May 16: BEST FROM THE BLOGOSPHERE
May 16, 2022
End RRIF mandatory withdrawals, RRSP end dates, and create national RRSP: Pape
Well-known financial author Gordon Pape has been observing the Canadian investment and retirement savings system for many decades, and has come up with a four-point plan to make retirement more effective for Canada’s greying population.
Writing in the Globe and Mail, Pape observes that there are now seven million Canadians aged 65 and over.
“This has the makings of a massive demographic crisis,” he writes. “Where are the future workers going to come from? Who is going to support our rapidly aging population? What will happen to the tax base as people leave the work force and reduce their spending?”
He then suggests that one way to address the problem would be to encourage more Canadians to work past age 65, a plan that would “require a massive overhaul of our retirement system,” but that is “doable.”
As a starting point, he notes that the trend towards more working at home, born from our experiences with the pandemic, may be a good “carrot” for encouraging older Canadians to keep working. Working from home is preferable for most, he says.
But other carrots are needed as well, he writes.
Eliminate mandatory RRIF withdrawals: Currently, he writes, registered retirement savings plans (RRSPs) must be “wound up by Dec. 31 of the year in which you turn 71,” and are then mostly converted into registered retirement income funds (RRIFs). With RRIFs, he explains, you are required to withdraw a minimum amount annually, an amount that grows until you are 94 and must withdraw 20 per cent of the RRIF.
“RRIF withdrawals are a huge disincentive to work after age 71. Added to regular income, the extra RRIF money can quickly push you into a high tax bracket,” Pape writes.
“The solution is legislation to end mandatory withdrawals entirely. Let the individual decide when it’s time to tap into retirement savings and how much is needed. The government will still get its tax revenue. It will just be delayed a few years,” he posits.
End RRSP wind up at 71: A second “carrot,” he writes, would be to change the age that RRSPs must be closed, currently age 71. Why, asks Pape?
“RRSP contributions are tax deductible. Making RRSPs open-ended would therefore create an incentive to continue saving in later years, when people may have more disposable income (no mortgage, kids moved out). That would result in more personal savings, which should result in fewer people requiring government support in later years,” he writes.
Create a national RRSP: Pape proposes that a national RRSP – to be run by the Canada Pension Plan Investment Board – be created. “It would provide Canadians with first-rate management expertise, at minimal cost,” Pape writes.
This idea is needed, Pape says, because many people don’t know how to invest in their RRSPs and lack the advice they need to do so.
Allow CPP and OAS to be deferred longer: His final idea would be to allow people to start their Canada Pension Plan and Old Age Security later than the current latest age, 70. Again, this is to accommodate folks who want to work longer and don’t need the money as “early” as 70.
These ideas all make a lot of sense if the goal is to help people working longer. The idea of being able to withdraw RRIF funds as needed rather than based on a government mandatory withdrawal table is sensible. After all, who wants to withdraw money – effectively selling low – when markets are down? And if one is working into one’s 70s, why take away the effective tax reduction lever of RRSP contributions?
Let’s hope policy makers listen to some of Pape’s ideas. Gordon Pape spoke to Save with SPP a while ago, and he knows his stuff. He also spoke with our friend Sheryl Smolkin in an earlier Save with SPP column.
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Written by Martin Biefer
Martin Biefer is Senior Pension Writer at Avery & Kerr Communications in Nepean, Ontario. A veteran reporter, editor and pension communicator, he’s now a freelancer. Interests include golf, line dancing and classic rock, and playing guitar. Got a story idea? Let Martin know via LinkedIn.