CPP enhancements not enough to bridge the retirement savings gap

By Andrew Rickard | August 09 2016 11:28AM

Photo: Freepik

The Investment Industry Association of Canada (IIAC) says that the government needs to make a number of changes to registered plan rules so that people can set aside enough money for their retirement.

The IIAC made a number of recommendations in its submission to the federal government's pre-budget consultations. Among other things, the association argues that the recently-announced improvements to the Canada Pension Plan (CPP) will not properly address the challenges faced by younger Canadians, nor will they help older people who are close to retirement but who need to work and save longer.

In particular, the submission says legislators have overlooked the important role that group RRSPs could play in helping people save for retirement. IIAC notes that there are about 34,948 companies that sponsor group RRSPs for 2.82 million employees, with $74.3 billion under management.

“Higher savings for individuals”

"Group RRSPs face tax disadvantages versus Defined Contribution pension plans and Pooled Registered Pension Plans. This tax unfairness disenfranchises the many Canadians that rely on Group RRSPs from saving for their retirement," reads the submission. "For example, employer contributions to a Group RRSP are treated as earnings and, hence, payroll taxes like CPP and EI are deducted from those contributions. This uneven treatment is justified on the spurious grounds that Group RRSPs are not really a pension plan as funds can be withdrawn before formal retirement. The IIAC recommends that the government relieve employers’ and employees’ contributions to Group RRSPs from payroll tax, which will lead to higher savings for individuals using these plans."

Many Canadians risk outliving their savings

IIAC is also concerned about the rules which require annuitants to wrap up their RRSPs and convert them into Registered Retirement Investment Funds (RRIFs) and start drawing income at 71. With life expectancy on the rise and real returns expected to remain low, IIAC suggests that many Canadians risk outliving their savings.

"It is critical the benefits of existing tax-assisted retirement savings program are adjusted to accommodate the changing demographics and the changing pattern of retirement savings," concludes IIAC. "Therefore, the IIAC recommends the age of eligibility for contributing to RRSPs be extended beyond age 71, and that the rules mandating minimum yearly drawdowns from RRIFs and similar accounts be eliminated to provide seniors with more flexibility and longer income tax deferral."