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Ottawa should rewrite “out of date” tax rules for seniors and their retirement funds

By The IJ Staff | March 18 2020 01:46PM

Tumbling stock markets are disconcerting at any time, but with the potential economic impact of COVID-19 many seniors are drawing down on their retirement funds. But the C.D. Howe Institute says they should not have to face “out-of-date” tax rules that are forcing them to sell in a down market.

In a letter to Finance Minister Bill Morneau, C.D. Howe says there are many Canadians who rely on their registered retirement saving plans (RRSPs) and defined-contribution pension plans and who are drawing down savings in registered retirement income funds (RRIFs).

Once they do though they are permanently lowering their prospects for retirement.

C.D. Howe has come up with three steps for the federal government to consider.

Give retirees a break on RRIF withdrawals

The first is to give retirees a break on mandatory RRIF withdrawals. C.D. Howe says the current schedule, starting at 5.28 per cent of the RRIF's market value as of December 31 of the previous year at age 71, and steadily rising thereafter, was already out of date. “Life expectancy is up, yields on safe investments were low and just went lower, and too many seniors risk depleting their tax-deferred savings. Withdrawals for 2020 will be calculated from pre-crash values, which will force drawdowns at a terrible time.”

During the 2008-09 crisis, Ottawa gave seniors a temporary cut in mandatory RRIF withdrawals. “Now would be a good time to suspend them entirely.” The Institute says that if permanent elimination is too big a step for the government to take, it could announce a subsequent one-percentage-point reduction of minimum withdrawals mandated for each age. “Retirees will breathe a sigh of relief in the present, and be better off from now on.”

Mandatory RRIF withdrawal age out of date

The second step is to raise the age at which Canadians must stop contributing to, and start drawing down, tax-deferred saving. The current age of 71 is, like mandatory RRIF withdrawals out of date and discourages Canadians who would like to work longer, increasing the likelihood that retirees will exhaust their savings in these accounts.

The third step, suggests the think tank, would be to raise limits on tax-deferred saving in defined-contribution pension plans and RRSPs for everyone. The limits presume that the cost of providing a dollar of income in these plans is nine times the rate at which benefits accrue in a typical defined-benefit pension plan.

More difficult now to provide retirement income

But increases in life expectancy and lower yields on safe investments have dramatically increased the cost of providing a dollar of income in retirement. “A more realistic equivalency measure would now be around 15, which would raise the limit for contributions to these plans from the current 18 per cent to 30 per cent of income.”

The Institute says the moves fit perfectly in a framework of responding to the crisis that do not threaten the government's long-term fiscal framework. While taxes would be deferred in RRIFs, RRSPs and pension plans, the money the government does not collect in 2020 would be due in 2021 and beyond.

“The fiscal stimulus is temporary. The relief to seniors would be immediate.”

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