Malcolm Hamilton elaborates on retroactive TFSA mechanics

Actuary Malcolm Hamilton, worldwide partner with pension consultants Mercer’s, has elaborated on the mechanics of how his proposal for retroactive TFSA room might work. The TFSA is of course the new Tax Free Savings Plan, the equivalent of America’s Roth IRAs. The comment was appended to yesterday’s post about Jon Kesselman’s view of how the TFSA could be enhanced. I’ve republished the comment in this format for the benefit of some who may have missed it as a comment. The words that follow, in Italics, are Malcolm Hamilton’s:

I want to thank Professor Kesselman for his thoughtful comments and for the work he did championing the TFSA. I believe that my proposal is generally compatible with his.

The idea is really quite simple. On January 1, 2010, Canadians would be given $5000 of TFSA room for each year from the attainment of age 18 until 2008 inclusive. For example, someone who turned 60 in 2008 would receive an additional $160,000 of TFSA room. There would be no tax free transfers from RRSPs to TFSAs. There would be no requirement to demonstrate $160,000 of investment losses to get the additional room.

Not everyone will need or want the additional TFSA room. Some didn’t lose any money. Some can’t afford to save more. Some have large pensions. Some have plenty of unused RRSP room. But some Canadians need a little help right now….in particular those between the ages of 50 and 70 who had large RRSPs, lost a lot of money in the stock market, and now have the thankless task of trying to salvage their retirement plans by saving outside a tax shelter and earning a negative rate of return after taxes and inflation.

I think that my proposal works on a number of levels.

First, a country that expects taxpayers to make up large deficiencies in public sector pension plans should be prepared to forego some tax on the investment income that taxpayers will earn on their own retirement savings.

Second, all that the proposal does is put elderly Canadians in the position that younger Canadians will enjoy when they grow old. If we can afford to give today’s 18 year old $235,000 of TFSA room by the time he or she turns 65, why can’t we afford to give today’s 65 year old the same opportunity?

Third, we should recognize that those approaching retirement today have had a pretty rough ride. They have endured 2 market crashes in the last 10 years. They are contending with the lowest interest rates in 50 years. They had less RRSP room than the generation that preceded them and less than the generation that followed them…thanks to the federal government’s use of RRSP limits as a political football during the deficit years of the 1980s and 1990s.

There are other ways to accomplish more or less the same thing. I am not opposed to higher TFSA limits for elderly Canadians, but I don’t think that permanently higher limits are needed because future generations will automatically benefit from the maturation of the TFSA. I am not opposed to temporarily higher RRSP limits, but I doubt that the federal government will accept the up-front cost at a time of high deficits.