PRPPs are no panacea

This article was published by Financial Post November 26th 2011.  To see this story and to read related stories on the Financial Post website, please click here

By: Jason Heath

An Ipsos Reid poll taken last month found that one-third of Canadians aged 55 and above have at least 16 years left on their mortgage. Given the fact that interest rates are at historic lows with nowhere to go but up, it’s not hard to imagine a future that includes one-third of Canadians dying at their life expectancy of age 81, still paying off that same mortgage.

The federal government is concerned about debt. In fact, Finance Minister Jim Flaherty announced tighter restrictions on mortgage amortizations and refinancing earlier this year to “make sure we don’t have the kind of medium-term problem that has been experienced elsewhere.”

The Bank of Canada is concerned about debt. In fact, governor Mark Carney has received global attention for his outspoken criticism of the European debt crisis.

That said, even though the two top financial decision-makers in the county are concerned about debt and the statistics confirm that debt is going to weigh heavily on Canadians in retirement, the key retirement planning solution from our government is nothing more than a wolf in sheep’s clothing – an RRSP masquerading as a Pooled Registered Pension Plan (PRPP).

In general terms, the PRPP program is no different than an RRSP. Contributions generate tax deductions, enable taxdeferred growth, tax is payable on withdrawals and for the most part, will be invested in mutual funds – pooled investments that, according to a 2006 report entitled Mutual Fund Fees Around the World, are subject to far higher fees in Canada than in any other country. It’s no wonder the investment and insurance industries are applauding the introduction of PRPPs.

Given the fact that RRSPs have been around since 1957 and that the Toronto Stock Exchange is at the same level it was at in 2000, it seems strange that the key publicpolicy proposal purports that PRPPs are the panacea for all of our retirement ills.

Perhaps finance ministers should be considering tax incentives to encourage extra mortgage payments or even a tax refund for paying off your mortgage? It would be like having the government attend your mortgage burning party. It would also be in stark contrast to a tax incentive in the United States allowing taxpayers to deduct their mortgage interest, which has arguably encouraged excessive borrowing and the subsequent bursting of the housing bubble south of the border.

And if the government thinks the workplace is the best environment to introduce and encourage retirement programs, like PRPPs, maybe they should consider what the average Canadian really needs: guidance. Canadians don’t need yet another salesperson (investment advisor) trying to sell them an overpriced product (mutual funds).

Canadians need to be empowered with the knowledge of whether it’s better to invest or to pay down their debt or to do something entirely different with their precious paycheques. After all, is a retiree that much better off going into retirement with $100,000 more in their PRPP account compared with $100,000 less debt?

Jason Heath is a fee-only certified financial planner at E.E.S. Financial Services Ltd. in Markham, Ont.

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