Policy researchers suggest tweaks to outdated rules governing RRSPs and RRIFs
For Canadian seniors, the coronavirus represents a particularly painful one-two punch. Not only does it represent a greater threat to their health — scientific evidence has borne out that older adults may be particularly susceptible to the illness — but it has also put their wealth as grim and seemingly irreversible domino effects play out in the financial markets.
The ruinous effect of the pandemic on Canadian retirement savers was the primary focus of a new intelligence memo from the CD Howe Institute titled Crisis Relief for Canadian Savers, authored by the institute’s CEO William B.P. Robson and its director of Research Alexandre Laurin.
Robson and Laurin noted that older Canadians rely on savings stashed in RRSPs and defined-contribution pension plans, and some are already drawing down savings in RRIFs just as the markets are crashing down.
“[T]hey should not face tax rules that force them to sell when the market is down, permanently lowering their prospects for retirement,” the two said in the memo addressed to Finance Minister Bill Morneau.
As a measure of relief, the two recommended that retirees be given a reprieve from mandatory RRIF withdrawals. They noted that given longer life expectancies, low and still-shrinking yields on safe investments, and the risks of seniors depleting their tax-deferred savings, the current schedule, which starts on their 71st birthday at 5.28% of the RRIF’s market value as of December 31 of the preceding year, “out of date.”
“Withdrawals for 2020 will be calculated from pre-crash values, which will force drawdowns at a terrible time,” they said, maintaining that suspending RRIF withdrawals would be a timely move. “If permanent elimination is too radical a step, you should simultaneously announce a subsequent one-percentage-point reduction of minimum withdrawals mandated for each age.”
They likewise took aim at the current mandate requiring Canadians to start drawing down their tax-deferred savings at age 71. Aside from discouraging Canadians who would prefer to work or save longer — particularly as their retirement plans get derailed by the shockwaves from COVID-19 — it raises the probability of their savings in RRIFs being depleted too early.
“Raising the age to 73 immediately would alleviate anxiety – and get us to a better place long-term,” Robson and Laurin said.
Finally, they called for raised limits on tax-deferred saving in defined-contribution pension plans and RRSPs for all participants. The duo maintained that current limits are badly outdated, as longer lifespans and lower yields have likely stretched the cost of every dollar of income retirement income.
“[The limits today] presume that the cost of providing a dollar of income in these plans is nine times the rate at which benefits accrue in a typical defined-benefit pension plan,” they said. “A more realistic equivalency measure would now be around 15, which would raise the limit for contributions to these plans from the current 18 percent to 30 percent of income.”
Aside from addressing Canadian retirees’ longstanding needs, they said their proposed measures have the added bonus of not threatening the government’s long-term fiscal framework.
“Money the government does not collect in 2020 will be due in 2021 and beyond,” the two said. “The fiscal stimulus is temporary. The relief to seniors would be immediate.”