Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 4 - Evidence - April 14, 2010
OTTAWA, Wednesday, April 14, 2010
The Standing Senate Committee on Banking, Trade and Commerce met this day at 4:20 p.m. to study the extent to which Canadians are saving in Tax-Free Savings Accounts and registered retirement savings plans.
Senator Michael A. Meighen (Chair) in the chair.
[English]
The Chair: Honourable senators, I apologize for my late arrival.
[Translation]
This afternoon, we will continue our investigation of Canada's pension systems. The pillars of the Canadian pension system are the following: old age security, public pensions, private pensions and personal savings. We will concentrate on the tax advantages provided for personal savings intended for retirement.
According to our order of reference, we will study the extent to which Canadians resort to tax-free savings accounts and to registered retirement savings plans, the federal measures that could be taken to increase the use of these savings instruments as well as the costs, for taxation, of an increased use of these instruments and the possible means for ensuring the protection of these savings.
[English]
Today we are joined by representatives from Deloitte, BMO Financial Group and Mercer, as well as by Mr. Doug Andrews on video link appearing on his own behalf.
Senator Moore: Where is he seated?
The Chair: He is in Toronto.
For the benefit of those watching and particularly Mr. Dunn and Mr. Andrews, let me introduce the senators. We have Senator Mac Harb from Ontario; Senator Céline Hervieux-Payette, the deputy chair of the committee, from Quebec; Senator Irving Gerstein from Ontario; Senator Stephen Greene from Nova Scotia; Senator Fabian Manning from Newfoundland and Labrador; Senator Percy Mockler from New Brunswick; Senator Vim Kochhar from Ontario; Senator Paul Massicotte from Quebec; Senator Pierrette Ringuette from New Brunswick; and Senator Wilfred Moore from Nova Scotia.
Mr. Dunn will proceed and Mr. Andrews can be the clean-up hitter.
[Translation]
Andrew Dunn, Managing Partner, Tax, Deloitte: Mr. Chair, I am glad to be here with you today. I am Andrew Dunn and I am the National Director for Taxes at Deloitte.
[English]
I am honoured to be here. I am the Managing Partner for Tax of Deloitte, the largest tax practice in the country. We believe it is our responsibility to participate in the debate about tax policy in Canada. We believe that tax policy affects Canada's well-being and future prospects far beyond its direct fiscal impact by creating behavioural incentives and disincentives. Those behavioural incentives and disincentives are sometimes in absolute terms and sometimes in relative terms when compared to tax attributes of tax regimes in our major trading partners.
We recognize that the subject today is saving for retirement. Initially, my remarks may seem to go in another direction, because I will give some context for the recommendations that follow.
We see the value of saving for retirement. We believe it is a key element of the success of our tax system. It not only reduces the burden for individuals in saving for their own retirement; it reduces the burden on the safety net for those who do not save enough for their retirement. That has multiplier effects on the economy in everything from health care to retail activity.
Similarly, we see that individuals who will retire over the near term are likely to see fewer pension benefit dollars than retirees of the recent past. For those reasons, we think this is a very important topic.
I will cover three categories in my broader comments. We believe that the RRSP system is fundamentally sound, but there are ways to make it more effective, more attractive to immigrants to Canada and, particularly, better at allowing non-working spouses to work. I will begin with broad comments about the RRSP regime and work my way to more specific recommendations. I promise not to give actual statutory language, but I will go from the broad to the general.
The Chair: Did you say "allowing non-working spouses to participate"?
Mr. Dunn: That is correct.
The Chair: I thought he said "work." Please proceed.
Mr. Dunn: That is all I wanted to say in the introduction. I am happy to elaborate on some recommendations when you give me a little more time.
The Chair: In terms of questions?
Mr. Dunn: Yes, in terms of questions.
The Chair: If you have an opening statement, please proceed, but be mindful of the time and the fact that we have another witness as well.
Mr. Dunn: Let me start with some context. I will begin quickly with an economic model called the Laffer Curve. Under this economic model, raising tax rates does not necessarily increase government revenue. Governments learned that in spades during the 1930s when many governments around the world increased duty rates for goods crossing borders and almost cut off cross-border trade.
If you think about it, a corollary of the Laffer Curve model is really a "carrot" in terms of encouraging behaviour. In effect, lowering rates can sometimes increase government revenue. We believe that is particularly true for a small open economy like Canada's. As we look at the future and globalization and demographic trends in Canada, it is important for Canada to think of this model when looking at its personal tax system.
In general, in terms of the Canadian tax system, we believe that Canada has made great strides in reducing the tax rate on business income, both federally and provincially, and by setting out a multi-course plan to reach lower corporate tax rates than its major trading partners. Hand in hand with this are changes to the tax regime on withholding rates and on simplifying tax reporting for non-resident ownership of Canadian equities. These are all designed to make it more attractive to do business in Canada.
A friendly business tax regime is a good place to start, but it is not enough. I turn next to personal tax.
Roughly half of Canada's tax revenue comes from personal tax. Our top marginal rates are extremely high compared to the U.S. and many of our other major trading partners. Not only that, but our top marginal rates kick in at much lower incomes than in the case of our major trading partners.
For example, the top marginal rate for a resident of Ontario kicks in at $120,000. You come close to that top marginal rate at $82,000. In the U.S., a resident, a single filer or a married joint filer, does not face the top marginal rate until income levels of $374,000, and that top rate is much lower.
I would also point out that at Deloitte, the fastest growing service line we have as a practice is moving individuals from country to country. With Canada facing an aging population, we need to think about ways of attracting the most productive individuals in the global economy to work and reside in Canada.
I will reserve most of my comments for the RRSP rules. We believe that the Tax Free Savings Account (TFSA) rules are generally more generous than those affecting RRSPs, at least for every dollar of investment. That is true the longer that the savings are allowed to accumulate.
Having said that, we believe that the real way to get a substantial increase to the savings rate is to focus on making some targeted changes to the RRSP regime. If you do that, you do not need to do much with the TFSA regime. In fact, you can question whether you need it.
We believe that a tax system should be progressive, with the highest burden on those who are most able to pay. When you consider that in Canada the top marginal rates kick in at relatively low income levels and that credits are phased out at even lower income levels, individuals can face high marginal rates at modest levels of income.
We view the concept of a lifetime income measure as the best way to measure equity in determining the burden of who should pay more under a tax system. A corollary to that principle, for the most part, is lower personal tax rates, offset by a higher tax on consumption — and particularly, higher GST rates.
We look to the RRSP rules in general as an extremely powerful tool to shift income from one year to another. In effect, tax-assisted retirement savings are the polar opposite of a tax on consumption. So, I have a couple of comments on RRSPs to start off.
If you look upon RRSPs as the primary tool for Canadians to access a lifetime averaging of earnings or a lifetime earnings approach to their savings pattern, we agree with the C.D. Howe Institute and others who have advocated substantially higher annual contribution limits for RRSPs, while at the same time retaining lifetime carry-forward of unused contributions.
We do like the concept of carry-forward of unused contributions, and we also acknowledge that many Canadians have not taken advantage of the opportunity to use all of their contribution room. Having said that, we see bifurcation of that average. We see many Canadians maxing out on their RRSP contributions, whereas others contribute far less.
Particularly again, because high rates kick in at relatively low levels of income, we would like to see an increase in both the total amount of contribution room and in the percentage rate.
This would also be attractive for immigrants to Canada, who have no carry-forward of unused room from prior years, to be able to have a higher rate of contribution accumulating from their current earnings in order to use the RRSP regime to catch up on any retirement savings.
The same is true for non-working spouses. They have gaps in their earnings years and you can make up for that by having higher accumulation of RRSP room from the years in which they are earning income.
In order of magnitude, we would like to see an increase from 18 per cent to 25 or even 30 per cent.
The next concept is that today, all RRSP withdrawals are included in income at the same rate. That is regardless of whether the underlying source of growth in the savings is as a result of interest income, dividends or capital gains. In the past, RRSPs were subject to foreign property limits, and the foreign property limits inversely were designed to encourage investment in Canadian capital markets.
While we think the removal of the foreign property rules was attractive, we do see value in supporting Canadian capital markets. One way to do that, and to take advantage of the fact that over time equities tend to outperform fixed income securities, would be to have the accumulation of tax characteristics inside an RRSP be gathered up and allowed to be reflected on the withdrawal of amounts from the RRSP. In other words, this would preserve the underlying character of what caused the income to accumulate.
There are many examples of that in the tax world, such as how capital dividend accounts are treated in the corporate world. In effect, in the same way that income is reported on a T4 today, dividend tax credits and the untaxed portion of capital gains can be streamed out of an RRSP at the time that RRSP withdrawals are made.
The Chair: I can only speak for the deputy chair and myself, but we did not exactly follow that. Could you go back and perhaps give an example?
Mr. Dunn: Sure. If there was $1,000 in an RRSP and that $1,000 was invested only in preferred shares, and over time that $1,000 turned into $10,000, all from dividend reinvestment, the full $9,000 of earnings in that $10,000 is dividends. However, dividends are subject to a special tax regime if you receive them directly, you have a dividend tax credit fundamentally relating to the underlying corporate tax paid by the issuer of the stock on which the dividends were paid.
The Chair: You want to treat what is going on within an RRSP the same way you treat what is going on outside, is that it?
Mr. Dunn: Exactly. We would describe the characteristics as a flow-through of whatever the underlying source of income is but only at the time of the withdrawal from the RRSP. All those characteristics are simply held in suspense until such time as there is a withdrawal made from the RRSP and then those characteristics flow out. The purpose of that is to bias the investor to more often choose to invest in equities than fixed income.
Senator Hervieux-Payette: When the stock goes down, of course, they have a loss. There is no problem with their taxes.
Mr. Dunn: Right. In effect, they would get an asymmetrical result in that circumstance. If you take the same $1,000, put it into an RRSP and it eroded completely, there is no withdrawal, so there is no income inclusion. There are no funds left in the RRSP at that point for income inclusion.
The Chair: Is there a tax loss?
Mr. Dunn: We would not have the flow-through of the capital loss. Today, for example, a capital loss is not deductible except to the extent of historical capital gains. We would treat it in that same way.
For simplicity, because people can have more than one RRSP, we would envision that each RRSP would be dealt with as a stand-alone entity for the accumulation of these amounts. That makes it much easier for an individual to track. In effect, it allows the financial institution that is the sponsor of the RRSP to be able to keep track of all those characteristics and report them back to the individual and to Revenue Canada at the time of distribution.
In the interests of time, I will move into mobility related adjustments.
First, when someone moves to Canada, they have no RRSP contribution room in their first year because RRSP contribution room is based on earned income in the prior year and a new Canadian has no income earned in Canada in that year.
We would suggest that new Canadians be given a first-year initial transitional RRSP contribution room. They would be granted a full year's contribution room regardless of their underlying income in that prior year. The purpose would be to begin planning and saving for retirement while a Canadian resident, and we view that as both an important conceptual signal to new Canadians and a practical response to what frequently comes up when we talk to new immigrants to Canada about how RRSP systems work.
The second category related to immigrants is foreign pension plans. A new Canadian or any participant in a foreign pension plan, generally speaking, is subject to a pension adjustment. Any participant in any pension plan has a pension adjustment which reduces the amount of RRSP room that they have based on the benefits that they have through their pension adjustment.
A foreign pension is subject to a different calculation than a Canadian pension plan. The main reason for that is that there is enough information is within the Canadian system to calculate the exact pension adjustment appropriate for a Canadian resident, using a Canadian pension plan. Often there is not enough information for a foreign pension plan to make that same calculation. An estimate is done that tends to deny the opportunity to make a substantial RRSP contribution for members of a foreign pension plan. We suggest that a foreign pension plan have the same right to calculate an exact pension adjustment, using the same methodology as for a Canadian pension plan.
The other change relating to foreign pension plans is to soften up a three-year exemption. New immigrants to Canada are entitled to avoid current taxation on a foreign pension plan for the first three years they are in Canada. After that, there is a series of anti-avoidance rules called the "salary deferral arrangement rules," that sometimes cause the current taxation of foreign pension plan savings, and we would simply say that that three-year exemption period should be extended. Alternatively, the salary deferral arrangements should be clarified to make it clear that foreign pension plans would not be caught by these rules that cause current taxation of pension plan savings.
Regarding spousal contributions, one working spouse can contribute either to their own RRSP or their spouse's RRSP, and the contribution room that the working spouse has is unaffected by whether the spouse has their own contribution room. For example, if one working spouse has $20,000 of room, they can contribute all or some portion of that $20,000 to their own RRSP or to their spouse's RRSP, in total up to the $20,000.
We would suggest that we provide additional contribution room for a non-working spouse. There could be additional contribution room for non-working spouses. Alternatively, the system which is now based on earned income, to a maximum of 18 per cent of employment income, could be changed to be based on a broader assortment of taxable income. A base of all taxable income is a logical extension of that thinking. This would also increase the amount of contributions for non-working spouses.
In summary, our view is that global competitiveness is a policy priority, and it will become increasingly so. We should not be afraid of having lower personal tax rates the same way that we were not afraid of having lower business tax rates because, over time, they will result in more revenue.
RRSPs are a critical policy tool, but we would look at them as an element of the principle of life-time earnings and use that as our driver of figuring out what is an equitable RRSP policy. As a corollary to that, RRSP limits and the rate at which earnings can be set aside in an RRSP should both be higher.
Dividends and capital gains should retain their status on withdrawal.
Immigrants should be considered in establishing a fresh start first year into the country, and there should be more tolerance for foreign pension plans.
Non-working spouses need additional attention.
With respect to TFSAs, under the current regime they accumulate at $5,000 a year. If there is a desire to keep the TFSA system and not make radical changes to the RRSP rules, we would suggest considering a more dramatic increase to the amount of savings that can be set aside for tax-free savings accounts for older Canadians. For example Canadians, 55 and older, close to retirement, would be eligible to set aside a much larger amount than the $5,000 per year accumulation. Set that number at $100,000 currently and allow it to catch up over time.
The Chair: I appreciate the way in which you summarized your testimony and helped us out in terms of time constraints.
To be polite to our witness, we should allow our other witness, Mr. Andrews, to give his evidence, and then we will have questions.
Mr. Andrews, thank you for being with us. You may proceed.
Doug Andrews, Fellow of the Canadian Institute of Actuaries and Chartered Financial Analyst, as an individual: It is an honour and a privilege to be invited to address this committee. I am Doug Andrews, an actuary and senior lecturer at the University of Southampton. I have done research and made many presentations regarding the impact of an aging population on Canada's social programs and the need for retirement savings.
Because I have been asked to limit my formal remarks to five minutes, I will talk to only five points, but will be happy to have a broader discussion as we go along.
The five points are as follows: first, in general, Canadians are not saving sufficiently for retirement, and initiatives to facilitate increased retirement savings are appropriate; second, TFSAs and RRSPs have different characteristics and should both be available to Canadians for retirement savings; third, greater flexibility should be provided in the rules governing TFSAs and RSPs to permit significant lump sum contributions; fourth, the marketplace provides Canadians with a sufficiently large range of administrative and investment options, but generally the fees charged are excessive and that requires attention; and fifth, the most significant component of many Canadians' retirement savings is the family home, and solutions need to be found to release the equity in the home over the retirement period in a manner that facilitates retirement in place.
I will address each of those in turn.
In general, Canadians are not saving sufficiently for retirement, and initiatives to facilitate increased retirement savings are appropriate. A June 2007 report entitled Planning for Retirement: Are Canadians Saving Enough?, produced by the Canadian Institute of Actuaries in collaboration with the University of Waterloo, concluded that two thirds of Canadian households expecting to retire in 2030 are not saving at levels required to meet necessary living expenses. Other researchers have drawn similar conclusions. This CIA report also observed that saving through an RRSP plays an important role but is unlikely to fill the gap.
In a 2002 paper presented to the International Congress of Actuaries held in Mexico, I proposed the introduction of tax-free savings plans, as a way for Canadians to save to pay for the increasing health care expenses that I anticipate they will face in the next 30 years. Laudably, TFSAs were launched in 2009. I still believe strongly that with an aging population, Canadians will be asked to pay for more of their own care expenses than they are today, and the TFSA is an ideal vehicle to use for saving for such future expenses.
Expanding opportunities for Canadians to save for retirement is appropriate.
Second, TFSAs and RRSPs have different characteristics and should both be available to Canadians for retirement savings. Depending on the marginal tax rates at the time of contributing to a TFSA or RRSP, compared to the marginal tax rates at the time of making withdrawals, one vehicle may be more advantageous to the contributor than the other. Moreover, TFSAs permit the contributor to contribute again in respect of any withdrawals made, but such flexibility is not available to contributors to an RRSP. Consequently, both vehicles should be available.
Third, greater flexibility should be provided in the rules governing TFSAs and RRSPs to permit significant lump sum contributions. Neither vehicle provides sufficient flexibility. I am sure you are aware Canadians have not contributed the maximum permitted to an RRSP. This statistic should not be interpreted to mean that Canadian do not think they need to save for retirement or do not consider the RRSP to be an appropriate vehicle.
I believe the statistic is more an indication that most Canadians do not have sufficient disposable income to be able to contribute the maximum permitted. That being said, Canadians may experience certain events that would provide them with funds for saving, such as sale of a house, receipt of an inheritance or a severance allowance. On receipt of these significant lump sums, Canadians might make significant contributions to an RRSP if permitted.
I recommend there be a lifetime as opposed to an annual limit for RRSP contributions. For example, there might be a lifetime limit of $500,000 per taxpayer. Alternatively, if it is thought desirable to continue to relate the limit to earned income, there might be a contribution limit of $300,000 plus six per cent of annual earnings to a maximum annual limit of $7,000. Similarly, consideration should be given to having a limit of $50,000 for TFSAs rather than requiring Canadians to transition to this limit over a period of years.
Limits expressed as described would recognize that many Canadians are more likely to save for retirement using lump sums that might be viewed as unanticipated windfalls rather than as part of a disciplined routine.
Fourth, the marketplace provides Canadians with a sufficiently large range of administrative investment options, but, generally, the fees charged are excessive and this area requires attention. Although it is not the focus of your present inquiry, how to strengthen the retirement system to achieve higher incomes in retirement is a major concern of governments and all parties.
Consideration is begin given to expanding the Canada Pension Plan either on a mandatory basis or as a vehicle to accept additional voluntary contributions. I do not support either of these proposals. I believe the private sector currently provides a wide range of savings vehicles offering adequate investment choice that are capably administered to those who have funds available to save for retirement.
If I were to expand a social insurance program on a mandatory basis, I would expand Old Age Security. OAS is not based on earnings or employment history as is CPP. It is a demogrant. Moreover, it is clawed back from taxpayers who have substantial additional income. It is more likely to place retirement money in the hands of those who may need it because they have had periods of unemployment or low earnings.
Although the marketplace provides a wide range of vehicles offering adequate investment choice that are capably administered, generally, the fees charged are excessive. Greater scrutiny of fees charged on RRSPs and TPSPs, especially management expense ratios, is recommended. One might reasonably wonder whether the public is well served when management expense ratios exceed one per cent — and most do.
I am not an expert on how to regulate the fees in private sector savings plans. I appreciate that any form of regulation may result in undesirable consequences. Nonetheless, I urge you to consider how fees, particularly management expense ratios, can be reduced in TFSAs and RRSPs.
Few Canadians have the investment expertise and discipline to generate significant investment returns over time. Even fewer Canadians have sufficient funds and knowledge to negotiate lower fees. The fees charged represent a substantial portion of the expected investment return. Canadians need your help in obtaining lower fees and thus having a greater expectation of higher retirement savings.
Finally, the most significant component of many Canadians' retirement savings is the family home. Solutions need to be found to release the equity in the home over the retirement period in a manner that facilitates retirement in place. The 2007 CIA report to which I referred earlier quoted a Statistics Canada survey that stated that 69.2 per cent of Canadians aged 65 and older in 2005 owned a home; and that 88 per cent of those homeowners did not have a mortgage. The median value of the principle residence for homeowners was $163,800. As such, a significant part of the retirement savings of many Canadians is their home.
In a paper presented to the International Congress of Actuaries in South Africa in March of this year, I discussed how to make the housing asset a more viable retirement asset. To do so would enable the seniors to remain living in the home for as long as they wished or were able and to use the equity in the home. There are products available to facilitate equity release, but as I stated in my paper, they are not reasonably priced. I proposed that a body such as the Canada Pension Plan Investment Board (CPPIB), in combination with Canada Housing and Mortgage Corporation, develop an investment product that securitizes residential reverse mortgages and other real estate into an investment that would appeal to pension plans.
Perhaps, you think I am digressing from the scope of your inquiry. Let me re-establish the connection. There is a need to increase saving for retirement. A main component of many Canadians' retirement savings is the value of their principal residence. If this committee could find a way to use the TFSA or the RRSP to make the housing asset a viable retirement savings asset, it would be a substantial development with respect to retirement savings.
The 2007 CIA report suggested making mortgage interest paid on a principle residence tax deductible. Here is another idea for your consideration and to stimulate your thinking in this regard. There might be a provision similar to the lifelong learning plan, which permitted those 60 years or older to take a reverse mortgage on their principle residence in an amount up to $100,000 from their RRSP. If the home were sold before age 71, then the mortgage would have to be repaid. However, if the home were sold after age 71, the mortgage need not be repaid. The reverse mortgage would be permitted to be written at a zero per cent interest rate. Hence, the tax system would be used to facilitate seniors accessing some of the equity in their homes while they continued to age in place.
I am certain there may be other ideas that could be produced particularly if you make this one of the areas of interest in your investigations. I believe it is important to expand the retirement savings through TPSAs and RRSPs. I hope these remarks provide ideas for your consideration.
The Chair: Thank you, Mr. Andrews. I am sure your remarks and Mr. Dunn's remarks will stimulate a lot of questions.
All members will have an opportunity to ask questions. We will have a transcript of both your remarks that will be distributed. You have both done exactly what we hoped in addressing our mandate and to provide ideas for us to consider in due course.
Honourable senators, please address your question to either witness or both.
Senator Massicotte: Let me tell you my understanding of the issue following the appearance of the Department of Finance two weeks ago to give us a summary of the issue. I say this to ensure we agree on the starting point.
We were told that overall, the Canadian population has no serious issue with respect to a lack of pension monies. The average person has a significant percentage of his years' income available. According to OECD data, we are the third best off retirees in the world. It is not an issue for the overall population.
In the details, middle to upper income people were stretched to get to 70 per cent of replacement income. You can make the argument that it should be 50 per cent. That was the only area where there seemed to be a problem of getting adequate replacement income. There are many schemes and details to deliver more money to these people. Coming back to the issue, it seems to me that is where the problem lies. Lower income individuals have no problem given the pension programs in our country.
If you look at their publicly-available tables they gave us on unused RRSP limits, you will note that a very small percentage of those people who need higher savings are actually using the existing RRSP limit.
I am sure some people are hitting the limit; I am sure you have clients that do. However, if you look at the big picture, where there are significant problems is not the amount of the limit, it is that people are not using RRSP or the other savings account provisions.
The impression I had was the structure in place is perhaps adequate, but there seems to be a cultural problem where people are not saving enough. Meanwhile, if you look at the study by David Dodge and the C.D. Howe Institute, what they basically say is that if you compare the average saver to a government pension plan, which was the comparable, most people in the middle and upper income range are falling far short of that. That was their point of comparison, saying it is unfair these middle-upper people can never even get to be as well off as the government pension employee would have.
That seems to be where the problem lies. I appreciate that if you have a lifetime limit on RRSPs, it would avoid those one-time lump gains of selling a home or something. You can put it aside. However, how do we get there?
I think only 20 per cent of the people with a significant income even contribute to an RRSP. How do you get those middle to upper income people, who seem to have the income available to them, to save more? That is where the problem lies.
Do we agree with what the Department of Finance told us? Is my analysis correct as to where the problem lies? How do we solve that particular problem as opposed to every Canadian taxpayer's problems?
Mr. Andrews: I cannot comment on whether your summary is accurate as to what the Department of Finance told you, but I can comment on what you have said. I have seen similar data from the OECD, and I think you are absolutely right that for the lowest income level, our transfer systems and savings systems are providing higher replacement ratios than most other countries. I think we are doing a good job in protecting those who are at the very low level. Consequently, in terms of retirement savings, we are looking at the middle and upper retirement savers.
With respect to the unused RRSP limits, as I pointed out, I think most Canadians on an ongoing basis do not have the disposable income and perhaps also the discipline to save on an annual basis. However, I think they may come into times when they have additional amounts of savings available — the sale of a house, for example, or a severance allowance or an inheritance. If you had a lifetime limit, it would allow them to save at that time.
The other point is the high fees charged on savings accounts. In all of the analysis I have seen, whether by the OECD or by Finance Canada, they are assuming investment returns net of fees that I think are unrealistic. Canadians are not achieving those kinds of investment returns net of fees. It is important that attention be paid to the fees, because unless it is, the kinds of savings that are talked about in the Department of Finance's report and other reports will just not be there for retirement.
I have one other caution, because I have seen a report by Dr. Mintz, which I think is the one that the Department of Finance referred to. This talks about retirement income at a particular point in time. It also talks about the income that people are receiving. We have an aging population and people, particularly people in couples, tend to consume at the level that they think they need at that point in time, I am very concerned that when the first spouse dies, which is typically the male, the female spouse will have less adequate income and will have to take a substantially reduced standard of living.
While the Department of Finance report says females typically live three years longer than males, typically those female spouses are five or so years younger to start with. Therefore, they may live another 10 years beyond the male, living at a much lower level of income. I would be asking some serious questions about the Finance Canada report in terms of the adequacy of the retirement income that is being measured.
Mr. Dunn: If I could make two supplementary comments, the category of middle to upper income Canadians is the right area of focus. I also would say that looking forward, and Mr. Andrews alluded to this as well, the two categories of Canadians that have the most acute issues when you sort through the details are immigrants to Canada and non- working spouses.
If you play this out over time, looking at international competitiveness, today it is an opportunity. It is not yet a problem. However, over time, unaddressed, it will become a problem.
Senator Massicotte: The lifetime limits being proposed have significant merits. We will get to that. However, can I make a comment to the issue of culture or not saving enough?
The argument you are making is that they do not have enough disposable income. No one has enough disposable income. I note that China, which has much lower per capita income, has a much higher savings than we do in Canada, and there are many examples of that in the world. It seems to be more of a cultural problem, perhaps our habit of using credit cards and spending a lot of money. We are relatively well off as a country and yet we are having an acute problem with savings, which is not occurring in other countries.
I totally agree with the observation that the average fee in many accounts is far too high, but I suggest that it is more an issue of education. Many empirical studies exist showing that where index fees are much cheaper and provide much higher return, investors consistently are using these expensive savings accounts. It seems to be more education than a government law or policy. Would you agree with that?
Mr. Andrews: I teach at a university, so I am a strong believer in education. However, having observed the financial markets, I do not think that individual investors have much ability to negotiate lower fees.
If the market truly were an open and free market that was working effectively, those fees would have come down. I think the forces on the other side keeping the fees high are too strong a barrier to overcome with education alone.
Senator Harb: The presentations were brilliant by both of you. There are so many questions to ask and so little time to ask them, so I will try to limit my questions to a specific three.
First, obviously the government is interested in looking at this issue of pensions because it believes, and we believe collectively, that there is a problem. Can either of you tell me how much money we have in RRSPs presently in the pot, for Canadians in total? In 2007, it was $33 billion for one year. Do we know in total how much Canadians have?
Mr. Dunn: I am sure we do, but I do not offhand.
Mr. Andrews: I do not know off the top of my head.
Senator Harb: Frankly, if we do not know how much we have now, probably we have no clue about the impact of the latest economic crisis on RRSPs. How much money did our RRSPs lose, in terms of Canadians? We do not know, do we?
Senator Massicotte: There was $30 billion of RRSP money at the end of 2007.
Senator Harb: For one year, not the total.
Senator Massicotte: No, $33 billion in total accumulated.
Senator Harb: Collectively? That is one year.
Senator Massicotte: That is the paper we have here.
The Chair: No, in 2007, RRSPs. That is one year.
Senator Harb: To be honest with you, unless we know the answer — and I asked the gentleman from the Department of Finance the same questions, and he did not know either — we do not know the magnitude of the problem.
If, as Senator Massicotte said, there was $33 billion in 2007 and the RRSP was established back in the late 1950s, approximately 40 years ago. If we were take it on the average and say we have close to $1.5 trillion or $2 trillion that is sitting somewhere, a good chunk of it now with baby boomers, it will become taxable. Therefore, quite a bit of money will come into the government coffers at some point with baby boomers nearing retirement age, when they will have to pay tax on that.
The reason I am raising this is to go back to your point, Mr. Dunn. You spoke quite a bit about the flow-through. While there is a lot of merit to the idea, I think it is quite complex, especially with allowing Canadians to invest in foreign funds.
Have you had a chance to look at the possibilities, for example, of creating some sort of an average rate rather than income tax on what you earn? If we turn around and say we want to take an average, have you done any studies?
Mr. Dunn: I have not done any studies on that front. I am not sure it would achieve the behavioural effect we would be looking for.
One of the reasons we suggested simply looking at it RRSP account by RRSP account is, at that point, it becomes a relatively simple exercise to track just the two categories of Canadian dividends and capital gains. There is a precedent for that. That is how trusts pass through income to preserve that status. Trusts have an additional category of foreign income to allow foreign tax credits to flow through.
In the case of RRSPs, for most purposes, the income is exempt earned inside the RRSP, so we would not view that as an important category to preserve the status, only dividends and capital gains. If you have it account by account, the financial institution can keep track of it. It is a complex exercise over time, but we believe the tools exist today so that it would not be particularly difficult or onerous for the financial institution.
Senator Ringuette: Mr. Andrews, I appreciate the depth of the comments that you made in regard to suggesting something concrete to us, such as the lifetime limit. If you have further elements or research on that particular issue, I, for one, would certainly welcome more information on that.
With regard to the high fees for RRSPs, I certainly agree with you. May I remind you that for two years I have been tackling the fees on credit card issues and have not got any result. I am not about to take on the issue of high fees on RRSPs.
I would like to have more of your research with regard to the reverse mortgage issue and what CMHC could be doing. For some time, I have been trying to have this committee look into this issue, and maybe the CMHC involvement in securing these reverse mortgages could be an interesting element of retirement income.
The Chair: Do you have any comments, Mr. Andrews?
Mr. Andrews: With respect to the lifetime limit, I am advocating that there be one, but I know that different parties have advocated different lifetime limits, so I would suggest that you look at different proposals in that area. Having a lifetime limit would facilitate making contributions when people have money available.
With respect to higher fees, you do not have to take it on today, but I would encourage you to keep it on the agenda.
With respect to the reverse mortgage issue, I saw CMHC playing a role in providing the guarantee. In a reverse mortgage there is something called a "negative-equity guarantee," and that is where the individual lives beyond all of the equity in his or her house, and so at the time that the house is sold, there is not enough equity to pay off the total loan. That negative-equity guarantee has been priced in the marketplace to have a high value. A number of studies have been done by the Institute of Actuaries in the U.K., by individual researchers at the University of Waterloo and a number of others that have indicated that the pricing of those non-equity or negative-equity guarantees is too high.
In the United States, the government agency provides that no-equity guarantee, and the rates are lower. I think that CMHC could play a role. If they could secure the negative-equity guarantee, the mortgages could be offered at more acceptable rates. The proposal I made of having the reverse mortgage issued from the RRSP would allow a 0 per cent interest rate on that particular one, which indeed would be favourable to the individual. In combination, having the no- equity guarantee and the low interest rates, you do have a viable product in the reverse mortgage.
Does that clarify some of those comments?
Senator Ringuette: Yes, and we will try to get the further research that you have indicated.
Mr. Andrews: I will send you my printed remarks, and I can make reference to the papers as well.
The Chair: That would be helpful, Mr. Andrews, if you could point us to the research at the University of Waterloo or elsewhere that you alluded to.
Senator Ringuette: Mr. Dunn, we have received statistics from the Department of Finance. If we look at them closely, we see that it is the middle-income Canadians who are not investing or not taking the full amount that they could in the RRSP.
Have you looked into what kind of additional incentive the Government of Canada could put forth to make it more attractive for that particular income group?
Mr. Dunn: Probably the next speakers will talk about that a little bit. My guess is Ms. Di Vito from the Bank of Montreal will probably comment on that.
Partly, that group is most faced with deciding between paying down the mortgage or investing in an RRSP. That math, in many situations, does not produce a clear result. The assumptions that go into that analysis drive the decision whether to pay down a mortgage or invest in an RRSP. It depends on a person's age, income and expectations going forward et cetera.
I will say that the flow-through of characteristics, dividends and capital gains, does make investing in an RRSP more attractive over time. That will make that analysis of whether to pay down the mortgage or invest in an RRSP more attractive on the RRSP side in any scenario in which there is investment in equities.
I would add this: If you go to a lifetime income focus in terms of the RRSP rules, using either the method I was talking about, larger limits, or Mr. Andrews' method, which I like as well, and combine that with a higher consumption tax so that there is a disincentive to current spending, that all together creates a tighter behavioural package.
Senator Ringuette: Reducing personal income tax, which would provide more liquidity to invest.
Mr. Dunn: Yes.
Senator Moore: With regard to Senator Harb's question about the total amount of RRSP contributions now in place, it is an interesting statistic. In the paper that Ms. Di Vito, the director of retirement strategies at the BMO Financial Group provided us, is a figure that says it is projected that unused RRSP contributions will exceed $1 trillion by 2018. I think of that number. Last week or two weeks ago, the Department of Finance told us that other than government employees, two thirds of Canadians do not have a pension plan
We have heard advocated today that we should increase the amount that people can put into their RRSPs, whether annually or over a lifetime. Maybe this goes back to Senator Massicotte's question. If 66 per cent of the people are not contributing, how do we change that culture? What will it take to get people to realize that this is a benefit that could help them tax-wise, plus it will provide for their retirement years?
Mr. Andrews: With respect to the statistic that two thirds of Canadians other than government employees do not have a pension plan, I think that certainly is true. With respect to your statistic about unused RRSP room, it is also the case that a group of people that ought to be saving, as I have said, I think do not have the discipline or the disposable income to save. I have proposed a lifetime limit to allow them to save when they have an opportunity and when they have money available.
The statistic about the unused RRSP room hides that a number of Canadians are already saving the maximum and need to save more. Therefore, I think you need to raise the limits on savings to permit those Canadians to save more, particularly when two thirds of Canadians outside of the public sector do not have pension plans.
Senator Moore: I do not understand. You will let the people who are already saving save more. I want to know how we get the other 66 per cent of Canadians involved.
Mr. Andrews: I have suggested the lifetime limit, but the second area is education. We have to educate Canadians that they need to save more for retirement.
For example, when we start off with the statistic that Canada is doing one of the best jobs internationally in retirement savings for its seniors, then people ask why they should save for retirement. That statistic applies to low- income people. It does not apply to upper-income people. We need to educate people about the need to save more for retirement.
Mr. Dunn: I agree that it seems to be an oxymoron to increase limits and rates when there is such a large gap in what is being contributed today, but the average is a mask. I agree with Mr. Andrews. Increasing RRSP contribution room, whether on a lifetime basis, either rates or a total limit, will increase the savings rate for many individuals. Therefore, more individuals will reach the desired retirement savings amount.
Education can play a role. There is no single silver bullet with a legislative amendment. A combination of nudges is needed to make a difference: Lower personal rates providing more disposable income; A higher tax on transactions, the GST, providing a disincentive to consumption; and, more flexibility around retirement savings, taking into account some of the specific things Mr. Andrews and I have mentioned today. That package will increase the overall incentive to save.
Senator Moore: What does Mr. Andrews think a reasonable fee would be? If one per cent is too high, what should consumers be facing?
Mr. Andrews: I think I said that one per cent was as high as was reasonable.
The Chair: Mr. Dunn, do you agree with that?
Mr. Dunn: I have no comment on that particular subject.
The Chair: It seems like the politicians and the financial people have switched places.
Senator Massicotte, we could ask the question to our next witnesses who are in the same field. I apologize, but I do not see any way to proceed without being rude to our next witnesses.
I thank both our current witnesses for their brevity and insight. You were both superb witnesses. We appreciate your addressing our mandate and possible solutions. If you have any ideas as to how those investments can be protected, which is dear to the heart of the deputy chair of this committee, perhaps you might let us know. Many people lost a lot of money, both high- and low-income people. Thank you again for your cooperation and attendance today.
[Translation]
The Chair: This afternoon, we have with us from the BMO Financial Group, Ms. Tina Di Vito, Director General, Retirement Strategies.
[English]
We also have Mr. Malcolm Hamilton, who is a Senior Partner with Mercer, although I would not guess it from his youthful appearance. We appreciate your attendance and willingness to help the committee in its study.
You heard the previous witnesses. If there is anything you strongly agree or disagree with, please let us know.
Ms. Di Vito, the floor is yours. I remind everyone that we have another committee coming into this room at 6:15 p.m. Let us keep our questions and answers succinct.
Tina Di Vito, Director, Retirement Strategies, BMO Financial Group: Thank you. I have a few responses to some of the questions asked in the previous session that, with your permission, I will address before my opening remarks.
Regarding the size of RRSPs currently, we have some information from Statistics Canada as of 2008. Understand that we are now in 2010, we have had two RRSP seasons since. The value of the accounts at that time was $631 billion. The $33 billion I heard someone mention refers to the dollar contributions made in 2008. Certainly, it is a substantial amount of money in RRSPs.
Regarding what can be done to get middle-income Canadians to continue to save more, the committee has already heard comments from the other witnesses. They indicated a lack of ability to afford to make savings and not having enough money to make contributions. My former colleague, Andrew Dunn, indicated that I, coming from the bank, may have a suggestion.
One of the things I did suggest was treating RRSP contributions the way we treat charitable donations. There is a minimum amount with charitable donations that you make. The first $200 is the lowest tax credit and anything above that is at the top marginal rate. Could we potentially do something like that for RRSP contributions for the middle income earners who are not at the top rate?
One of the things they look at when they make RRSP contributions is the fact that the deduction they get on their tax return is equivalent to 25 or 30 cents on the dollar because of their marginal tax rate. Increasing the marginal rate at which we give the refund could potentially increase contributions from that particular income band.
I agree with the previous witnesses on educating Canadians. Financial literacy is a big thing for Canadians these days. We do a great deal at BMO Financial Group to educate Canadians.
One of the ways I like to highlight the importance of saving for retirement is I explain it in a timeline. You spend the first 25 or 30 years going to school, growing up. You spend the next 25 to 30 years working — maybe it is a little longer — saving and building up a net worth. Then you spend the last 25 to 35 years living off the savings you have generated and made during that middle third.
When I explain it that way, it allows Canadians to fully understand what it will take for them to continue living at that particular standard of living, whatever it happens to be, for the balance of their lifetime.
Mr. Chair, those are the only two comments I wanted to give before my opening remarks and, with your permission, I will proceed.
On behalf of BMO Financial Group, I thank you for the opportunity to present our views on RRSPs and the TFSA. Throughout my entire career, I have been involved in financial planning and dealing with the issues the committee is looking at now. As financial planners, we hear directly from our customers all the time. We have firsthand knowledge of what is on their minds and we would be pleased to share that with you this afternoon.
I am also head of the BMO Retirement Institute, which we established two years ago. The retirement institute conducts independent research and provides insight and financial strategies for individuals entering and currently living in their retirement years. Of note to the committee, we have established the BMO Advisory Council on Retirement, chaired by a former clerk of the Privy Council, Mel Capp. The panel is made up of a cross-section of talented individuals, including one of your colleagues, Senator Wallin.
We see all of these activities — the work of the institute, the advisory panel, the reports we publish and participation in events like this — as part of our efforts to help people make better financial decisions. As a bank, we are trying to do our bit to improve financial literacy among Canadians. That is the thinking behind our customer commitment: making money make sense.
We are also strong advocates of the various savings vehicles that the government has created, not only the RRSP and the TFSA, but also the RDSP, the Registered Disability Savings Plan, which was introduced by the Minister of Finance in December 2008. We are proud to say BMO was the first bank to offer RDSPs to its customers and we are proud to say more families have entrusted their RDSP savings to us than any other financial institution.
We had recently proposed an improvement to the RDSP regime — we have already mentioned the policy options paper — which was the ability to have your RRSP or RRIF savings roll over tax free to an RDSP on death. We were pleased to see that measure adopted in the last federal budget.
The objective of the committee study, as I understand it, is to consider the adequacy of the RRSP and TFSA programs and whether Canadians are making sufficient use of them. It is a valid question. In our view, Canadians are not doing all they can to save for retirement.
There are many trade-offs that individuals at all income levels must make. Through the retirement institute, we have conducted a number of surveys, the results of which I will share with you today.
For example, the survey we did at the end February 2010 showed that 38 per cent of Canadians made an RRSP contribution before the deadline. Approximately two thirds of respondents cited lack of funds as the reason they did not make that RRSP contribution. We are on the right track that Canadians cannot afford to make them.
In another study in January of this year, we found only 34 per cent of Canadians have a financial plan. This was an improvement over 2008, when only 27 per cent reported having a financial plan. We believe that having a financial plan will help identify savings gaps and create strategies to reduce those gaps.
The introduction of the TFSA is probably the most significant change to the tax system affecting Canadians since RRSPs were introduced in 1957. Our experience to date with TFSAs, and these are early days, indicates that TFSA contributors tend to be older and more affluent, and that contributions are higher than we were expecting. There is a maximum $5,000 contribution limit and contributions tend to be around the $4,000 range.
What is interesting is that most of the assets held in the TFSA tend to be very conservative — deposit accounts, term deposits and GICs. Many savers are unaware that they can invest those contributions in other assets such as stocks or bonds. I have argued that potentially it is because of the words "savings" in the Tax Free Savings Account, which leads people to believe it is a savings account, not an investment account. Alternatively, given what has been happening in the economic climate for the last 18 months to 2 years, potentially it is an opportunity for individuals to leave their money in a liquid state so they can access and withdraw the funds should they need to.
Whatever the asset mix they choose, Canadians are discovering that TFSAs have a lot of potential from a financial planning perspective, and not just for older and affluent people. For example, younger people may want to defer making RRSP contributions specifically because of their tax rate. A lower tax rate means a lower impact on making a RRSP contribution.
They are tending to make TFSA contributions first and RRSP contributions later, when they have a higher marginal tax rate. That is something we are recommending for younger and lower income earning taxpayers — to make their TFSA contribution first and then roll the funds to their RRSP.
For more affluent Canadians, we suggest that once they use all of their existing RRSP room, and some do maximize their RRSP contribution room, they can use the TFSA to supplement their savings. As Canadians get older and reach age 71, the year they have to collapse their RRSPs, they now continue to save through the TFSA and continue to invest for their future.
The TFSA is a good addition to the suite of products that Canadians can use to fund their retirements. I do not have much in the way of suggestions of how to improve it. I have heard from Canadians that $5,000 is not a high enough limit. We will wait and see whether the limit is used, and which income and age brackets of Canadians use that account, before we make a recommendation to the committee to increase those limits for TFSAs.
Although RRSPs are a great savings vehicle, there are several positive changes that we could bring to the program and to its complementary program, the Registered Retirement Income Fund (RRIF). I have set out these in an article; I believe all of you have a copy of it. It appeared in Policy Options magazine last month, but I will summarize some of the points.
I noted that the current requirement is that RRSPs are required to be converted to RRIFs or annuities before the end of the year you turn 71. We recommend this age restriction for contributing to a RRSP be removed. As Canadians live longer and work longer, it makes sense you should be able to save longer instead of forcing you to stop saving at age 71 and begin withdrawing from the plan.
The Chair: No limit at all then?
Ms. Di Vito: No limit on when you must convert. Of course, there will be Canadians who require the funds at an earlier time. We would propose that you continue to allow withdrawals should that be the case, but not mandating the withdrawals at age 71.
The Chair: Would you settle for a higher limit as an initial step forward, such as 75?
Ms. Di Vito: Absolutely, yes.
The Chair: Would you view that as progress?
Ms. Di Vito: Yes. We are hearing from Canadians that 65 is no longer a normal retirement age; that they will continue to work a few more years. We have not been told what that means specifically. Certainly 75 would be a significant improvement.
One of things that I believe we have heard in the previous session, so I will not spend too much time on it, is we are recommending reducing the taxes on the withdrawals from the RRIF. This is similar to Mr. Dunn's proposal to tax withdrawals at a preferential rate similar to the types of tax that would have been paid had that income been generated outside of the RRIF. However, we do propose that contribution to RRSPs, when they are pulled out of a RRIF, can still be taxed at the normal marginal rates that they would be today.
We also recommend, together with the change to the age restriction, reducing the prescribed rate at which RRIF withdrawals must be made. Currently, at age 71 an individual must withdraw a minimum of 7.38 per cent from that account, and the percentage increases every year. We are recommending a reduction in RRIF withdrawals to permit the account to last longer.
Next, we think you should broaden the opportunities for tax-free rollovers when contributors die and pass on their RRSPs or RRIFs to their heirs. Why not allow a tax-free rollover from an RRSP or RRIF to an RRSP that is held by children of the deceased, adding it to their own retirement savings plans. Currently, the beneficiary of an RRSP or RRIF must pay tax on the proceeds. In this way, the net amount would be available to save for their own retirement. This is a bit of a tax deferral but certainly a way to improve the retirement savings of Canadians.
Finally, my last point, we recommend that the maximum RRSP contribution limit be raised. You heard that in the previous session, so I will not expand on that.
I want to give an example that has not been shared with you of why I think this is important. Two individuals in a family or couple each earning $100,000 would be able to contribute, at 18 per cent, $18,000 each. One individual earning $200,000 would be limited to the annual maximum of $22,000. When compared just on an income level, there is certainly a disparity between individuals and couples.
The Chair: Did I hear you say that you favoured a lifetime limit?
Ms. Di Vito: I did not comment on a lifetime limit. I do think that the elimination of the seven-year carry-forward of unused room was a good step in the right direction. As individuals get closer to retirement and retirement becomes more of a priority, we do see a correlation with increased RRSP contributions. A lifetime limit for those 55 or older would certainly help with downsizing the home or any other opportunity.
One thing that has not yet been addressed by the committee is that pre-1995 we had an opportunity to roll severance payments into an RRSP. We propose a review of that opportunity. That would allow another one-time lump sum to go into RRSPs later in a person's career.
Thank you very much. At this time I will pass the floor over to Mr. Hamilton.
Malcolm Hamilton, Senior Partner, Mercer: Thank you and good afternoon. I am a pension actuary, so I am not a tax expert. I will not give you tax advice, but I will talk about the pension system.
I have been a pension actuary for 30 years. I consult for the Ontario Teachers' Pension Plan and some of the other largest plans in Canada. I was a member of Jack Mintz's research group and am on the C.D. Howe Institute advisory group, so I have reviewed David Dodge's paper, and I am an actuary, so I saw the paper that Doug Andrews did for the Canadian Institute of Actuaries.
I have spent my whole life trying to understand our retirement system. On a good day I can barely make it out, so I sympathize with all of you trying to figure it out. If you are thinking you must be missing something and it seems complicated, it is simply very complicated.
I will try to keep my remarks brief, but it is difficult to cover the waterfront in just a few words.
The Chair: You will recall, Mr. Hamilton, that our waterfront is RRSPs and TFSAs. We are not doing a pension review.
Mr. Hamilton: I understand that, but these are part of the pension system, so you cannot really judge them in isolation. I will make systemic comments, although I will deal with that.
I will start with the financial crisis. We do not now have a pension crisis in Canada but rather a financial crisis. In 2008, almost every asset class around the world plummeted. Retirement savings plan are called "savings plans" because they have savings. When we have savings invested and all the asset classes plummet, we have a problem. We have a problem in Canada and every other country in the world. We have a problem for every type of retirement savings plans: RRSPs, registered pension plans, the full gamut. There is no way to make that go away.
As Ms. Di Vito said, we have $600 billion or $700 billion of RRSP assets. We have $2 trillion of retirement savings assets if you include pensions and RRSPs. When you have that much in assets and you have a negative-20-per-cent year, you lose $400 billion, and there is no easy way to finesse that loss. You can wish it would go away; you can hope it does not happen again; but it is a problem.
All the proposals now for fixing Canada's retirement income system will not alter that. If Canadians had all saved more, in 2008 Canadians would all have lost more. If we had had $3 trillion, we would have lost $600 billion instead of $400 billion. The good news is we would have more left over. The bad news is we would have lost more and everybody would be pretty much equally unhappy. No one should think that if everyone saves more, the next time the system collapses Canadians will all be happy, because it will not happen.
That is an observation. We must have realistic expectations of what can be accomplished.
Our interest rates are very low. That is a good thing for an economy that is trying to bounce back from a financial crisis, so I understand why that is done. It is a very bad thing for retirement savers and retirement savings plans. People who are not prepared to take risk now can get 0 per cent short term and 4 per cent long term, and that is it. We need a system that produces not just adequate benefits but also safe benefits. The only asset class that didn't collapse in 2008 was government bonds. If we are going to have a safe system, it will ultimately be a system in government bonds. It will be a system where people earn 4 per cent, and it will be a very expensive system.
Again, we need to be realistic. The retirement savings plans of the future will involve people taking risk, bearing risk and, when bad things happen, there will be disappointment.
Our system is one of the best in the world. My company, Mercer, does a global ranking. We have four countries at the top. In no particular order, they are Canada, Holland, Australia and Sweden. If you told Canadian experts that they could trade places with the system of experts elsewhere in the world, I do not think they would do it. That is not to say that our system is perfect, but if you think we have problems, look at the U.K., U.S., Greek or European systems. Our problems, while not insignificant, are way better than those of most, so we need to start with a sense of accomplishment. In difficult circumstances we are doing pretty well, all things considered.
As to criticisms of the system, one common criticism, which I read in the transcript with which the clerk kindly provided me, is that we have $500 billion of unused RRSP room: Does that not mean that there is something wrong with the RRSP system. I do not think so. When the RRSP system was set up, the allowed contribution was 20 per cent, and it is 18 per cent now, regardless of income. It was known at the time that low-income people would be crazy to use the 18 per cent. If you are a minimum wage earner in Ontario, you are making $17,500 a year. After taxes, your income is the same as someone who collects welfare their whole life and stumbles into the GIS post age 65. The lowest income a single senior can have in Ontario is about $15,000 after tax. That is very comparable to what someone working full time for minimum wage takes home after tax.
I would be more worried if Statistics Canada said that all poor people are saving their 18 per cent. They cannot afford to save the 18 per cent. Retirement savings is about putting money away when you have a good income so that after you retire and your income disappears you can support yourself in retirement. When low-income Canadians get to age 65, their incomes jump, even if they save nothing. Many of them will save nothing and should save nothing.
The criticism is that a large percentage of Canadians are not contributing to RRSPs or that a large percentage of low- income Canadians have huge amounts of unused RRSP room. If you fix that problem, we will have much worse problems. All we will do is disastrously depress the standard of living of the working poor, and their standard of living today is not as good as the standard of living of minimum income seniors. We need to be careful with understanding how the system works and not fixing things that, frankly, are working properly but are widely perceived to be failing.
I want to deal with the inadequacy of savings. It is virtually universally accepted that Canadians are not saving enough. I am the dissenter. It is not clear to me that Canadians save too little, and I will tell you why.
Let me look at the David Dodge paper. I read the paper; it is fine. The headlines have nothing to do with the paper. There is nothing in there about Canadians not saving enough. The paper says if Canadians need to replace 70 per cent of income when they retire, then the author suspects they are not saving enough. The paper does not conclude that Canadians need to replace 70 per cent; it just throws that out as a hypothetical. The headlines said that David Dodge thinks Canadians are disastrously under saving. David Dodge probably does think Canadians are disastrously under saving, but David Dodge has not put a single reason in that paper to believe that that is the case.
If you read the rest of the paper, it says that at 70 per cent replacement, the average Canadian needs to save 17 per cent of pay. Then it says for 60 per cent replacement, the average Canadian needs to save 11 per cent of pay, and at 50 per cent, the average Canadian needs to save 5 per cent of pay. The amount Canadians need to save is hugely dependent on whether they need to have 50 per cent income replacement at retirement or 70 per cent.
I have looked at these statistics for a long time, and for as long as I have looked at them, typical retiring Canadians replace 50 per cent. If David Dodge's paper proves that working Canadians are not saving enough, it equally proves that all Canadians for all time never saved enough. It is totally incompatible with an observation that retired Canadians today seem to be okay, notwithstanding the fact that they did not save 17 per cent and they did not replace 70 per cent of their income.
I am often asked how it can be as low as 50 per cent. I will throw the numbers out, and I do not, obviously, have time to defend them all. It will look like a magic trick, but here is how it works.
Looking at a typical working Canadian, if 100 per cent is the gross income, 20 per cent taxes; 15 per cent acquisition costs of houses, cars and other things, and these are not maintenance costs, just acquiring things that they start life without and retire with; 10 per cent for two children; 10 per cent for retirement savings, if we think they should save half the conventional wisdom; and, 3 per cent for working expenses.
When you add those up you have 20 per cent and 15, that is 35, and 10 for children, that is 45; 10 for saving, that is 55, and 3 for work expenses, 58. That means the husband and the wife — take out the children, the mortgage, the loan payments, taxes and retirement savings — they are living on 42 per cent of gross. They retire with 50 per cent replacement; about 5 per cent of that is tax, no CPP, no EI, half the income, three quarters of income tax gone. Five per cent of their 50 per cent is taxed. They have no mortgage, no children to support, no retirement savings, no work- related expenses. Their net is 45 per cent, compared to the 42 per cent when they are working. They have half the gross income and a better standard of living close to retirement than pre-retirement.
You need to understand that, because if you start from that 50 per cent target instead of the 70 per cent target, then David Dodge's paper says Canadians need to save 5 per cent, and Canadians are saving more than 5 per cent.
You hear a lot about the savings rate in Canada. There has been no reduction in contributions to RRSPs as a percentage of GDP and to pensions as a percentage of GDP in the long run. We now save much more than we used to.
Regarding the $2 trillion number I gave you, if you read the papers, you would think this was down from the very high levels of saving we used to have. After inflation, it is triple what it was 20 years ago. There are a lot of things in the system that people do not appreciate and do not understand correctly.
Last thing I will leave you with is something that is seldom mentioned in Ottawa but needs to be looked at. We have a horrible case of systemic bias between public and private sector. It is hard to get statistics because the public service does not like studying the huge divide public service pension and private sector pensions. If you look at average public servants, they have three times the per capita retirement savings of the average private sector worker. The sole explanation is the difference in the sector. That is not a healthy thing.
They will tell you that this is all innocent, and there is no systemic problem here. I do not have time here, but if you want a list of systemic problems, I can give you a long list coming right out of the Income Tax Act from 1990 that made it highly advantageous to have levels of tax sheltering in the public service that the private sector cannot match.
Am I saying we should rip down the public sector plans? Not at all, but if we want to try to build up the private sector plans, let us do that. However, there is a huge gap and it is an embarrassing gap. It is not unique to Canada because if you go to the U.K. or the U.S. or the state of California, you will see the same thing. It is an ugly aspect of retirement systems around the world, and it is no less ugly in Canada than elsewhere.
Those are my off-the-cuff remarks. I am glad to take your questions now.
The Chair: Thank you, Mr. Hamilton. Your remarks were entertaining and stimulating.
I am not quarrelling with your analysis, but one of our witnessesa — it might have been Mr. Andrews — said, in support of the need for increased savings, that there will be higher expenses going forward. He did not say health care but looking after yourself, because you will live longer and there will be more of us.
Does that affect your analysis in any way?
Mr. Hamilton: Not really, because when I looked at this, there was little evidence that seniors at advanced ages were spending huge amounts on eldercare, medical expenses or those kinds of things.
The remarkable thing about Canadian seniors is, notwithstanding the fact they replace 50 per cent, they save right through retirement. The second highest savings age group was seniors in Canada. In the way they manage their lives, they are remarkably frugal. They do not spend their money. They do not like spending their investment income, and they certainly do not want to encroach on capital. They manage their finances more or less as if they will live forever. They are always preparing for bad things to happen down the road. They do not like reverse mortgaging their house; they do not like selling their house. They want to live in their house until they die, and they want to pass their house to their children.
Yes, there are bad things that can happen late in life to some seniors, but I have the reverse worry. We tend to terrify young people about the dismal prospects they face on retirement with no good reason for doing so. We terrify seniors with the prospects of eating dog food, being hungry and not being able to afford medical care. Can it happen? Yes, it probably can happen in a country with 4 or 5 million seniors, but it is not common or typical of the experience Canadian seniors have.
The Chair: Maybe that explains why younger people in Canada are not bigger risk takers.
Mr. Hamilton: The reason young people do not save is simple, and I cannot believe that it is always missed. They do not have money. You say: How can they not have money when they are all spending? The answer is it is mortgages. The pattern for the Canadian family is they live well until they have children. Then they have to buy a house, so they have the house, the children, and it all comes online. Their standard of living at that point in time plummets. Typical Canadians will self impoverish to buy the best house they can get. They will stretch. No matter how much money they have, it will be a bigger, more expensive house with a bigger mortgage payment. They go through 15 to 20 lean years.
I see these examples in the paper all the time. Here is a couple not saving for retirement. Look at their income. When you net it out and look at their income, knock off the mortgages and what they spend for their children, their savings, et cetera, it is not uncommon to find a number that is comparable to government benefits for seniors. I mean government benefits; I do not mean any savings or anything. They live frugally and they find it hard to save in that part of their life because they have three big things they have to do during their working lives to deal with life. They have to buy their house and pay for it, raise their children and save enough to retire.
You look at those and ask what the natural order is, because they cannot do them all at the same time. What is the deferrable one? You cannot defer the children until late in life. It makes no sense to buy the house after you have raised the children and they are moving out, so the children and the house have to come early. It crowds out their retirement saving.
Everyone says: Look, two thirds of Canadians are not saving for retirement. A third of them are poor, a third are in debt up to their eyeballs. No wonder they are not saving for retirement. They are saving. They put a lot of money against the debt, and that is saving. They have to dig themselves out of that debt, and the dollars that go to the debt is a tax effective form of saving. The after-tax risk adjusted return on paying down your mortgage is better than what you will get in an RRSP. They can behave rationally and not be saving at all.
Now, does that mean there are not irresponsible Canadians? Of course not. I am sure there is an army of irresponsible Canadians out there, but many of the people being called irresponsible are just struggling through life, trying to raise families and pay off their house, and then they can get on to their retirement savings.
[Translation]
Senator Hervieux-Payette: May I take the liberty to address you in French? At this stage of the day, it is easier for me to make my comments in my mother tongue.
Thank you for your comments wherein you said that when we look at various ways of saving money for our retirement within the terms of reference of our study, and we look specifically at the tax aspects of both ways of saving money, there is always an element of risk.
Obviously, when one invests in financial products that have an inherent element of risk, that is one thing, but when one invests in a fund, one thinks that the risks are being minimized, although that is not the case.
As you just said, we will perhaps no longer see yields of 10, 15 and 20 per cent.
Have you some way, given your great imagination and experience, of ensuring at least that the money invested in these pension funds — I am not talking about regular portfolios — be protected in some way?
Currently, if you lose 50 per cent of what you saved up in your registered retirement savings fund, because of the financial crisis — we will probably go through another one as well — and if you live through two or three more in your lifetime, you spend all your time saving up money and yet you will have very little left in the end. How can we go about recovering our capital — some have lost it — and how can we have a yield that will assure us that when we retire, we are certain to find a certain amount of money that will justify all the investments we made?
[English]
Mr. Hamilton: I would love to tell you there is a magic bullet. People want to believe that there is a way that you can get guaranteed, safe, high returns, or at least reasonable returns. There used to be in the 1980s and 1990s. I do not know if you look at these things, but we have something in Canada called real return bonds where the Government of Canada has issued $30 billion of inflation-protected, long-term bonds. In the 1990s, you could buy those and it would give you a guaranteed long-term return of CPI plus something between 4 and 5 per cent right through the whole decade.
Today, if you buy it, the guaranteed return is CPI plus 1.5 per cent, not 4 to 5 per cent but 1.5. So we are down about 3 per cent on what you can get as a guaranteed, inflation-protected return. Retirement savings is typically for a 25-year period. If you lose 3 per cent a year for 25 years, this means a safe pension today is twice as expensive as a safe pension was 10 years ago. The C.D. Howe Institute's number, 34 per cent for the federal civil service plan, would not have looked nearly as bad 10 years ago. Ten years ago, with interest rates high, that 34 per cent would have looked more like 18 per cent.
We have had reductions in interest rates that are game-changers. They mean there is no affordable, adequate, safe pension anymore. If you want it to be safe and you want it to be adequate, it will cost a lot of money. If you are not prepared to save a lot of money and you still want it to be adequate, you have to take risk. There are many products out there that encourage people to believe that there may be a way to get the high return without really taking the risk, but I think as an operating principle people should understand, if someone is telling you that you are likely to make a high return, you are probably taking risk, whether you understand it or not.
[Translation]
Senator Hervieux-Payette: For myself, my colleagues and those who will listen to this broadcast, we are doing away with the myth that it is easy to constitute a retirement fund and that we can have an excellent yield in the coming years. This is obvious.
Ms. Di Vito, you mentioned a disability pension plan that was transferable.
[English]
Who is this disability pension plan transferred to if I die? Is it transferred to another disabled person? I do not know about this vehicle.
Ms. Di Vito: My comments were regarding RRSP and RRIF holders, if they were to die, then to allow a tax-free rollover into the RDSP, but was announced in the most recent federal budget, so that is on the table for discussion. It is not to create an additional pension plan for a disabled person. Currently with the Registered Disability Savings Plan, individuals can contribute to this plan to support a disabled Canadian. What I am suggesting that has been adopted in the budget, is that the parents' RRSPs or RRIFs, rather than being paid to an individual after tax, should be able to flow tax-free to that person so they have the maximum benefit of the savings that the parents have had.
[Translation]
Senator Hervieux-Payette: My last question is addressed to Mr. Hamilton. Does it seem reasonable to you to increase the age limit to 75 so that people can continue investing in their pension funds, given the fact that you are an actuary and that the average age of Canadians is increasing on a yearly basis? Or should we do away with this limit altogether?
[English]
Mr. Hamilton: I am a deregulate guy, but you need a limit there. The reason you need a limit is if you want retirement savings plans to be about retirement instead of about estate building, you need to compel people to take the money out at some reasonable age. I can tell you right now, average Canadians are not working until 75 or 70 or 65. The average retirement age is under 65. Seventeen per cent, last time I looked, of Canadians are over 65; 3 per cent of the workforce is over the age of 65. The people who do work over 65 tend to be farmers and judges and they are in occupations or are self-employed, or are senators.
It was said many times, and it is correct. This particular round of concern is focused on middle- and upper-middle- class Canadians. It is not about the poor or the rich. The worst nightmare of middle-class and upper-middle-class Canadians, by and large, is they will be working at age 70. When you survey them and ask their preferred retirement age, it is around 60. When you ask them what age they think they can retire, it is later. It is not later by choice, but because they keep reading in newspapers that they are not saving enough money. They assume the people in the newspapers must know what they are talking about.
The bottom line is that whether it is 71, 73 or 75 years of age, I do not think the viability of our retirement system will turn on that. That is a detail. I am happy having it at 75 years and am not concerned about you setting it at 71 or 73 years. That is not the area where we are having difficulty currently.
Senator Massicotte: Mr. Hamilton, the Department of Finance gave us a number of charts when they appeared, which I think you saw. It was part of their document where they were looking for comments.
Mr. Hamilton: Unfortunately, I read the description of the charts, but had no charts.
Senator Massicotte: They ask for comments on possible modifications to the savings programs. One chart shows that people earning less than $125,000, regarding savings, is replacing 70 per cent of their income. Everyone, including those who make more than $125,000 on average, is replacing at least 50 per cent of their income. It would appear that if you accept 50 per cent, on average no one has serious problems with retirement based on the averages, which basically confirms your opinion.
Seventy per cent of those people in excess of $125,000 are not maximizing their RRSP on average. Maybe the problem is not in the savings program, but that they are not saving enough for other reasons. It does not appear as though increasing the maximum contribution will solve the issue.
Therefore, one largely reaches the conclusion that there is not a big issue. Some people are not saving enough; some are possibly saving too much. The problem is not the program or structural; maybe it is habit or cultural.
Having said that, should we even tinker with the programs? Many recommendations are coming forth saying to increase the lifetime RRSP limits and RRIFs. Is there anything of a serious structural nature we should be examining or is it the education of our people, telling them not to forget to save, et cetera?
Mr. Hamilton: I want to clarify something. When I say there is little evidence of inadequate savings, the only reliable test of saving adequacy is to look at the already retired and the retiring. Whether some 40-year-old is saving enough is simply speculation at this point. You have no idea what will happen in the next 25 years of their life. When their mortgage payments stop and the kids move out, will they save more or spend more? Will interest rates go up or will they stay low? Will the stock market do well or badly?
We are confident regarding people approaching retirement, recently retired and already retired. They are doing rather well, which makes me think 50 per cent is probably enough. It is an open question about whether younger Canadians are saving enough to get to the 50 per cent level. I am sure some are and I am equally sure some of them are not. To the extent some of them are not, we have to be careful. It is hard to separate their debt issue from their savings issue. If you look at someone's financial situation who is 45-years-old and has no savings, but has paid for their house, I think they are in rather good shape.
Almost all studies of retirement saving adequacy will say they are have done terribly. They are profligate and are irresponsible if they are 45-years-old, have a good income and have not saved yet. However, they may have accomplished a lot if they have managed to raise kids and pay their mortgage off.
There is reason for concern looking forward, but largely because people are borrowing a lot and mortgaging a lot, and amortizing over long periods. My generation was able to pick up our savings starting in our 40s. I am not sure that will be equally true of the next generation. If they have to live with low interest rates, while we lived with high interest rates, it will make their problem that much worse. I do not think we can afford to be complacent. All you can do is give them opportunity.
I want to return to the importance of the lifetime limit. For example, a public servant who is a member of the Ontario Teachers Plan saw their plan take a big loss in 2008, leaving a big hole in their savings. There is no way to make the hole go away, but that money can go back into a tax-deductible plan. The province can put it in or the members can put it in. Their counterpart with an RRSP that lost the money has to replace it without being able to put it back in the RRSP, because the limit does not recognize that they have taken a loss.
Moving to a lifetime limit system, so that people who have big investment losses can at least replace them with their own money in a tax effective way is a great leap forward in creating equalization between public and private sectors.
Senator Massicotte: Ms. Di Vito, you are from the Bank of Montreal, and you lead a retirement group. We have received other briefs that talked about high management fees on RRSP or mutual fund accounts. I understand that mutual fund fees in Canada are significantly higher than in the United States.
Some people say we should legislate lower management fees. Why are they so high? Why are they cheaper in the United States? What do we do with the issue?
Ms. Di Vito: I cannot comment on why they are so high. I have heard a few comments that savings accounts are expensive. An individual with a guaranteed investment certificate, GIC, will pay absolutely no management or other fees to have an account at the Bank of Montreal. We also want to emphasize that we are the only bank in Canada to launch exchange-traded funds, which are inexpensive compared to mutual funds in respect of those types of fees.
I am not an expert in the mutual fund product area, but I can at least give you that information.
Senator Massicotte: There is a suggestion that we do not have enough competition in Canada and that that is why your fees are so high compared to the American system. Do you agree with that?
Ms. Di Vito: I cannot comment on the competitive nature of this country.
Mr. Hamilton had an interesting comment about replacement of lost value. I want to share feedback we have received from our clients in this regard.
Over the last 15 or 20 years, Canadians have embraced debt. We have surveyed pre-retirees, those ten years from retirement, as well as retired individuals. They are quite comfortable with their debt. For previous generations — I think about my parents — debt was a bad four-letter word. It is now embraced, and it is not unusual to have debt during retirement years.
The Chair: Was not that because it became comfortable because in previous years they got caught by inflation? Maybe we will not have that.
Ms. Di Vito: Who knows?
Mr. Hamilton alluded to the fact that a mortgage would be paid off in retirement. That is not necessarily true. At the bank, we encourage our five-year rate, which is the lowest available competitive rate in Canada. We offer it on a maximum 25-year amortization because we see this as a problem. Some Canadians are carrying mortgage debt into retirement and that can be very expensive, even in low interest rate environments.
If we compare the lifestyle of previous generations, they were quite happy to retire into retirement. I am not quite sure if Canadians now are comfortable to retire into the traditional retirement phase.
Some of our clients tell us when we do financial plans for them that the income replacement they are looking to create is not 50 per cent or 70 per cent. Some tell us that it is 100 per cent or 120 per cent because they are planning to spend more. They have raised their kids and paid their mortgage. Retirement is their time. They may like to start a new business or travel.
I have also heard from many Canadians that inheritance is not as high on their list of priorities. It is becoming more and more common that we hear Canadians saying this money is theirs. They gave an education to their education and supported them. They now want to live their life.
We had a story not long ago. One of our own employees came to us for some advice. She is faced with dealing with the care of her mother. It is costing her upwards of $40,000 per year. Her concern was that she can no longer save for her own retirement and is now wanting to downsize her own home because her mother has no assets left and it is falling upon the children to pay for the care of their parents.
We take these things very seriously. When we look at how much income is required to replace pre-retirement lifestyles, we often forget about the honeymoon phase of retirement. In the first five or seven years when our health is good, we spend more. Canadians must think about that, because a few years of bad markets or overspending can cause retirement savings to dwindle much more than the markets can.
Senator Manning: This has been very interesting. My grandfather used to say that a fool and his money soon part. After listening to you, I am not sure where half of Canadians are.
A 20-year-old fellow told me a couple of weeks ago that he made $100,000 last year in the oil sands in Alberta. That is a fair chunk of change and things look good for him for the next 10 to 15 years. He operates heavy equipment.
Would you advise him to buy a house, an RRSP or a TFSA?
Mr. Hamilton: I assume he is single and has no children. He is 20 and earned $100,000. The good news for him is he can buy the maximum RRSP and the maximum TFSA. The one thing he cannot do is pay for a house, and I would not buy the house as an investment. Unfortunately, there is no good un-tax-sheltered thing for him to do with much of that money. If he thinks he will stay in Alberta for 10 or 15 years and earn that kind of money and wants to be a homeowner, he should probably take a mortgage. If he continues to earn $100,000, five, six or seven years from now he will own a house, have money in an RRSP and in a TFSA and have a great financial start to his life.
The Chair: Make sure he buys that house and takes the mortgage out in Newfoundland.
Senator Manning: He will.
The Chair: Thank you very much to our witnesses. We have enjoyed and learned from your testimony, and we appreciate it. Thank you for taking the time to be here.
(The committee adjourned.)