Time for an RRSP Policy Revamp?Trevor Parry
One of the clear advantages that China has over our consumption based Western society is their ability to think in staggeringly longer terms than us. One of the central pillars of Chinese society is duty to the family, both past and future generations. As a follower of Edmund Burke I like that outlook. Part and parcel of a multi-generational vision is a continued focus on the importance of savings. We as a society, both North America and European seem to have discarded the concept of long term savings in favour of an immediate gratification philosophy. We have delivered the latter with years of cheap credit. The events of 2008 and the malaise we find ourselves in, “the great deleveraging” is the direct consequence of the folly of monetary policy.
Part of the task of arresting and reversing the consequences of our slavish devotion to credit is to re-engender a societal devotion to the concept of savings. Businesses should be saving, individuals should be saving and governments must be saving. Unfortunately policy makers in Washington and Brussels have been tippling from the chalice of Neo Keynesianism. Massive government spending has for the most part not been directed at infrastructure projects ( a modern day Hoover dam or Interstate Highway system), but rather at propping up the fetid consumption economy by paying the bloated salaries of bureaucrats or offering the perpetually unemployed 2 years of free money. There is therefore no economic spark to encourage the economy to surge forward, but rather a continued morphine drip to those whose engagement in the economy is restricted to the weekly visit to Wal-Mart or the Colonel.
What can we in Canada due to promote a national savings strategy? Well Minister Flaherty has begun the job by trying to drive the froth out of the real estate market. More can be done here. Municipal governments, particularly Toronto, were a housing boom continues largely due to foreign money finding a home should consider a non-resident purchase tax to finance long term infrastructure projects (i.e. subways). However individuals must lead the way. In addition to removing a reliance on credit tax rules may be the means by which savings is encouraged.
One such area where change is needed is with regard to the RRSP rules. As we consider our annual RRSP contribution for the end of this month now would be a good time to review the efficacy of the plans. In recent years the Canadian Federation of Independent Business has reported that some 65% of Canadian under fund or do not fund their RRSPs at all. Why? For some it is cost of living, where everything must be deployed for lifestyle costs. The Great Deleveraging is certainly adding to this as people pay down amassed debt.
For many the RRSP does not fact or into their financial plans. They have been sold a bill of goods, largely by accountants that they are better off saving in their corporations. For some this has been a sound strategy, but for many lacking discipline it rings hollow. Whatever expanded savings that are possible are quickly replaced with expanded spending.
Can the RRSP be reworked to make sense, and encourage a new reverence for savings? The answer is yes. The Federal Government could consider increasing limits, but that would have little effect. What should be considered are two reforms: 1. replacing the system with a greatly expanded TFSA system, or; 2. allowing for the creation of a secondary market for the transfer of unused RRSP contribution allowances?
The benefits of the TFSA are well known. The second proposal should be given due consideration. If those in top tax brackets could reduce some taxation in the current year and increase retirement savings the benefits to both the individual and society are clear. More dollars result in a more robust retirement which would not be simply a series of withdrawals to cover lifestyle costs but likely continued investment, and expanded withdrawals necessarily means expanded government revenues owing to the taxation of those withdrawals. Such expanded revenue might be used to fund a supplemental public plan for those on the lower income rungs of society, and who make little use of the RRSP in the first place.
Sure the plan recognizes the simple fact that there are disparities in income in Canada, but creates a means for expanded revenue and expanded overall savings and investment in our society.
Posted: February 19th, 2013 under General.