The overlooked backdrop to the rise in the TFSA limit is our high and rising level of household debt.
Having eliminated its deficit, Ottawa felt it had room to increase the annual contribution ceiling for tax-free savings accounts to $10,000 from $5,500 in last week's budget. But a lot of Canadian households still live in deficit-land. The ratio of debt to disposable household income hit a fresh high at the end of last year, and total growth in debt levels continues to run well ahead of increases in salary and wages. This suggests an ongoing inability of some people to live within their budget.
So far, the debate over the appropriateness of the TFSA increase has focused on two questions – whether the federal treasury will miss the forgone tax dollars in the decades ahead (I argued it will in this column), and whether just a well-off minority of Canadians will benefit (debatable). What we haven't yet discussed is how the higher TFSA limit has glossed over what is far and away this country's biggest economic problem – high debt levels.
In our Globe and Mail universe, there's been a huge level of interest in the higher TFSA limit. How to light up the Globe website: Post a story about TFSAs. Okay, we skew to an audience here that can afford to put more money in TFSAs. But TFSAs have been receiving attention from all media lately.
This is partly because TFSAs are a crowd pleaser. Regardless of how much money you have, the concept of saving or investing tax-free really resonates. TFSAs are also aspirational – you might not have the money to use them now, but you hope to in the future. Plus, there's the fact that TFSAs are relevant to adults of all ages, comparatively simple to manage and still widely spared the admin fees plaguing other types of registered accounts.
But as much as we love TFSAs, they're a personal finance sideshow in this country. The main event is household debt, a problem that TFSAs don't address.
Let's review some basic personal finance. The foundation of smart money management is to live below your means. Not within your means – that's too vague. If you live below your means, then you've built in room for saving and for using TFSAs. As a country, we're tripping over Step One while obsessing over Step Two.
You don't need to be debt-free to be a smart money manager. Far from it. If you make enough money, you can carry one of those mega-sized Toronto or Vancouver mortgages plus car payments and a line of credit while still managing to save at least 10 per cent of your gross pay. Problem is, not enough residents of Toronto, Vancouver and plenty of other cities are in that position.
That's the story told by this country's high debt levels. The federal government may have its finances back in line, but many of the nation's households are sinking in debt. Higher TFSA limits won't help them. They may even hurt some people by diverting them from the goal of debt reduction.
We can argue all day about the optimum choice between saving/investing or paying down debt, but optimum solutions are a luxury item. They're for people with the time, energy and inclination to work through angles such as the difference between the interest rate on debt and rates of return on savings and investments. There's no way that the people who have driven personal debts so high they can't save are going to do this math.
So here's a suggestion for them that works on the principle that the best solutions are sometimes the ones that are easiest to understand and put into action: Take a pass on TFSAs for a limited time, say a year or two, and pay down your debts. Start with your highest-rate debt and work down from credit cards and consumer loans to unsecured lines of credit and then home-equity credit lines. However much your debt payments decline, add that amount to your savings.
A higher annual contribution limit for TFSAs isn't inappropriate just because we have high debt levels in Canada. But it does feel as if the national conversation on personal finance has been hijacked. Debt's the big issue. Increasing the TFSA limit to infinity and beyond won't fix that.