A new report calls for 30-year-old rules to be updated to avoid tax-deferred savings shortfall
Brian Mulroney was prime minister and Mr Big’s To Be With You was one of the biggest hits of the year. It was 1992 and the framework for Registered Retirement Income Funds (RRIFs) was fresh.
But more than 30 years later, the rules for these and similar retirement vehicles are outdated and in need of revamping according to a report from CD Howe Institute.
Authors William Robson and Alexandre Laurin warn that, without reform, the current rules detailing age limits and mandatory withdrawals will leave many seniors with nothing more than negligible income from their tax-deferred savings in later years.
This is due in part to people living longer, while the age at which savers in defined contribution pension plans and RRSPs must stop contributing to their plan has not kept pace.
Also the investment returns on safe assets are lower than they were, falling to near zero compared to yields way above inflation that were seen back in the nineties.
Despite the shift in circumstances, the authors of “Live Long and Prosper? Mandatory RRIF Drawdowns Raise the Risk of Outliving Tax-Deferred Savings,” note that there has only been one lasting update of the rules, a modest reduction of mandatory minimum withdrawals in 2015.
They calculate that the purchasing power of minimum RRIF withdrawals could fall to half their initial value by the time their holder reaches age 94 – which one in eight men and one in five women aged 71 can expect to see.
A better way?
Robson and Laurin would like to see age limits on saving and mandatory withdrawals abolished.
Or at least they want policymakers to raise the age limits and shrinking mandatory withdrawals, and/or establish a threshold below which RRIF holders do not need to make withdrawals at all.
“All these options would give Canada’s seniors a better chance of enjoying long life and prosperity – the post-retirement security they save for,” they conclude.
Raising the age limit is something that Kevin Hegedus, a portfolio manager with PWM Private Wealth Council with iA Private Wealth in Saskatoon, recently told Wealth Professional that he would like to see.
“We’ve got an aging workforce, so we have more and more older people who want to stay in the workforce,” he said. This would allow them to continue to make those RSP contributions after age 71, so I think that would be a benefit.”
Learn the benefits of an RSP in this article.
