Reform Proposals for Replenishing Retirement Savings

The 2008-2009 economic crisis dealt a serious blow to Canadians’ retirement savings. While markets have since partially recovered, the ratio of Canadians’ household net-worth relative to disposable income still remains below where it was in 2007. So much wealth that workers had accumulated to prepare for retirement has been wiped away, while the years since 2008 that might have otherwise been spent compounding retirement savings have been spent, instead, on trying to recover losses in a low-interest-rate environment that has limited returns. With large waves of older workers approaching retirement age, and these future retirees projected to live longer than previous cohorts, Canada now faces the very realistic scenario that a significant number of people will reach retirement age without the funds they will need to provide a comfortable post-working-life income. Canadian policy-makers may not have the ability to restore that destroyed wealth. And with most governments already struggling to resolve serious deficits, the situation is not likely to be ameliorated with anything that requires additional spending, or that could reduce tax revenues. But there are policy reforms available that can help at least in better preparing the coming waves of retirees for a financially secure retirement. The reforms need not be far-reaching to have a meaningful impact. And they need not be costly, either. They can include a modest expansion of the Canada Pension Plan (CPP) to allow larger contributions — shared by employers and employees, or covered entirely by employees — that would, in turn, allow retiring workers to draw a larger maximum pension, rather than having to rely on the guaranteed income supplement (GIS). CPP contributions could also be made deductible from taxable income, like RRSP investments, to encourage workers to maximize contributions. To minimize an increase in payroll taxes, the eligibility age for CPP benefits could be increased to 67 years of age, similar to old-age security eligibility. Meanwhile, the tax treatment of group RRSPs — for which employer contributions are currently subject to payroll taxes — should be made the same as it is for defined-contribution registered pension plans (RPPs). There is also the option of increasing the age limit for RPP and RRSP contributions, from 71 to 75 years, to reflect the increase in life expectancies. RRSP contributions can be altered to allow lifetime-averaging, allowing workers to take advantage of additional contribution room. Contribution limits on Tax-Free Savings Accounts should be increased as well. Policy-makers should also look at creating a capital-gains deferral account, to allow investors to sell off underperforming assets, without fear of triggering a tax bill, as long as they reinvest the proceeds. The freedom to unlock unwanted investments, and make better ones, will improve revenue prospects for investors and the government. Many of these reforms can be phased in gradually, to assess their effects on government revenue and savers’ behaviour. But they all appear to have the potential to encourage increased saving, without significantly harming long-term government revenue, helping Canadians better prepare for comfortable retirements, even after the serious wealth destruction that accompanied the recent economic crisis.