Bump RRSP limits from 18% of earned income to 34%, CD Howe tells Feds

The National Post, February 11,  2011

Now here’s something those whose RRSPs were shattered by the 2008 crash should welcome: raising RRSP contribution limits from 18% of earned income to 34% of earned income, and raising the maximum dollar amount proportionally, from $22,000 to $42,000.

That’s the eminently sensible suggestion from C. D. Lyndo Howe Institute president and CEO William Robson.  In a backgrounder containing suggestions for the 2010 federal budget, Robson says Ottawa should provide more tax deferral room for both RRSP savers and members of  employer-sponsored Defined Contribution pension plans. “Using the federal Public Service Plan as a benchmark suggests raising the contribution limit from 18% to 34% of earned income” as well as almost doubling the current $22,000 maximum to $42,000.

Extend RRSP life to age 73 from 71

The paper,  entitled Cutting Through Pension Complexity: Easy Steps Forward for the 2010 Federal Budget, also recommends raising the age at which people lose access to tax-deferred saving and must start withdrawing funds:  from age 71 to 73. Robson also suggests giving holders of Registered Retirement Income Funds (RRIFs) and Life Income Funds the same spousal income-splitting opportunities as recipients of annuities from pension plans. The government should also make the pension credit available to those drawing income from RRIFs or LIFs “regardless of age, as it is to recipients of annuities from pension plans.”

Further changes to the Income Tax Act would make retirement-related services more readily available to employees of small organizations and to the self-employed, Robson suggests.

Redress Pension Adjustment inequity between DB plans and DC/RRSPs.

The big suggestion is to bring RRSPs and DC plans to closer parity with the traditional Defined Benefit pensions which are enjoyed primarily by politicians and government workers and — less and less, unfortunately — some in the private sector.  As things stand, savers in DC/RRSPs “get less generous tax deferral than do most DB participants,” Robson writes. That’s because the Income Tax Act uses a “Pension Adjustment” [the PA shown on T-4s] to estimate how much saving people without DB plans need to undertake in order to accumulate the same amount of wealth as those with DB plans.

However, the Pension Adjustment “assumes relatively high returns and overlooks important provisions often found in public-sector plans” and so “tends to underestimate the required amounts of saving.” As a result, annual contribution limits for DC plan members and RRSP owners are set relatively low.

Similarly, larger contributions for past service are possible in DB plans than in DC plans and RRSPs. When DB plan assets fall short of liabilities, the tax act lets employers rebuild the plans with no limits, a practice encouraged by regulators and which many companies implemented after the crash. But as millions of Canadians hurt by the 2008 meltdown know, when values fall in DC plans and RRSPs, annual contributions limits “make no accommodation,” Robson says.

Ultimately, lifetime savings limit would help investors recover from 2008 crash

Therefore, the “first step” is to boost tax deferral room for RRSP and DC savers.  Ultimately, a lifetime pension saving limit would help those individuals recover from setbacks but the first step would be the recommendations made in the report.

The report makes no mention of the Tax Free Savings Accounts (TFSAs), which were long ago another CD Howe Recommendation when they were called Tax Prepaid Savings Plan. Nor does the report mention the suggestion of actuary Malcolm Hamilton that TFSA contribution room be samachar made retroactive to age 18 — or a similar lifetime TFSA contribution amount be implemented — in order to similarly help those whose RRSPs and DC plans were hurt by the crash.