Advocate urges change to RRIF withdrawal rules

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Canadian stock markets have been taking a beating lately, and so are the retirement savings of some seniors.

The advocacy group CARP, previously known as the Canadian Association of Retired Persons, says the federal government should be paying closer attention to the plight of seniors who may be facing the prospect of outliving their savings.

For that reason, says Susan Eng, CARP’s vice-president for advocacy, Ottawa is being asked to eliminate mandatory withdrawals from registered retirement income funds.

“Anybody who has ever had to complete their taxes or do this draw-down has whined about it, so it’s not as if we found the idea by ourselves,” says Eng.

“It really hit hard in (the market crash of) 2008, for a number of reasons.

“Stocks were falling — that wasn’t necessarily the government’s fault — but … the RRIF rules forced you to take money out not when you thought it was wise or needed it but because it was an annual requirement.”

Registered retirement savings plans were created to encourage people to save for their retirement, but they must be converted to a RRIF or an annuity by age 71, says Eng.

However, federal tax rules force people with RRIFs to withdraw prescribed amounts from their accounts annually, based on a formula. The withdrawal rates — starting at about seven per cent of savings and increasing yearly to about 20 per cent — allow the government to recoup taxes that were deferred when an RRSP was created.

The rules were designed to reduce deferred savings room to almost zero in about 20 years, Eng says in a telephone interview from Toronto. The funds withdrawn are taxed and the tax deferral room is lost, even with the option of putting money into a tax-free savings account, thus making it more difficult to build retirement savings.

Some older folks are being left with greatly reduced funds at their time of greatest need, says Eng. And considering people are living longer, the rules put a greater number of people at risk of outliving their savings.

CARP states that there are 265,000 Canadians 90 or older, and demographers are projecting there will be 355,000 by the year 2021.

Mandatory withdrawals may have been good public policy in the ’90s to deal with the government’s deficit when longevity rates were lower and investment returns much higher, says Eng.

But things have changed, she says, and it is no longer good policy in a time of low returns, increased longevity and a projected government surplus.

The rules have not kept pace with increasing lifespans and time spent in retirement, declines in personal savings rates and reduced access to workplace pension plans, says Eng.

Many Canadians are not saving enough for their retirement, and the fear is that some will be faced with income insecurity, she says. That is why CARP is on the federal and provincial finance ministers to address the prospect of seniors poverty.