Even out savings playing field: Helping to pinch pennies without losing revenue

Originally published in the Financial Post on February 27th, 2010. To go to the Financial Post website, please click here.

By all accounts, Thursday’s federal budget will not unveil major new tax or spending initiatives, so those hoping for juicy incentives to save money will be disappointed.

That doesn’t mean we won’t see minor revisions to existing programs — tweaks that require just a few keystrokes to change the Income Tax Act. Seemingly minor changes in wording or numbers would dramatically change the amount we can save for retirement or at least narrow the retirement savings gap between public and private sectors.

C.D. Howe Institute president William Robson suggests RRSP contribution room could be almost doubled from the current 18% of earned income to 34%, with the maximum cap raised from $22,000 to $44,000. Robson also suggests that contributions federal public servants make toward their pensions should increase from one-third to 50%.

Others prefer doubling the $5,000 annual TFSA limit, which would help low-income seniors because the tax-free withdrawals won’t result in clawbacks to Old Age Security or other means-tested programs.

Alternatively, Malcolm Hamilton, partner at Mercer Human Resource Consulting Ltd., suggests Ottawa should make TFSA room retroactive to age 18, or simply set a lifetime contribution limit for all Canadians, regardless of age. That would help near-retirees whose RRSPs were torpedoed by the 2008 crash.

Hamilton likes Robson’s idea to redress public-vs. private-sector retirement parity, but doesn’t expect the gap to narrow next week. “I’m not sure the government wants to encourage saving at this particular time,” he says. The purpose of stimulus spending and low interest rates is “to get people to spend, not save,” Hamilton says.

Given the need to tackle deficits, he says, “retroactive or higher TFSA limits are the best we can hope for.”

Deloitte Canada national tax leader Andrew Dunn says RRSP or TFSA limits may be easy to change, but the optics of giving high-income earners more room are bad. Raising the cap to $42,000 might be viewed as regressive since higher income people save more than lower-income people. By contrast, he says, “lower income people rarely use maximum RRSP contribution room as it is and their contribution room carries forward.”

The sweet spot is middle income people. It would be politically expedient to raise the percentage rather than the cap, or change the percentage more than the cap, Dunn says. Boosting limits by hiking the percentage of earned income it’s calculated on would most appeal to middle incomes and is politically attractive. This could be coupled with a modest boost in the cap for higher-income people. “In the context of things the government could do, this would not be at the expensive end of the range,” Dunn says.

Susan Eng, CARP vice-president of advocacy, believes comprehensive pension reform is necessary and is calling for a moratorium on RRIF withdrawals and a boost to government-provided pensions like OAS and the Guaranteed Income Supplement. But for next week’s budget, Eng is resigned to the likelihood Ottawa is more likely to expand voluntary options like the RRSP or TFSA “safe in the knowledge that only the more knowledgeable and confident among us will actually take them up on it.”