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the long view

Ottawa’s changes to RRSP and TFSA rules fail to address what is arguably the most important goal of the retirement system – ensuring all Canadians over 65 enjoy a decent standard of living.John Sopinski/The Globe and Mail

Ottawa clearly wants the votes of seniors. Now if it would just address the real flaws in Canada's retirement system.

Last week's federal budget showered goodies on the grey-haired set, ranging from more time for seniors to tap their registered retirement income funds (RRIFs) to vastly expanded limits on contributions to tax-free savings accounts (TFSAs).

Neither move addresses what is arguably the most important goal of the retirement system – ensuring all Canadians over 65 enjoy a decent standard of living.

Canada has been a world leader in this regard and our old-age poverty rate remains among the 10 lowest in the Organization for Economic Co-operation and Development. But the most recent OECD report on pensions notes disturbing trends. While old-age poverty is declining in many developed countries, it is rising in Canada.

Some indicators hint at financial stress even among apparently well-off seniors. For instance, 6.5 per cent of Canadians over 65 who own their own homes are still repaying a mortgage, according to the OECD's 2013 report.

There is also evidence of growing inequality among the elderly. At the top of the retirement heap are the shrinking aristocracy of workers fortunate enough to enjoy defined-benefit pensions, which pay out guaranteed monthly amounts, sometimes even adjusted for inflation.

Below that lucky elite is the growing mass of retirees who must patch together their own safety net. Their prosperity, or lack of it, hinges on how much they can stow away in RRSPs, TFSAs and defined-contribution pensions. If they happen to be in the wrong industry and suffer prolonged periods of unemployment, their retirement nest eggs suffer, through no fault of their own.

Our reliance on private savings to fund our retirements makes Canada an outlier among developed countries. Public transfers – programs such as Canada Pension Plan and Old Age Security – account for less than 39 per cent of seniors' incomes compared to 59 per cent on average among OECD members.

Women are most at risk, especially if they are divorced or separated. "Higher poverty among older women reflects lower wages, more part-time work and career gaps during women's working lives, as well as the effect of longer female life expectancy," the OECD notes.

These are problems that Ottawa should be addressing, but isn't. Instead, it's bending its efforts to ensuring that those who already have substantial retirement nest eggs can live even better.

Revised withdrawal rules on RRIFs, for instance, are clearly a good idea – as Canadians live longer, we should have more time to withdraw our savings. However, the new rules primarily benefit those who have amassed major wealth in their RRIFs, not the vast majority of seniors with less than $100,000 in tax-sheltered accounts.

The affluent will also win from expanded contribution room for TFSAs. However, most Canadians aren't using the contribution room they already have. Roughly a third of TFSA account holders make no contributions from one year to the next. The people who will benefit most from the new $10,000-a-year ceiling on contributions are the small sliver of the population that has already maxed out its retirement accounts.

To make matters worse, the TFSA system narrows the tax base. As wealth builds up in those tax-sheltered accounts over the years to come, Ottawa will have to push more of the tax burden on to the remainder of the population – in effect, shifting the load from affluent, older Canadians onto younger, poorer Canadians.

There are ways to fix the problem while still maintaining all the good parts of the TFSA program. Armine Yalnizyan, senior economist at the Canadian Centre for Policy Alternatives, recommends instituting a lifetime cap of $150,000 on contributions to TFSAs, as well as a lifetime tax-exempt limit of $450,000 on each TFSA holder. That would allow typical Canadians to amass a substantial nest egg without subsidizing million-dollar-plus portfolios for the affluent.

Another good idea would be for Ottawa to increase the efficiency of our savings.

Given our growing reliance on private savings to fund much of our retirements, it's crucial for Canadians to derive the best possible returns from RRSPs and TFSAs. The problem is that much of this money is invested in highly inefficient mutual funds and other investment "solutions" that can easily eat up 20 per cent to 40 per cent of potential returns.

That cost could be avoided if RRSP and TFSA providers were required to offer an ultra-low-cost, balanced portfolio of diversified index funds as one option on the investing menu. This plain-vanilla, standardized portfolio would provide typical Canadians, even those who have no financial expertise, with a highly efficient way to build their savings.

For a nation that truly wants to achieve a good retirement for everyone, that doesn't seem like too much to ask.