and long-term care, as well as the enjoyments of retirement, the better off Canada will be.

Therefore, the report says the 2015 changes should be a down payment on further liberalization. In the alternative, if more regular adjustments to keep the withdrawals aligned with returns and longevity are impractical, it is suggested that eliminating minimum withdrawals entirely may be the best way to help retirees enjoy the lifelong security they are striving to achieve.

Robson and Laurin conclude that government impatience for revenue should not force holders of RRIFs and similar tax-deferred vehicles to deplete their nest-eggs prematurely. While the 2015 budget’s changes are a step in the right direction, they say retirees need further changes to these rules if they are to enjoy the post-retirement security they are striving to achieve.

Also read:
What the new RRIF withdrawal rules will mean for you

RRIF rules need updating: C.D. Howe