Issue in Focus: 51 and Counting – Is It Time to Remodel RRSPs? 

Backgrounder

The Certified General Accountants Association of Canada (CGA-Canada) published a research paper as part of its Issue in Focus series aimed at discussing important and relevant issues in today’s marketplace. This paper discusses the ability of the Registered Retirement Savings Plan (RRSP) Program to influence individuals' behavior towards savings, and whether or not it is time for the federal government to look at the alternative public policy approach to stimulate private pension saving.

Key Report Highlights

As discussed in the paper, the declining ability of the RRSP Program to boost savings of Canadians can be seen in the following:

Socio-economic factors

• Declining popularity of the RRSP program (since 1998) would not be problematic, if other types of savings had been picking up. However, if we look at the developments in certain socio-economic factors over the past decade (decreasing RRP coverage, changing age composition, labour demand and income dynamic) the use of the RRSP program should have been alleviating when in fact it was not.

Tax incentives

• Changes in federal and provincial income tax rates and surtaxes may represent important elements in encouraging or discouraging individuals to contribute to RRSPs.
• Changes in attitudes to RRSPs within each income group do not seem to follow the changing tax incentives.
• The tax benefits of participating in RRSP has noticeably decreased over the past decade, particularly so for middle and high income Canadians and more so in western Canada. Following the change in RRSP tax benefits, one may assume that middle-income Canadians would have become less eager to make RRSP contributions, but this has not been the case.
• The tax incentives associated with RRSP are not strong enough to motivate households to use the RRSP savings vehicle more extensively than non-pension financial assets.

Individual preferences

• The eroding habit of contributing to RRSPs has become a lifestyle. RRSP funds are often used prior to retirement, the frequency of contributions decreases whereas the unused RRSP room amplifies.
• Tax treatment of an individual (and RRSP tax incentives) depends greatly on the individual’s distinct economic and social character. This mainly relates to the province of residence, level and source of personal income, age, marital status and number of dependants.

Although the RRSP program has undergone a number of considerable modifications and improvements, CGA-Canada sees the need for further enhancement to the policy. Particularly in the time of Canada’s recent financial crisis and economic downturn, RRSPs represent a favourable deal for Canadians as a solid financial strategy.

Recommendations

The following recommendations from CGA-Canada aim to remedy the decline of interest in RRSPs by engaging Canadians to invest in the program:

RRSPs required

• Develop an improved or alternate public policy approach to hearten private pension savings.
• Consider international experience regarding using natural human inertia towards increasing savings. For instance, one of the options may be making initial enrolment into a private pension plan compulsory with the time sensitive ability to opt out.

Make investing a lifestyle choice

• Financial education and awareness programs are useful to educate individuals on the RRSP program and how it works in their favour.
• Conventional measures seems to have created a fatigue and adverse reaction among Canadians – 59% of whom do not like being told that they are not saving enough money for retirement.
• A new information approach may be required to achieve positive results when providing education and awareness.

Deciding to invest in RRSPs is increasingly important during a time of economic uncertainty where limited financial resources of households are called upon to meet diverse and often conflicting priorities.

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