Why Governments Are Wrong to Overlook Enhancing RRSPs

Government policymakers should not overlook enhancing RRSPs as a way to boost retirement savings by Canadians, according to a report from the C.D. Howe Institute. In “The Overlooked Option for Boosting Retirement Savings: Higher Limits for RRSPs,” author Alexandre Laurin finds that those who most need private saving to meet their retirement income goals use RRSPs more extensively than widely believed.

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“Governments are neglecting RRSP improvements,” he says, “based on the misperception that RRSP usage among Canadians is low because of high aggregate unused contribution room and low RRSP participation in the general population. But a more relevant breakdown of the data tells a different story.” Laurin finds RRSP enhancements would benefit people with middle incomes and up. Among those without workplace pension coverage who earn $50,000 or more, nearly one-in-two made an RRSP contribution in 2013, contributing more than 10 percent of earnings on average. Three-quarters of tax filers earning more than $50,000 participated in either a workplace pension plan or an RRSP, or both. As for low- to middle income earners, the report finds much lower RRSP participation. “This is not surprising given that a fair number of lower-income workers will be able to maintain their standards of living in retirement exclusively from government support programs and the CPP/QPP without, or with very little need for, private retirement savings such as RRSPs, pension plans, non-registered savings or tax-free savings accounts (TFSAs).” Overall, about 15 percent of those earning less than $25,000, and half of those earning between $25,000 and $50,000, participated in either a workplace pension plan, an RRSP, or both. Fairly good RRSP take-up rates, on the part of those for whom such savings are most beneficial, suggest that the case for remedial action, in the form of broad supplemental forced savings plans, is weaker than widely assumed. Laurin concludes that “policymakers should not dismiss the option of higher or more flexible contribution limits, since there are many Canadians who would be well placed to take advantage of them.”