Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 3 - Evidence
OTTAWA, Wednesday, March 31, 2010
The Standing Senate Committee on Banking, Trade and Commerce met at 4:15
p.m., this day, to examine the extent to which Canadians are saving in Tax-Free
Savings Accounts and registered retirement savings plans.
Senator Céline Hervieux-Payette (Deputy Chair) in the chair.
The Deputy Chair: Welcome, this afternoon we will be starting our
investigation into pension systems in Canada. The pillars of the Canadian
pension system are old age security, public and private pensions, and personal
savings. We will be focusing on tax incentives for personal savings earmarked
Our orders of reference state that this committee will study the extent to
which Canadians are saving in Tax-Free Savings Accounts, TFSAs, and Registered
Retirement Savings Plans, RRSPs, federal measures that might be taken to
increase the use of these savings vehicles, as well as the fiscal costs of
increased use and ways in which savings in these vehicles might be protected.
We are joined by representatives from the Department of Finance and the C.D.
Howe Institute, both of whom will share their views on RRSPs, TFSAs and savings
We are pleased to have with us, from the Department of Finance, Baxter
Williams, Director, Personal Income Tax Division, Tax Policy Branch. You have
Baxter Williams, Director, Personal Income Tax Division, Tax Policy
Branch, Department of Finance Canada: Thank you for the introduction. First,
we provided a backgrounder deck on retirement savings statistics. My remarks
today will be limited to discussing these statistics and answering any questions
you might have on that topic.
By way of context, the government over the past year has been engaged in a
discussion with Canadians on pensions and pension income security. The
government has also taken concrete actions to strengthen Canada's retirement
income system and to reduce the tax burden on pensioners and seniors, since
2006. These actions include completing the triennial review of the Canada
Pension Plan, CPP, in May 2009; undertaking extensive consultations and
announcing measures to strengthen federally regulated registered pension plans;
improving the tax rules governing pensions and RRSPs; introducing the Tax-Free
Savings Account, which I might add is the most significant change to
tax-assisted retirement savings since the introduction of RRSPs; and launching a
task force on financial literacy.
In addition, federal, provincial and territorial finance ministers have been
examining the retirement income system. A joint federal-provincial-territorial
research group was established in May 2009, led by the Parliamentary Secretary
to the Minister of Finance, Mr. Ted Menzies.
The working group's report was presented by its research director, Professor
Jack Mintz, to financial ministers at their December 2009 meeting in Whitehorse.
In general, the report confirms the strength of Canada's retirement income
system. Ministers tasked senior officials to analyze the wide range of ideas
that have been put forward.
On March 24, the Minister of Finance launched online consultations and a
series of cross-country round table discussions, speaking engagements and town
hall meeting to gather input from Canadians on ensuring the ongoing strength of
Canada's retirement income system. In this context, the government has published
a consultation document, which has been shared with the committee and which
outlines some proposals in the public domain aimed at addressing perceived
issues with respect to retirement savings. Finance ministers will discuss the
findings and appropriate next steps at their next meeting.
I will recap some of the introductory remarks. The government-sponsored
retirement income system consists of three pillars, and I would like to start
with a quick summary of those. The first pillar consists of the Old Age
Security, OAS, and Guaranteed Income Supplement, GIS, programs, which provide a
basic minimum-income guarantee for seniors who meet residency requirements. The
government is currently spending about $33 billion annually on that.
The second pillar consists of the Canada and Quebec Pension Plans, which
ensure basic levels of earnings replacement in retirement for all workers in
Finally, the third pillar, which will be the focus of my remarks, consists of
a system of voluntary, tax-deferred savings and registered pension plans, RPPs,
and RRSPs to encourage and assist Canadians to save for retirement to help
bridge the gap between public pension benefits and their retirement income
goals. Current tax expenditure on RRSPs and RPPs is about $20 billion annually.
Essentially, the contribution and benefit limits for RRSPs and RPPs are
designed to permit most individuals to save enough over a 35-year career to
obtain a pension equal to 70 per cent of their pre-retirement earnings, an
amount that is generally considered sufficient to allow individuals to maintain
their standard of living in retirement. Annual contributions to RRSPs and money
purchase, or defined contribution, RPPs are limited to 18 per cent of earned
income up to a dollar maximum of $22,000 a year annually for RRSPs and $22,450
annually for RPPs in 2010. For defined benefit RPPs, the maximum annual pension
benefit limit per year of service is 2 per cent of earnings up to just under
$2,500 in 2010.
In terms of calculating the 70 per cent, it is important to note that the
RRSP and RPP limits are additional to the retirement income support that is
provided through CPP and through the OAS system.
I would now like to present several charts giving some basic statistics on
participation in these plans.
The first chart provides an overall assessment of the expected earnings
replacement that Canadians can achieve by income levels. It is a stylized
presentation. We have taken evidence on a year's annual savings and used
assumptions of constant savings over an individual's working life, the rate of
return which underlies the RRSP system and its calculation of benefits in
It looks at the type of benefit someone could expect in retirement when
private savings are considered in conjunction with government programs or
publicly provided income in retirement plans.
The blue bars are the percentage of pre-retirement income replaced by OAS and
GIS, and the grey bars are that replaced by CPP. Collectively, they represent
the public pensions.
The Deputy Chair: Can I stop you? We do not have colour. Could you
tell us which is which? We have a dark one, a medium-grey one and a white one.
That way, we can understand the code.
Mr. Williams: That is the problem with technology. The bottom bar is
what I am referring to. It is the black bar, and that is the income replacement
a person would achieve through OAS and GIS. The grey bar is what would be
provided after a working career through the CPP system. The top bar — the clear
white bar in your deck — is based on the income replacement that a person would
achieve through his or her private savings.
I will clarify how we calculate that. We take a snapshot look at what
Canadians are saving by income for a particular year. In this case, it was 2006.
We are assuming they undertake the same savings over their working life. Then,
based on our assumption about what investments would earn on that savings, we
look at how much income they would have in retirement.
This is a stylized chart. Its advantage is that it gives a good overview and
starting point to look at the adequacy of the existing retirement income system.
As you can see, there are lower-income individuals, but they are able to easily
achieve a 70 per cent replacement rate when all sources of retirement income are
considered. That is probably most important, that people have a high replacement
rate in retirement because of their lower incomes during their working life.
The other comment I would make is that at the upper end, you will see a
reduction in the income replacement rates that would be achieved through
government-supported retirement savings, mainly because we limit the total
amount you can save within an RRSP or RPP. These individuals would rely
principally on private savings in order to satisfy their retirement saving
needs. I think that gives a fairly good explanation of this slide.
I would like to turn to look at this issue in the context of the savings
limits and the excess contribution room that is built into the system relative
to what is required to achieve a 70 per cent savings rate. As I mentioned, the
contribution and benefit limits for RRSPs and RPPs are designed to permit most
individuals to achieve a 70 per cent replacement rate relative to their
pre-retirement income. However, as I noted earlier, these required savings rates
are less than the 18 per cent of earnings for most Canadians because the RRSP
limits are in addition to earnings replacement provided by public pensions.
In the table "Amount of excess RRSP contribution room,'' for each earning
level in the first column, column 2 shows what percentage of those earnings
would be replaced by public pensions. This repeats much of the information that
is on the first slide. It shows that someone whose income is between $20,000 and
$40,000 can achieve a desired 70 per cent replacement rate largely within public
Column 3 shows the gap between public pensions and the 70 per cent
replacement rate target. In other words, what replacement rate would a person
need to achieve through private savings? Column 4 shows the annual contribution
relative to income that a person would be required to save in order to achieve a
70 per cent replacement rate.
Column 5 shows the excess savings room that a person would have available
within his RRSP in order to achieve the 70 per cent replacement rate. In a way,
it is a measure of the redundancy that is built into current limits in terms of
people's available room to save to ensure continuity of a standard of living in
The next slide looks at the issue slightly differently and asks how people
are using their currently available retirement savings room. "Unused RRSP
contribution room for 2006'' is the slide I am referring to. This is just
another measure of the adequacy of the existing system in providing people an
opportunity to save. The table shows the total amount of unused RRSP
contribution room available to Canadians by earning level in 2006. The fact that
the 18 per cent of earnings limit provides excess savings room to most Canadians
is reflected in the available amount of accumulated unused RRSP room, which was
about $470 billion in 2006.
It is principally among lower-income individuals where unused retirement
savings room is greatest. The third column shows the share of earners with
unused RRSP savings room. If you look at this inversely, it will also give you
an indicator of the percentage of the population constrained by current RRSP
In total, 91 per cent of Canadians have unused RRSP room. This suggests that
only 9 per cent are constrained by the current limits to achieve savings within
RRSPs and RPPs. Canadians most constrained are concentrated at higher income
levels over $100,000.
Senator Moore: With regard to column 2, you mentioned that the total
amount of unused RRSP room is approximately $470 billion. Is it not trillion?
Mr. Williams: No, it would be billion.
Senator Moore: You have three zeros above the column.
Mr. Williams: That is right. That would be billion because the
statistic below reads $467 million. Then you add three zeros.
Senator Moore: Okay, I see what you are doing.
The Deputy Chair: That makes more sense.
Mr. Williams: We would have no reason to raise the limit if it was
The Deputy Chair: That is money not used; we could save all of it
within the margins of the entire program.
Mr. Williams: That is correct.
My next slide gives an indication of participation in registered pension
plans by earning level. We are basically looking at savers as a percentage of
all earners in each earnings range.
The blue bars represent the percentage of those who save only in RPPs. The
yellow bars represent those who save only within RRSPs. The blue bars would be
Canadians with pension plans.
The Deputy Chair: I want to ensure we understand.
Mr. Williams: The light grey bar that runs along the baseline shows
Canadians who participate only in pension plans. The next bar shows those who
save in both an RRSP through their own contributions and, in addition,
participate in a pension plan. The clear bar at the top indicates those
individuals who save solely within an RRSP.
This is a reflection of the chart I started with that showed people's ability
to achieve a replacement rate in retirement by income. The participation rate
rises rapidly with income. Most individuals in the lower income bands would be
able to achieve their retirement savings needs through public pension benefits.
For those with significant saving needs — those earning over $45,000 per year —
the participation rate in some form of tax-assisted pension plan is relatively
high at 80 per cent to 90 per cent. Participation in a pension plan is
concentrated among middle-income earners. The proportion of individuals at upper
incomes who save solely within an RRSP generally tends to be greater.
The next chart shows participation within an RRSP or RPP by year for
individuals with earnings over $30,000 annually. The pattern has been relatively
stable over the last 15 years. There has been a moderate decline in individuals
who participate within a pension plan. This has been compensated somewhat by
growth in the number of individuals who save through RRSPs.
What is not captured in these statistics is savings within a Tax-Free Savings
Account. The Tax-Free Savings Account was introduced in Budget 2008. The TFSA is
a flexible, registered, general purpose account that allows Canadians to earn
tax-free investment income. Canadians aged 18 years or over are eligible to
contribute up to $5,000 annually through a TFSA with unused contribution room
being carried forward to future years.
While the TSFA is designed as a general-purpose savings vehicle, some
observers have pointed out too its advantages for retirement savings purposes.
In particular, the TFSA improves incentives for low- and modest-income earners
who may face higher effective marginal tax rates in retirement than they do
during their working years.
As individuals who save within an RRSP make withdrawals, it could reduce
their eligibility for Guaranteed Income Supplement benefits or reduce the value
of the tax credit available to seniors based on age. Unlike the reduced rate of
return on savings in an RRSP, income earned within a TFSA and withdrawals from
it are not taken into account when calculating federal income-tested benefits or
tax credits. The TFSA also helps seniors over the age of 71 years who are
prevented from contributing to an RRSP to save on a tax-efficient basis to meet
their ongoing savings needs.
The TFSA only became available in 2009. Consequently, data are not yet
available on participation or savings within this vehicle. However, we have some
idea from private sector surveys on how successful the TFSA has been to date.
According to a report from Investor Economics and survey data from Ipsos Reid,
Canadians opened four million TFSAs by the end of December 2009. The value of
Canadians' TFSA assets amounted to approximately $16 billion. That is a rather
successful first year.
The TFSA has also been quite popular among those who are at or near
retirement age. A separate survey undertaken by Leger Marketing for the Bank of
Montreal found that one third of people over 65 years of age and one quarter of
those aged 55 to 64 had opened a TFSA by February 2009.
To provide more context, I think it is worth considering total assets held by
Canadian households. It is important to recognize that assets held within
pension plans are only one source of wealth available to Canadians in order to
meet their retirement savings needs. Other components indicated in the final
table, such as housing, non-registered savings and non-financial assets, make up
a significant portion of household net worth and can act as sources of
retirement income beyond that which is provided through the three-pillar system.
That concludes my remarks. Thank you for providing me the opportunity to
present this information to you this afternoon.
The Deputy Chair: Thank you, I think we have quite a few things to
examine. The first question goes to Senator Massicotte.
Senator Massicotte: Thank you, Madam Chair.
Mr. Williams, I read the minister's statement in order to study this, but I
am trying to figure out where the problem is. I read your chart on the
percentage of existing income we can replace within the existing system. The
projection was made by Jack Mintz, I believe. At the higher income levels, it is
down to 50 per cent to 60 per cent. However, a study came out a few weeks ago
suggesting that above $100,000 there is no need to replace the 70 per cent, that
people often say you can get lower than that.
Mr. Williams: That is right.
Senator Massicotte: Where is the problem? There does not seem to be a
problem. Perhaps the problem is that some people do not save this much. This is
an average figure for all Canadians. Do people save enough? When asked that
question, Jack Mintz seems to conclude that there is not a serious problem.
However, David Dodge suggested that there is a major problem. Could you tell us
who is right in this regard and whether there is a problem?
Mr. Williams: My expertise is in the area of looking at savings
patterns within tax-assisted retirement savings vehicles. I would imagine that
at some time the committee would have Jack Mintz as a witness. In terms of
reporting on the research results, he would be best positioned to speak to the
From an aggregate perspective, the system has been quite effective in
allowing Canadians to meet their savings needs. In the minister's consultation
paper released on March 24 there are other tables or charts showing the income
of seniors as a percentage of average income and showing our international
ranking. Those reinforce that on a total basis, our system has been very
effective at ensuring that seniors have sufficient income replacement.
Senator Massicotte: I am left with the impression that there is not a
problem, yet there has been a lot of talk about amending pension programs. There
is a political wish to review it.
However, if this is accurate, there are two issues your department should
focus on. Certainly there is a problem with the insolvency of certain pension
plans, which is an issue of bankruptcy or solvency that might affect a minor but
important portion of our population.
The other issue of concern is that an increasing number of pension plans are
going by defined contribution and not by defined benefit. As many as 75 per cent
of all new corporate pension plans are set up by defined contribution. That
means the retirees have no sense of certainty as to their income when they
retire. I suspect that might cause insecurities and might even cause serious
damage to our economy. In places that do not have a pension program, savings
reached as high as 12 per cent to 14 per cent, which means that people are
saving and are afraid to spend. Some people worry that it could happen in
Canada, also. Is there a solution? Companies are fed up. It is not their game to
manage future investments, and they no longer want to guarantee that. Is there
not something the government could do to encourage defined benefits and take
away that risk? It could mess up the economy somewhat if nothing is done. Could
you comment on that? Is there a risk?
Mr. Williams: That question is fairly wide open in terms of what the
macroeconomic implications of different savings choices would be. I do not think
there is strong evidence to support such a situation becoming an issue.
Senator Massicotte: In a report, the Bank of Canada says that it is.
In his speech, David Dodge spoke to the same effect. He is quite worried about
Mr. Williams: He is quite worried about what?
Senator Massicotte: He is worried by the fact that employer pension
plans are increasingly defined contribution as opposed to defined benefit.
Mr. Williams: There is some trend toward the use of defined
Senator Massicotte: They make up 75 per cent to 80 per cent of all new
pension plans. The defined benefit plan is dying. Only one third of
non-government employees have a pension plan and 80 per cent of that 33 per cent
are defined contribution. Forget the defined benefits.
Mr. Williams: These are interesting issues, but I hesitate to speak to
them because they are a bit out of my area of expertise.
Senator Harb: Mr. Williams, your presentation is timely.
My question deals with the consultation. We are faced with massive problems,
but the government seems to be allocating only six to eight weeks in order to
come up with an action plan. Could you tell us when they expect to come up with
an action plan?
Mr. Williams: Regarding next steps, I can tell you a bit about the
process that has occurred to date. As I indicated at the beginning of my
remarks, this is an opportunity for the federal government to consult the public
more broadly, but it has been engaged in discussions on pension issues with the
provincial finance ministers over the last year. What will come out of that
process is difficult to predict, given that we have not concluded the
consultations and that the ministers have not met.
Senator Harb: There are terms of reference, and there is an agenda for
the talks. To a large extent, the set agenda could define the outcome.
You mentioned the pension assets in the last quarter of 2009 that are $1.8
Mr. Williams: Yes.
Senator Harb: How does that compare to 2008? In 2009 the market took
quite a dip. How much of that will we still have?
Mr. Williams: I do not have those statistics.
Senator Harb: There were major losses in the market. Senator
Massicotte mentioned that some private pension funds lost quite a bit of money.
I presume many of the people represented in these charts before us would have
put their RRSPs in stocks and mutual funds. Does the Department of Finance
Canada not have any figures on the losses experienced in RRSP accounts as a
result of the economic crisis?
Mr. Williams: How do you see this as helping you to understand the
Senator Harb: Obviously, we are trying to do the consultation because
we have a sense that there is a crisis or a problem, but we do not seem to know
the magnitude of it.
Mr. Williams: Yes.
Senator Harb: As a person who sits on this committee, I think it would
be useful for us to know how big the problem is. I do not know.
Is the government planning to look at the impact on RRSPs, for example, of
the economic crisis?
Mr. Williams: The consultation process is not limited in the type of
input we receive. That would be a legitimate issue that could arise.
In terms of my own framework for examining the issue of RRSPs, we tend to
look at things over a broader time perspective. As you would be aware, there is
a natural volatility to the markets. They have recovered somewhat. For the
period before 2008, there was relatively strong growth within the market. From
our perspective, from a tax policy point of view, we would look at more
long-term rates of return that someone could expect to achieve.
Senator Harb: The public pension funds now are managed through either
the provincial governments or the federal government. As an individual, if I
want to invest in RRSPs, I have to find a mechanism for my investment. Would it
be feasible for the federal government, in consultation with the provinces, to
set up a national system of sorts? You, Mr. Williams, could throw in any portion
or all of your RRSP into that big pot of public funds. As a result, you would
not have to worry, as you are worrying now, about whether or not it will
perform, because it is managed by a group of individuals who have the expertise
to do so. As the public funds perform, your investment will perform. Therefore,
you can sleep better. You do not have to worry about the fact that if the
company goes under then your money will be gone too.
Would we have to amend any federal laws to allow that kind of thing to
happen? How would that be possible?
Mr. Williams: That is identified in the consultation paper as a
potential option. We would seek to better understand the considerations
associated with that.
My general understanding is that amendments to the CPP would require both
federal and provincial agreement. However, it is better to ask someone with more
direct expertise in that area to understand the mechanics of it.
Senator Harb: I think you did an amazing job in trying to do the
breakdown. It was telling that in essence there is a correlation between the
level of income of individuals and the contribution to the RRSP. I want to thank
you very much for that.
Mr. Williams: It is my pleasure; thank you.
Senator Ringuette: I would like to go back to slide 3, which is the
amount of excess RRSP contribution room. I want to make sure I am reading this
For a person in 2006 earning $20,000, would the public pension, whether it is
the Canada or the Quebec pension plan, replace 72 per cent?
Mr. Williams: That is right, through the Guaranteed Income Supplement
benefits and through their CPP benefits.
Senator Ringuette: You then add with RPP and RRSP savings. You are
adding to that 72 per cent a portion of employer-employee sponsored pension
Mr. Williams: That is right. Are you looking at this chart here?
Senator Ringuette: No, I am looking at the one on page 3. I want to
read this correctly. You just said 72 per cent for a person earning $20,000. It
is not clear. What is represented by the 72 per cent?
Mr. Williams: You would look at the number, the 72 per cent, and also
look at their pre-retirement income, which is $20,000. Then you look at what
they can expect to receive through government-supported and government-paid
benefits, for example, old age and pension benefits. That amount would equal 72
per cent of their pre-retirement income.
Senator Ringuette: Then you go down to 40 per cent.
Mr. Williams: That is right.
Senator Ringuette: You have 40 per cent. Are you saying that in the
case of a Canadian earning $40,000 in 2006, a combination of public pension and
employee-employer pension would provide only 40 per cent of his earnings for
Mr. Williams: No.
Senator Ringuette: Then something is wrong with your numbers, because
it has to be a constant here.
Mr. Williams: As you move to $40,000, your eligibility for GIS will
decline and you are close to the maximum you could receive through CPP, so the
total government income you receive will not rise as quickly.
Senator Ringuette: I understand that. However, you add in that same
column RPP and RRSP savings, which is the employer-employee contribution to a
Senator Moore: Did they include it in there?
Mr. Williams: No, they are not included in that.
Senator Ringuette: This graph is not telling the right picture.
Mr. Williams: I think it is.
Senator Ringuette: It is not constant.
Mr. Williams: If you are eligible for GIS, for example, we would take
that into account. Among people earning $20,000 a year, a certain fraction of
them will have private savings as well in retirement. Those private savings will
reduce their eligibility for the Guaranteed Income Supplement.
Senator Ringuette: Yes, we understand how the system works.
Mr. Williams: It would be misleading for us to give you the maximum
amount of Guaranteed Income Supplement those people could receive, because in
fact when you look at the data, they will receive less than the maximum because
some of it will be displaced by the fact that they are also receiving RRSP and
RPP income. It is not to include directly the income from RRSPs and RPPs, but it
is rather to acknowledge that we take that into account in determining
eligibility for Guaranteed Income Supplement benefits. I think that could be
Senator Ringuette: I am referring to the numbers in your column and in
your entire second column.
Senator Moore: That is public pension.
Senator Ringuette: No, because they say "public pension with RPP and
Mr. Williams: Yes.
Senator Ringuette: This column should not be there at all, because it
does not reflect the reality of the situation with regard to earners in 2006
dollars with possible pension contribution, whether it is public or private or
Mr. Williams: The first chart I showed you is supposed to give a total
picture of both private and public savings by income. The second chart, or the
table, is supposed to look simply at public savings to show how much you would
need to contribute in addition through private savings in order to achieve the
70 per cent replacement rate. I admit the parenthetical remark there could be
better worded to make it clearer. That is more of a footnote to explain we are
taking into account the impact of people's private savings on their eligibility
for Guaranteed Income Supplement benefits.
If you are interested in the overall picture, the first chart gives an
overall view of the kind of income replacement people could expect to achieve in
retirement according to their income during their working life.
Senator Ringuette: I am sorry to interrupt —
Mr. Williams: Not at all.
Senator Ringuette: I am going back to your slide 3. We have dealt with
the second column, which should not be there because it does not really
represent the government assessment of public pension replacement rates with RPP
and RRSP in regards to the different earning brackets you have shown in column
Let us go to column 3, which shows the gap to obtain a 70 per cent
replacement rate. Should we read that as a percentage of earnings?
Mr. Williams: Column 3 is a mechanical calculation. It basically takes
70 per cent and it subtracts column 2. Someone earning $40,000 a year needs to
save enough through private savings to achieve a 30 per cent replacement rate in
order to have an overall replacement rate of 70 per cent in retirement.
Senator Ringuette: Therefore, in order to get 70 per cent of his or
her income revenue, a person earning $40,000 would need to replace 30 per cent.
Actually, this entire thing does not contribute at all to what we want to
If we take the different earnings brackets that you have identified in column
1, we need to know what the current public pension replacement rate is for
people earning $20,000. What is the money value of the gap? This 40 plus 30,
which is 70, which is 70 per cent, does not provide us with the dollar
investment a person needs to make in an employee-employer contribution plan, a
RRSP or a Tax-Free Savings Account in order to obtain the 70 per cent income in
Mr. Williams: You will find that information in column 4. We are
trying to break it down step by step. Column 4 tells you the percentage —
Senator Ringuette: Are those dollar values?
Mr. Williams: It is the percentage of employment income that a person
would need to save in order to achieve that 30 per cent replacement rate.
Someone earning $40,000 annually would need to save 8 per cent of their income.
Senator Ringuette: Into what?
Mr. Williams: Into a RRSP. That 8 per cent is $3,200 of income. We are
just trying to break it down step by step.
Senator Ringuette: How much money can a person currently earning
$40,000 put into an RRSP in compliance with the Income Tax Act?
Mr. Williams: Just less than $8,000.
Senator Ringuette: Less than $8,000.
Mr. Williams: It is $7,200.
Senator Ringuette: You are saying the amount of money allowed by the
Income Tax Act to be put into an RRSP is $8,000, and that is sufficient enough
right now to meet the 70 per cent retirement objective. Is that correct?
Mr. Williams: That is right. It is more than sufficient; that is what
the table is saying.
The Deputy Chair: To complete what you are saying, a person can put in
the 8 per cent of the $40,000 that is needed to get to the 70 per cent; 8 per
cent of $40,000 is $3,200. If that person was allowed to put in $7,200 plus
$3,200 — $10,400 — she would reach the 70 per cent, would she not?
Mr. Williams: Not quite. To reach the 70 per cent, a person has to
stick $3,200 annually into a savings account. We are saying we have given people
enough room in their RRSPs that, if they wanted to, they could save more than
they need to reach the 70 per cent. In fact, instead of putting in $3,200
annually, they could put in $7,200.
The Deputy Chair: Is the tax-free account over and above the $7,200?
Mr. Williams: In addition, they could put $5,000 annually into their
Tax-Free Savings Accounts. That is why when you turn the page and look at unused
RRSP room, you realize that individuals at lower incomes tend to have a
significant amount of unused RRSP room.
The Deputy Chair: You have to have the savings to put to the side.
Mr. Williams: That is right.
Senator Ringuette: May I continue?
The Deputy Chair: For one or two minutes.
Senator Ringuette: I was going to slide 4, the third column, which
shows the share of earners with unused RRSP room.
Mr. Williams: That is right.
Senator Ringuette: The lower the earnings, the higher the share. I see
a problem right there. Our lowest earners have the least capability to have an
RRSP. Therefore, from my perspective, it is continuing the cycle of poverty —
and even greater poverty when people are in retirement age.
Understandably, 88 per cent of people earning less than $15,000 cannot put
any money aside for retirement. Let us say your average Canadian individual
would be between $25,000 and $35,000.
The Deputy Chair: Senator Ringuette, the average salary in Canada is
$44,000. Let us take the statistic that Statistics Canada is giving us.
Senator Ringuette: Is that the average individual salary or is it for
The Deputy Chair: It is an individual's salary.
Senator Ringuette: If you look at the $45,000 to $55,000 earning
bracket, 93 per cent of these earners have unused RRSP room. That is quite high.
Instead of going through the TFSA, would it not have been better to increase the
tax credit for RRSP contributions for lower-income Canadians, thereby trying to
boost the unused portion of the eligibility? Would you not have helped lower-
and middle-class Canadians to increase their retirement income, thereby also
reducing the probable requirement from the public plan, instead of boosting the
savings for the people who can save even more than the RRSP amount eligible
through the Income Tax Act? The issue and the crisis is that everyone fears
there will not be enough retirement savings for Canadians when it is time for
them to retire.
Mr. Williams: I have a couple of general remarks to make. When you
look at international comparisons, such as those done by the Organisation for
Economic Co-operation and Development, OECD — and they are contained within the
consultation paper that was released — you see that Canada fares fairly well in
addressing seniors' poverty issues.
I would also comment in particular around the RRSP system that the purpose of
the RRSP system is to recognize that during one's working life there is a need
to set aside a portion of that income to take into account that there will be a
period during which you are no longer working. The tax structure is designed to
ensure that as you set that income aside, you are not taxed on it until you need
There is a second question as to whether there is a need to provide tax
relief, particularly to low-income seniors, but that has less to do with the
RRSP system and more to do with the general tax system. In that regard, the
government has taken some action, for example in raising the age amount by
$1,000. That is a general age credit that is available to reduce taxes for
modest-income seniors. The government has done that twice. There are other
measures, such as increasing the pension income credit, which is an offset that
essentially offsets the taxes on the first amount of pension income from private
pensions that a senior would receive.
Those are more direct actions that have been taken in order to reduce the tax
burden on modest-income seniors, but they have occurred outside the RRSP system.
Senator Ringuette: I have not had an answer to my question.
The Deputy Chair: We will come back to it.
Senator Gerstein: Mr. Williams, thank you for your presentation. You
indicated that although you do not have hard data at the moment, you assume that
approximately 4 million Tax-Free Savings Accounts have been established since
the inception of the program.
Mr. Williams: That is what the initial indicators are.
Senator Gerstein: What is the number of RRSPs that Canadians hold
The Deputy Chair: If you want your colleague to join you, there is no
Mr. Williams: We can get back to you and provide some general
Senator Gerstein: How many Canadians make use of RRSPs? What, in your
view, is the universe of Canadians that could potentially use RRSPs? If those
two numbers could be provided to the committee, that would be appreciated.
Mr. Williams: Certainly.
Senator Gerstein: As I understand it, the cost to the federal treasury
of RRSPs is approximately $8.5 billion. There is approximately $13.1 billion of
lost tax revenues, of contributions that are made to RRSPs, minus approximately
$4.5 billion that is received in taxes from withdrawals.
As we see the population aging, is there an implication that there will be
fewer contributions and more withdrawals? Will we see a lowering of the net cost
to the federal treasury because of the demographic change?
Mr. Williams: That is an interesting question. Some academic studies
have been done on this issue. In principle, you would expect that as the
population ages and people begin withdrawing from RRSPs, we would see a
reduction or some sort of revenue from that. However, at the same time, most of
the estimates also show that the total value of assets held within RRSPs will
still remain relatively large. Because the population contributing to RRSPs will
grow over time with the natural growth of the country, we would not see a
situation where RRSPs would become a source of revenue.
Senator Gerstein: I am not suggesting that. As I understand, prior to
2007 you had to convert your RRSP over to a RRIF, a Registered Retirement Income
Fund, at age 69.
Mr. Williams: That is right.
Senator Gerstein: In Budget 2007, the government changed the rule,
moving it to age 71.
Mr. Williams: That is right.
Senator Gerstein: What are the implications of having increased that
level? Is there an area that could be explored where potentially you could
increase the age limit again? What kind of implications might that have for
Mr. Williams: We could give you costs on that. Again, this speaks to
the purpose of our current system and the fact that it is set up to allow people
to set aside income for use in retirement.
In terms of the age 71 RRIF conversion requirement, when you compare it to
the average retirement age of the population, which I think is around 62 years,
there is already a fairly substantial margin built into that. You would expect
that by age 71, the large majority of the population would have entered into
retirement. There would be a fiscal implication associated with it, but in terms
of the money you spend there, the question is whether that supports the
objective of the RRSP system, which is to allow people to save money for their
retirement, or whether that is simply allowing people to further defer taxes on
money, possibly for an inheritance.
Senator Moore: Thank you, Mr. Williams for being here. The information
we have been provided with regard to the Tax-Free Savings Account indicates that
24 per cent of surveyed Canadians had opened such an account. Is 24 per cent a
solid number? Do you know what the sample was?
Mr. Williams: No, I do not know the sample. However, when you look at
the efforts that financial institutions have put into promoting TFSAs, their
willingness to ensure they are available and the general interest in the TFSA,
the type of numbers you see here are consistent with what you would expect; it
has been a fairly popular program. The statistics are useful as a preliminary
indicator of that.
Senator Moore: At the same time, it was indicated that 71 per cent
were aware of the existence of such an account. Following from Senator
Ringuette's question, I am just thinking about who is able to participate. You
might be able to answer this, or perhaps you cannot.
A few years ago, the federal government loosened up the rules regarding the
amount of equity one had to put into a mortgage in order to qualify for a
mortgage to purchase a home. With the meltdown in the economy and people losing
their jobs, I am not sure how many mortgages would have been defaulted with
people unable to pay.
However, my real concern relates to a study that was released yesterday by
the Conference Board of Canada. Diana MacKay, the director of education and
health, is quoted:
The quality and cost of housing are major factors in the health of
Canadians. However, about one-fifth of Canadian households do not have the
resources to afford both good-quality homes and other health-enhancing
expenditures, such as nutritious food or access to recreational activities.
The food part bothers me.
In view of that statistic, how many of that 20 per cent have not been able to
afford to participate in RRSP programs or in the Tax-Free Savings Accounts? You
mentioned how many you think are able to, but how many are not?
Mr. Williams: You get a good indication of that from the second table
I showed. As well, let us take a look at the table here. I do not seem to have
Senator Moore: Page 5.
Mr. Williams: I cannot speak directly to your question regarding how
many people are able to afford a house in addition to —
Senator Moore: — participating in these various programs.
Mr. Williams: You see that, as expected, lower-income individuals tend
to have very low participation rates within RRSPs. In terms of the three
pillars, this is part of the idea that you have three complementary systems
through which we provide support for retirement income.
The RRSP system is really geared to middle- and upper-income individuals who
need to undertake a much higher level of private savings in order to ensure a
continuity of consumption in retirement. For lower-income individuals,
particularly, the public pension plans will replace a substantial portion of
However, this is a generalization, and there will be lower-income individuals
— and here you see just over 15 per cent in the lowest income bracket — who are
still saving. The advantage of something like a TFSA for these individuals is
that it will provide them better returns on their savings. That is why the TFSA
has been seen as a benefit to low- and modest-income individuals.
Senator Moore: It will provide savings for the future, for home
improvements and other things.
Is government considering at all bringing in regulations regarding the use of
the monies that Canadians put away in their Tax-Free Savings Accounts? It is
their after-tax dollars. Is there any consideration of things there that we
should be alerted to?
Mr. Williams: Not that I am aware of. I would hope that I would learn
Senator Moore: Thank you.
Senator Greene: With regard to the relatively low take-up rate of
RRSPs, especially in the lower income brackets, is there any data or information
on why that is so? One obvious reason is that people with lower incomes have
budgets that do not stretch very far, and it is hard to save. However, perhaps
people do not understand RRSPs. Perhaps they do not know about the program.
Perhaps they have not adopted a savings culture, or they think that maybe, when
they are older, someone else will take care of them. Perhaps they think the
government will change and a new set of rules will come into play when they are
older. Do you have any information on that?
Mr. Williams: I think you provided a fairly good canvass of some of
the possible areas. I do not have any specific information. As I said earlier,
it is reasonable that, to some extent, lower-income individuals would rely on a
public pension system to meet their savings needs in retirement. Mind you, at
the margin, I do not have any information on what would cause someone to decide
Senator Greene: Is the department doing any surveys in this regard?
Mr. Williams: We are not doing surveys that I am aware of, but we have
been looking at savings needs in support of the federal-provincial-territorial
process in supporting research in this area. I guess you would expect, though,
that people, wealthy or not, would want to try to keep —
Senator Greene: We have had the RRSP program for many decades. I would
have expected there would be some information somewhere collected over many
years regarding why people behave the way they do in deciding whether or not to
Mr. Williams: We have looked at the tax incentives associated with
RRSPs for lower-income individuals. It would suggest that they will face a
fairly high marginal tax rate due to the loss of income-tested benefits. In
addition, because they have fewer resources to save and possibly less need to
save, it is not surprising that we get the results we do in RRSP savings. In a
way, you have to look at the RRSP as at not being the principal vehicle through
which lower- income individuals will address their retirement income needs.
Senator Ringuette: How will they do so?
Mr. Williams: They will do so through the public pension arrangements.
Senator Ringuette: If you are earning between —
I am sorry, Senator Greene.
Senator Greene: I am fine.
Senator Ringuette: If you are earning $20,000 or $30,000, you have to
buy shelter, heating and food. You have no more to save.
On the other hand, if you are in the $150,000 or $200,000 bracket, then a
Tax-Free Savings Account is very welcome because you have you all this extra
money to save. You have put all the money you can in RRSPs to get all the income
tax credits that you can. Then you put the rest in the Tax-Free Savings Account.
You provide liquidity to the banks. It loses money for the government, which
could maybe provide better shelter or lower-cost shelter for Canadians.
Anyway, we are going in a vicious circle here. I am sorry.
Mr. Williams: That is okay.
The Deputy Chair: I would like to thank the witness. These two
particular measures will not enable us to solve all of Canadians' problems. It
is not an easy thing to save money when you are sitting on the poverty line, we
have to consider the region and the cost of living, which isn't the same all
across the country.
Thank you for your contribution. We have requested some additional
information that you can send to our clerk, if you would.
Mr. Williams: Yes.
The Deputy Chair: We are going to take a break for a few minutes so
that our next witness can join us.
(The committee is suspended.)
(The committee resumed.)
The Deputy Chair: We are now going to hear from Alexandre Laurin,
Senior Policy Analyst with the C.D. Howe Institute.
Mr. Laurin has written two articles on savings and retirement in Canada, one
entitled The Piggy Bank Index: Matching Canadians' Saving Rates to Their
Retirement Dreams, with David Dodge and Collin Bosby; and another entitled
Saver's Choice: Comparing the Marginal Effective Tax Burdens on RRSPS and TFSAS,
with Finn Poschmann.
Alexandre Laurin, Senior Policy Analyst, C.D. Howe Institute: Thank
you, Madam Deputy Chair, honourable senators.
I am pleased to be here. Thank you for this opportunity.
The C. D. Howe Institute has been working in the area of pension policy for a
few years. In 2007, we created a research program on pension policy. I will
touch on a few publications we published within that program to answer your
I will start with the extent to which Canadians are saving in TFSAs and
RRSPs. Statistics Canada recently — I think it was last week — published a study
on the rate of participation of working Canadians in private retirement savings
plans. The study shows that in any given year about 60 per cent to 65 per cent
of earners do not contribute to their RRSPs. That leaves only 35 per cent who
make an RRSP contribution.
On the face of it, this may look like a low rate of participation. However,
we must remember that about one third of lower-income earners can expect
government payments from OAS, CPP, GIS and other programs — provincial benefits
and GST benefits, for example — to replace at least 70 per cent of their gross
earnings once they retire. The need for them to save in an RRSP is much less.
We need to concentrate on the remaining 60 per cent — those for whom private
retirement savings will be necessary to maintain their standard of living in
retirement. Of that 60 per cent, about half are contributing to their RRSPs,
which is still low. We also must include those who contribute to registered
pension plans and other private pension plans. If we take into consideration all
these contributions, the proportion of people saving for retirement in private
savings plans jumps to about 82 per cent of that 60 per cent with whom we are
most concerned. That rate is much better.
It still leaves about 18 per cent of earners who should be saving privately
for their retirement but do not. That totals about 3 million Canadians. A
significant number of Canadians in any given year do not contribute to their
RRSP or to an RPP on a regular basis.
How much do Canadians contribute to their RRSPs on average, and will it be
sufficient to achieve their target standard of living in retirement? I recently
co-authored a study with David Dodge and Colin Busby. We calculated the fraction
of pre-retirement earnings that various individuals must save throughout their
working life to provide for reasonably adequate and secure retirement incomes.
We estimated that should people wish to retire at age 65 and replace 70 per
cent of their working income, which is the standard assumption, they would need
to save from 10 per cent to 21 per cent of their pre-tax earnings every year if
they save for 35 years, which is a normal working life for saving purposes. It
is lower than 20 per cent for higher- earning individuals and closer to 10 per
cent for lower-earning individuals.
However, the average actual savings rate of individuals is much lower. For
all earners under age 60, the annual RRSP savings rate is about 3 per cent of
earnings net of any RRSP withdrawals. If we add to that the contributions of
employees and employers to their registered pension plans, we reach an average
total savings rate of about 7 per cent.
We know many people do not make any contributions to their RRSPs. If we
exclude all of these, that would increase the savings rate. The average RRSP
savings rate of contributors to RRSPs only is about 7 per cent of earnings
annually. If we add to that contributions to registered pension plans by
employers and employees, the total savings rate jumps to about 8.5 per cent.
This is the savings rate for those who actually make contributions. However,
those are averages. We should not infer too much from them because they are
averages of a disparate population. A large portion makes low contributions;
others make high contributions. If you compare the actual savings rate to what
we calculated would be required for a comfortable retirement — that is, 10 per
cent to 21 per cent per year — we see that it is not enough.
There is another aspect to that. It may be that the 70 per cent replacement
rate is not the right assumption to use. Maybe that is not the right definition.
Maybe 70 per cent is too high, or too low. Interesting work has been done at
Statistics Canada. Instead of using some portion of gross earnings, Statistics
Canada's proxy for the adequate replacement rate was based on pre-retirement
consumption. Using a life path micro simulation model, Statistics Canada looked
at this question: How are individuals able to maintain their consumption level
once they go into retirement? It found out that currently 20 per cent, about one
in five recent retirees, retire with less than 75 per cent of their average
working life consumption. That is average working life, not final year. These
researchers considered 75 per cent of working life consumption to be a low
The Deputy Chair: You said 75 per cent of the average life. Are we
talking about a 35-year life span? That is, you created the salary over a period
of 35 years?
Mr. Laurin: It may have been 30 years. It was a large number of years.
The researchers also made projections. Looking into the future, they project
a steadily increasing proportion of new retirees achieving a low consumption
replacement level, rising from 20 per cent now to almost 45 per cent over the
next 40 years, driven mainly by what they project to be a decline in
occupational pension plans and public pensions.
Let us turn to TFSAs. I do not have any data on them. They are too new.
However, we can foresee that over the years there will be an increasing use of
TFSAs. Their gain in popularity will come at least in part to the detriment of
RRSPs. That is because, if one assumes no significant future change in taxes —
that is, tax rates and clawbacks on government benefits remain the same and no
real change to the tax transfer system; we must assume that — the overall tax
burden will likely be higher on RRSP income withdrawals at retirement than it
was on the RRSP contributions when savings where made. There will be a higher
tax burden in retirement on withdrawals from RRSPs than the effective tax rate
that was faced at the time of the RRSP contribution. That means there would be
more tax advantages to save on a tax prepaid basis such as TFSAs and RRSPs. That
is the case for many Canadians. This point is illustrated in a study that I
co-authored with Finn Poschmann, which was published recently. People will catch
up to this. The demand for TFSAs will likely increase over time as the tax
advantages of saving for retirement into a TFSA become more evident for more
What about the federal measures that might be taken to increase the use of
these savings vehicles? Up to now, policy-makers have been focusing on defined
benefit pension plans, and for good reason. A paper that was published before
the federal budget this year by Bill Robson, the president and CEO of the C.D.
Howe Institute, suggested a few ways in which savings in RRSPs or defined
contribution plans could be improved. His most prominent recommendation was to
provide more tax deferral room for defined contribution plans and RRSP savers,
who get less generous tax deferral room than most defined benefit participants
because of tax reduction around pension adjustments, and more flexibility in
time for using that room.
Also in the paper I co-authored with David Dodge and Colin Busby, some of the
savings rates we calculated especially for high-income earners exceeded the 8
per cent threshold for RRSPs. Basically, it would be illegal to save enough for
your retirement. For those who would prefer to retire early — that is, age 63 or
before age 65 — and would be saving over 33 years instead of 35 years and, as a
result, would have fewer years of saving, about 30 per cent of earners would
need to save more than 18 per cent. There is a need there to provide more tax
deferral rules. It is not to say that people will actually use that room, but it
would be good to have that room there if someone wanted to use it.
Also, governments wanting to strengthen incentives for private retirement
savings should be thinking of expanding opportunities to save on a tax-prepaid
basis, for example, TFSAs. One option would be to allow taxpayers more freedom
in allocating their tax-recognized saving room between their RRSPs and TFSAs.
There is a lot of unused room in RRSPs, so why not find a way so that you can
allocate some of the room you do not use in RRSPs into TFSAs and vice versa, or
marginally more savings room for TFSAs?
Other strategies would be to improve the legislative or regulatory
environment around RRSP and defined contribution savings to bring these plans on
a level playing field with defined benefit plans. There are many interesting
suggestions in this backgrounder by Bill Robson, including raising the age at
which people should convert their RRSP to a RRIF or Life Income Fund, LIF, from
71 to 73; making the pension credit available to people receiving income in
their RRIF or LIF regardless of age, as it is to recipients of annuities from
other pension plans; giving RRIF holders the same spousal income-splitting
opportunities as recipients of annuities from pension plans; alleviating the tax
disadvantages of group RRSPs by letting sponsors and/or participants deduct some
administrative expenses currently levied against plan assets from outside income
and by removing payroll levies from employer contributions.
For group RRSPs, the EI and CPP contributions cannot be deducted by the
employer; in defined benefit plans and defined contribution plans the employer
can. That is a disadvantage for group RRSP sponsors. It is the same for the
administrative expenses. There is no reason why these would be there.
Further changes could be made to the Income Tax Act. For example, currently
some impediments make it difficult to set up multi-employer plans. We should
remove those, and we should allow annuities within defined contribution plans,
especially towards retirement age.
The next question was the fiscal cost. That is, what will it cost the
government if there is an increased use of RRSPs?
There are two ways in which RRSPs impact tax revenues. The first is the
timing of income tax collection. The second is that the investment income
accumulating within the plan is sheltered from taxation.
The first effect has a tax-deferral effect. This is relatively easy to
quantify. I calculated an increase of one percentage point in the RRSP savings
rate, which is a sizeable increase because the savings rate is about 4 per cent.
It would reduce current-year federal revenues by about $1.4 billion. However,
that is not the real cost, because over time, all this loss will be recovered —
maybe not all of it, but a good part of it — when RRSP income is taxed upon
withdrawal. Actually, whether there is a cost or not will depend on the
effective tax rate on the savings into RRSPs and the withdrawals from RRSPs at
retirement. It is the tax rate differential that will drive whether there is a
The second thing that has a substantial effect on revenues is the tax-free
accumulation of investment income. Both TFSAs and RRSPs benefit from this tax
preference. We know that this cost is substantial. It costs the treasury
anywhere from $4.5 billion to $8.5 billion a year, depending on the investment
income that year. Yes, it costs a lot, but that is static. We should make one
nuance, which is that taxes on investment income are one of the least, if not
the least, economically efficient sources of government revenues because of
their negative effect on investment. We have to consider all behavioural effects
on the economy.
An economic study prepared by staff at the Department of Finance Canada in
2004 found that reducing personal capital income tax by $1 led to a welfare gain
of $1.30, thus leading to a welfare gain of 30 cent per dollar of tax reduction.
I am not saying that this is what is happening with what is not taxed in
RRSPs. That was a 2004 study, and many factors go into this. However, what we
should take out of this is that there is a cost in TFSAs and RRSPs in not taxing
investment. If the government needs to balance its budget, it is better off
taxing other sources of income. There is no need to tax this source of income.
The government could tax consumption, for example, which is much better and
would be less damaging to the economy.
The last question concerns the ways in which savings in these vehicles might
be protected. The problem here is that people saving for retirement in RRSPs are
effectively left on their own. We know that. They risk saving the wrong amounts,
paying too much in investment fees, and taking on too much risk or the wrong
kind of risk. This has been happening. A good example is the recent financial
meltdown. One way to increase the security of private retirement savings would
be to provide some guidance to investors and encourage the development of new
forms of occupational pension plans that are more robust than RRSPs to
individual investment and longevity risks and that will not collapse when the
economy turns sour.
As has been suggested in the study by Bill Robson, the solution may lie in
the development of hybrid plans, plans that sit between the traditional defined
contribution and defined benefit plans with different risk-sharing formulas
between employers and employees. Target benefit plans are a prime example.
Finally, we should make the regulatory environment conducive to the
development of such innovative plans. The regulatory changes suggested above
would definitely provide a good start. Hopefully, it would give more Canadians
access to cost-effective risk-pooling and funds management while respecting —
and this is an important point — the diversity of the different needs.
I would be happy now to answer any questions.
The Deputy Chair: You bring a perspective that is very useful to the
committee, particularly in terms of the mandate we have been given, protecting
money that has been set aside. It is not enough to set money aside. If the funds
are not available because they were not invested wisely, there will be problems.
Recently, a significant decline in pension funds has been observed. Rebuilding a
pension fund is not something you do quickly.
Senator Ringuette: I found your comments extremely interesting. You
cited a list of studies. Would it be possible to obtain a copy?
Mr. Laurin: Certainly. In fact, the clerk already has a copy.
The Deputy Chair: We are talking about the study by Mr. Robson?
Mr. Laurin: Yes.
Senator Ringuette: You referred to a new Statistics Canada study that
differs on the question of the 70 per cent of income based on consumption. Could
you give us more details on that model?
Mr. Laurin: Statistics Canada talks about a microsimulation model.
That model is very complicated to produce. A small group at Statistics Canada
worked on this project for several years. They relied on a database consisting
of several thousands of Canadian and other data.
Senator Ringuette: Such as consumer prices and trends?
Mr. Laurin: Trends, yes. In addition, you have to model the entire
Canadian tax system and several other aspects. They use a model that is
different from all the others. The advantage of that model is that it can be
used to look at the extent to which individuals are capable of replacing their
average level of consumption when they retire. That aspect is very important,
because it is the ultimate goal.
Senator Ringuette: You certainly piqued my curiosity with the results
of that analysis.
Mr. Laurin: You could invite them.
Senator Ringuette: I think we will have to invite them to come and
demonstrate their model for us.
You were in the room just now when we heard the previous witness?
Mr. Laurin: Yes.
Senator Ringuette: I am trying to do an analysis, with no computer,
based on the figures we were given. I see that first, a large number of
low-income Canadians, and somewhat fewer middle-income Canadians, after covering
their essential needs, do not have enough money to invest in a Registered
Retirement Savings Plan, or at least very few do. I put the question to the
previous witness. There is discussion of providing credits in an additional
savings system. The TFSA in question seems to be a last resort. Only Canadians
who have contributed the maximum to their Registered Retirement Savings Plan
will then be able to invest an additional $5,000 in a tax-free savings account.
I think that is the model: People will contribute the maximum amount they can
to Registered Retirement Savings Plan, and after that they will contribute up to
$5,000 or the maximum to a tax-free savings account. Is that what your model
Mr. Laurin: First, I have no idea how people have invested in their
TFSA up to now, how they break down by income.
Your question has two components. The first is whether people with low and
middle incomes have enough money left at the end of the month to save for their
retirement. That is an interesting question.
What we see, if we look at the documentation, is that incentives are
important and it is much easier for people who already have a pension plan. When
you have a situation where the employee invests one part and the employer also
invests part of the income in the pension plan, that is an incentive for people
to invest. But on the other hand, when we have to make the decision on our own,
at the end of the year, to invest in an RRSP, there is never enough left.
Senator Ringuette: That is what I am saying.
Mr. Laurin: I agree with you on that point, which has been raised
The second component of your question was comparing TFSAs and RRSPs: for most
low-income and middle- income people, it is more beneficial to invest in a TFSA
than an RRSP.
Senator Ringuette: Why?
Mr. Laurin: Because if we look at how the tax system works for people
who have pension income, for an individual living alone, they already have 50
cents taken out of the first taxable dollar. That is the clawback of the
Guaranteed Income Supplement. After that, more is added. What we see is that in
the first taxable $20,000 bracket, when you retire, tax rates are high, and
after that they flatten out.
But of course this is what makes the average rate, on retirement, very high
for the first taxable income withdrawn, and the more income you have, the lower
the average rate goes. It is the opposite of when you are working.
So what happens is that for people who have low or middle incomes, no matter
who does the calculations, and it is very complicated but it can be done, we see
that it is certainly more beneficial to invest in a TFSA.
Senator Ringuette: In terms of the Income Tax Act, for an individual,
for example, with an income of $40,000 a year, making the maximum contributions,
do you know what percentage of tax credits they receive, for the amount
invested, as compared to someone who earns double that, $80,000, and puts the
maximum in an RRSP?
Should we be looking at the Income Tax Act so that it provides more
incentives for low-income and middle-income people? Would that be something the
committee should look at?
Mr. Laurin: First, it is not a tax credit, it is just that the income
saved is not taxable. And second, the portion that looks like a tax credit is in
fact a refund of tax collected at the source. So it is not the same thing. If
someone paid no income tax at the source, there is no credit, nothing is
refunded when we file our tax return, it always depends on several factors. So
it is not a tax credit.
Should the government add an additional incentive so that people save for
retirement? That would simply amount to subsidizing the savings of low-income
people. Do we really want to do that? I have not considered that question.
Senator Ringuette: It is an area in which we are just starting our
research. There do not seem to have been any studies to see whether, in terms of
incentives, we should not help, from the information we were given just now.
These are middle-income and low-income people, and it seems they are in a
situation where they have extremely precarious income when they retire. It is
Mr. Laurin: Some low-income people will be in a better situation when
the time comes to retire. Perhaps because they do not pay any tax at all. Or
they receive a number of payments from the government, there are old age
security payments, including the Guaranteed Income Supplement; if we have worked
during our life, and the CPP. So it is cumulative. And then there are all the
other transfer payments, like the GST. The provinces have their own transfer
payments. So if we add it all up, in Ontario, for example, a person over 65
receives between $16,000 and $17,000 in transfer payments. If we add up all
these transfer payments, provincial and federal, if we assume that we want to
replace 70 per cent of income, starting with $17,000 is not bad. So low-income
Senator Ringuette: The poor stay poor. Do you have the tables with
you, as you were just saying, for Ontario and the various provinces?
Mr. Laurin: I have nothing prepared. For Ontario, I did do a graph on
the subject, so I remember the figure. It would still take some work to
calculate it for all the provinces. It should be similar just about everywhere.
The Deputy Chair: I had two little questions for clarification on your
presentation. A moment ago you said that tax- free savings accounts came to the
detriment of retirement savings accounts.
Why did you say "to the detriment of''? I would like you to explain how it
hurts, because that is how I interpreted it.
Mr. Laurin: Essentially what I meant is that while they do not
necessarily hurt, those are savings that would have gone into RRSPs that will be
going into the TFSA.
The Deputy Chair: What is the disadvantage in that?
Mr. Laurin: It is not a disadvantage, that is not the right term.
The Deputy Chair: A moment ago you said that if we raised the age
limit to 73 from 71, each additional year, $1.4 billion, that would mean $2.8
billion, more or less?
Mr. Laurin: I may have expressed myself badly. That is the tax cost
for increasing the savings rate by one percentage point. The rate of RRSP
The Deputy Chair: So it was not raising the age?
Mr. Laurin: No, it was not for age.
The Deputy Chair: In other words, if we raised — in RRSPs, I think it
is 18, now?
Mr. Laurin: No, the present savings rate. The savings rate is around 4
per cent of income. If we raised it to 5 per cent of income, it would cost about
$1.4 billion. It will not cost, because that money will be recovered in future,
but the initial cost would be about $1.4 billion.
The Deputy Chair: Just to complete the series of questions from
Senator Ringuette, I would like to know whether we could have, in some graduated
form, saying that $44,000 is the average wage, but from $20,000 to $44,000, we
will give people an incentive, you say they are treated better by the system,
except they are not treated very well in terms of income.
If, for every dollar set aside, instead of deducting from their income, we
deducted $1.50, for example, what you are saying is that if we increased, in
other words if they put aside $5,000, we would give them a $7,500 deduction, for
example. So at that point, say they earn $36,000 a year, so they pay tax, that
will take away several thousand dollars, so there would be less tax to pay.
We are trying to see the incentives. We do not have 56,000 ways, but that is
one way that could be considered. I'm asking you.
Mr. Laurin: It would amount to subsidizing saving by low-income
Senator Ringuette: But we subsidize saving by high-income people.
Mr. Laurin: I do not see exactly how we do, but that is not the
question. The question is whether we really want. . . it is paid for out of our
taxes, old age security, for example.
The Deputy Chair: The same thing.
Mr. Laurin: We can also give a bit more at the end. We do not have to
subsidize when someone saves money. And in any event, it is not really those
people who concern us most. The people, really, who have to save and are not
doing it are people who are not low-income.
The Deputy Chair: No? You have not said what category they are in.
Mr. Laurin: What I said is that there is nearly one third, 40 per
cent, who do not necessarily need to save to replace their consumption when they
retire. They do not necessarily need to save because old age security, CPP, et
cetera, will be sufficient. But for the others, it is mainly them, that is
nearly three million Canadians.
The Deputy Chair: So there is only 50 per cent who put in and the
other 50 per cent out of the 60, they set nothing aside. Is that it?
Mr. Laurin: There are 50 per cent, that is for RRSPs. However, you
would have to add the contributions to other pension plans. So the 50 per cent
goes up to 82 per cent.
Senator Moore: Mr. Laurin, you said that the goal of having 70 per
cent of earned income for retirement income might be too high or might be too
low and that it was based on pre-retirement consumption. When was that standard
set? What does consumption include? Should that be looked at?
Mr. Laurin: I do not know when it was accepted as a standard that
should be used. We know that the federal public service pension plan retirement
income rate is 70 per cent of gross earnings. It might come from that.
Senator Moore: Maybe you could find out when that was put in place and
let us know.
Based on pre-retirement consumption, many people I know are downsizing,
getting rid of things and consuming less. What is included in consumption?
Mr. Laurin: Now you are talking about the work of Statistics Canada.
Senator Moore: You do not get involved in these kinds of
Mr. Laurin: I know what they include, but that is not the 70 per cent.
Senator Moore: You said "based on pre-retirement consumption.''
Mr. Laurin: Yes. If you look at gross earnings, the rule of thumb is
about 70 per cent of gross earnings. Consumption occurs after taxes and depends
on how many dependents you have.
Senator Moore: Is it the amount of money that one spends on
Mr. Laurin: Yes, except taxes, dependents and a few other items that
Statistics Canada includes.
Senator Moore: That need reduces in retirement. I wonder, therefore,
why that 70 per cent standard should be looked at.
Mr. Laurin: The 70 per cent standard is a rule of thumb. For
high-income individuals, 70 per cent looks pretty high. Perhaps 50 per cent is
enough for their retirement, especially as someone ages. Someone with a lower
income would probably need 80 per cent to 90 per cent, so 70 per cent is not an
arbitrary standard. That 70 per cent is not consumption; it is earnings.
Senator Moore: Yes, it is pre-retirement earnings. We understand that.
Mr. Laurin: That is the standard we used in our publication with David
Dodge, because that standard is used most everywhere.
The Deputy Chair: Time is passing and it is already 6:15. First, I
want to thank you for your presentation, Mr. Laurin. I think my colleagues will
realize that we are only just beginning our work and we have quite a ways to go
yet. Thank you for your clarifications. In fact your colleague, Mr. Dodge, is
going to meet with us, so we will be able to flesh out the questions.
I think the main question we did not address today is the question of
demographics, and specifically the 70 per cent for people who are lower-income
when there will be fewer taxpayers. That may be one of the most agonizing
questions. I draw your attention to this because we did not address it today and
I think we will have to look at it, because at present we are assuming that
everything we have now will be able to stay, but we still have to make sure that
we are able to finance the portion that comes in part from the government.
(The committee adjourned.)