Raise RRSP limits to help rebuild losses

Originally published in the Financial Post on February 12th, 2010. To go to the Financial Post website, please click here.

C.D. Howe Institute calls for 34% maximum

By almost doubling RRSP contribution limits — as the C.D. Howe Institute recommended yesterday — working Canadians who suffered losses in the 2008 stock market crash would have a glorious chance to rebuild their shattered retirements.

The pre-budget recommendations from C.D. Howe president and CEO William Robson is to raise RRSP limits from the current 18% of earned income to 34% and bump the maximum dollar amount proportionally, from $22,000 to $42,000. The 34% is the amount of pay employees in the federal Public Service Plan enjoy.

Similar increases would apply to group RRSPs and employer-sponsored Defined Contribution pensions. This would provide more parity with the traditional gold-plated Defined Benefit plans enjoyed by politicians, civil servants and a few fortunate managers in the private sector.

In an interview, Mr. Robson said with real returns near zero in recent years, those wishing to replace 100% of their working incomes must save half their salary, so 34% capped at $42,000 is not out of line.

Eventually, there should be a lifetime contribution limit for RRSPs, a suggestion Mercer’s actuary Malcolm Hamilton believes could also apply to Tax Free Savings Accounts (TFSAs, which also got their impetus from the institute.). When it comes to making up for losses, higher RRSP limits won’t help seniors already retired, but higher TFSA limits would, Mr. Hamilton said in an interview.

For those still working, the crash exacerbated the lack of parity because employers offering Defined Benefit pensions were able to top up those plans with pre-tax dollars to make their members whole. Those with RRSPs and DC plans could not. Towers Watson principal Lyle Teichman says someone with a $500,000 RRSP lost $100,000 of that in the crash and would take five years to recover it at the current $22,000 maximum.

Mr. Hamilton said he “more than likes” Mr. Robsons’s proposals. “These are changes that should be made as soon as possible.”

He estimates the average private-sector employee has one-third the savings of the public-sector employee, which is “neither healthy nor fair. A country that can afford rich pensions for federal employees should be prepared to let others decide for themselves whether they want to contribute 34% of pay to an RRSP so they can retire in their fifties with large, safe, indexed pensions.”

The “inexplicable disparity” goes back to attempts to level the playing field in the 1990s. Today, “the anti-RRSP bias is evident and growing,” he said, citing income splitting and phased retirement as recent tweaks that further favour those with cushy DB plans.

Is it realistic to expect Ottawa to implement all this in next month’s federal budget? Mr. Robson thinks it could take baby steps, such as raising the age at which RRSPs must start to be drawn down from 71 to 73. “We already went from 69 to 71 so the logic of 71 to 73 is just as strong.” He also suggests holders of RRIFs get the same spousal income-splitting opportunities as recipients of annuities from pension plans.