The government should focus on creating a unified and sustainable system of retirement benefits that helps low- and moderate-income seniors.Kenneth Cheung/iStockPhoto / Getty Images
When the federal government announced in November that its proposal to temporarily loosen RRIF rules was off the table, the financial industry and retiree advocates bitterly voiced their disappointment. These groups have long called for broader reform of seniors benefits, with a particular beef about the mandatory withdrawals from registered retirement income funds that are required starting at age 72.
These types of complaints about seniors needing more favourable fiscal treatment to avoid hardship don’t line up with reality. The truth is that Canada already provides substantial support to seniors – even wealthy ones – leaving younger generations to foot the bill.
The advocates for changes to RRIFs lament that seniors are forced to deplete their savings, requiring them to pay tax “prematurely.” The Canadian Association of Retired Persons, for example, says it’s unfair seniors can’t decide when to draw on their own hard-earned retirement dollars.
These arguments resonate with seniors, who are understandably fearful of outliving their money. There are reforms needed to ensure that the poorest seniors have a dignified retirement, but those changes have nothing to do with RRIF rules.
The reformers conveniently forget to mention that by putting money into a registered retirement savings plan (RRSP), investors get a tax break up front. The money they should pay in tax that year is deferred to retirement, when they will likely be in a lower tax bracket.
By age 71, investors need to convert their RRSPs into RRIFs (or buy an annuity). Each subsequent year, they must withdraw RRIF funds on a fixed schedule, gradually depleting the account and finally paying tax on the money taken out.
Effectively, the government has loaned them back their tax payment, allowing it to grow tax-free for decades.
It’s also misleading to claim that RRIF rules force retirees to deplete their savings. Yes, they need to take money out of that account, but they can move it into a tax-free savings account or non-registered account. It’s even possible to do an in-kind transfer to avoid selling a particular investment, although for tax purposes, it will be treated like a sale. (The fact you can transfer investments also undercuts the logic for a one-time reduction in mandatory withdrawal minimums, like the Liberals promised during the election early last year, when markets were down.)
Another common argument for RRIF reform is that because people are living longer, mandatory withdrawals should start later, or be reduced or eliminated entirely. This ignores the fact that in 2015, the Finance Department revised the RRIF withdrawal schedule to reflect increased longevity.
The reality is that the people impacted by mandatory minimum withdrawals are not low-income seniors, but wealthy ones. RRSP contributors tend to have high incomes in the first place. Retirees with modest amounts in RRIFs generally need to take out more than the minimum to live off. Those most impacted by mandatory withdrawal rules, according to Schulich School of Business taxation professor Amin Mawani, are the highest-income seniors.
Reducing or eliminating RRIF withdrawals would bring down wealthy seniors’ taxable income, making it easier for them to claim government benefits, such as Old Age Security. This could put unsustainable pressure on the program – elderly benefits already cost the federal government $83.1-billion. It would also increase the cost of forgone tax revenue from RRSPs and RRIFs, already one of Canada’s biggest tax expenditures, at $25.8-billion in 2023. While the taxman will get paid eventually, in the interim, it leads to the government taking on more debt.
Instead of RRIF reform that tilts the tables further in favour of wealthy seniors, the federal government should tighten the criteria for OAS. Currently a couple 75 or over with a combined income of nearly $182,000 can receive almost $20,000 a year from the program. The OAS and the guaranteed income supplement, a payment for low-income seniors, should be merged into a single program, with less money to high-income seniors, and more to those with limited funds.
Seniors are a powerful voting group, so it will take courage to undertake reforms. The government should put aside ideas about tinkering with RRIF rules, and instead, focus on creating a unified and sustainable system of retirement benefits that helps low- and moderate-income seniors and is fair to younger generations.