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rob carrick

For reasons of fairness, it's time to revisit the rules that require people to withdraw a big chunk of money each year from their registered retirement income funds.

A fair approach to RRIF withdrawals is complicated, though. On one hand, we need to consider the needs of seniors who are required to withdraw annual amounts that are quite high in relation to today's low interest rates and longer lifespans. There's a strong argument for lowering the minimum withdrawal so that RRIFs last longer.

On the other, we need to be fair to the working taxpayers who help support government spending on seniors. Easing the minimum RRIF withdrawal rules means seniors pay less tax on a year-by-year basis. That could put more of a burden on other taxpayers.

The image of the financially frail senior who needs financial coddling at every turn is decades out of date. "As a group, seniors have never been better off financially," a recent report from BMO Nesbitt Burns says. "They are four times richer than their parents were at the same age in the mid-1980s and have 40-per-cent more spending power."

Seniors are quite capable of pulling their weight on taxes, and they certainly use services paid for with those tax dollars. Do we really need to take measures that would have the effect of lightening their tax load?

The answer is yes. If seniors drain their RRIFs too quickly, then that could put a burden on government to spend more money on programs like the guaranteed income supplement. People have to take responsibility for their own retirement savings, an argument I made in a column last week. But the government can still offer some help.

One way to do that is to tweak RRIF rules that date back to 1992, a time when yields on the interest-paying investments that many seniors rely on were in the range of 6 to 8 per cent and life expectancy at birth was in the mid-70s for men and around 80 for women. Today, a five-year Government of Canada bond yields 1.5 per cent and people will live to an average 80 for males and 84 for females, according to World Health Organization data.

Under the current rules, you must convert a registered retirement savings plan to a RRIF by the end of the year you turn 71, and then start withdrawing amounts from your plan according to a schedule that starts at 7.38 per cent of the plan's value. Withdrawals rise gradually to 8.75 per cent at age 80 and 20 per cent at age 94 and higher (note: you can use a younger spouse's age to set your minimum withdrawal amount).

A RRIF withdrawal schedule suited to today's world would allow seniors to withdraw less per year and max out at 15 per cent, says Clay Gillespie, financial adviser and managing director at Vancouver's Rogers Financial Group.

Mr. Gillespie was in Ottawa last week to brief the House of Commons Finance Committee on the need to update the RRIF withdrawal rules. Changing RRIF rules in the next federal budget offers the government the chance to deliver a big win to seniors just ahead of an election campaign. But the government also has to protect the flow of tax revenue it gets from RRIFs. Remember, this is money that has long been shielded from tax.

Before people have a RRIF, they have an RRSP. Contributions to an RRSP are tax-deductible, and investment gains within the plan are tax-deferred. The RRIF withdrawal schedule brings all this money back into the taxable world.

Mr. Gillespie said lower RRIF minimums would affect the government's cash flow in the near and medium term, but he believes the long-term impact would be neutral at worst. His view is that retirees will take advantage of lower withdrawal requirements and try to preserve their RRIF assets as much as possible. These assets become taxable on death, however.

"Seniors would like the RRIF minimum reduced because it may reduce tax," Mr. Gillespie said. "I'm not actually sure that's going to happen. The government may actually be better off by letting people defer their RRIF withdrawals because there will be a bigger pot of money on death," Mr. Gillespie said.

He offered the committee three options for changing the RRIF withdrawal schedule. All would shrink the withdrawal minimums to help preserve assets, and to build in the flexibility to keep adjusting them to changing circumstances.

"Our argument isn't that the RRIF minimum is evil," Mr. Gillespie said. "It's that the minimum hasn't kept up with changes in life expectancy and interest rates."


Globe app users click here for a chart outlining the case for lower minimum RRIF withdrawals