It’s time to change the rules around registered retirement income funds (RRIFs) to allow retirees to draw down their savings how and when they best see fit.
That’s the message from some seniors’ advocates who say the existing legislation around RRIFs is out of date. Namely, Canadians must convert their registered retirement savings plans (RRSPs) to RRIFs by the end of the year during which they turn 71 and start taking income according to a prescribed rate schedule starting the following year.
These advocates point out that if the federal government were to make changes to the rules around RRIFs, it wouldn’t be the first time. During the past six years alone, Ottawa has adjusted the rules twice.
In 2015, the annual withdrawal rates were reduced in recognition that life expectancies and conservative investment returns had changed since the previous formula was created in 1992.
Then, in 2020, the government temporarily dropped the forced withdrawals by 25 per cent for that year alone to give seniors hard hit by the COVID-19 pandemic a break.
“Limits might be justifiable [in cases in which] people are living less and returns on investment are much higher, but given how long we’re living and that returns on safe investments are so low, it really would make sense to change all these things,” says William Robson, chief executive officer of the C.D. Howe Institute in Toronto.
Mr. Robson and Alexandre Laurin, director of research at the C.D. Howe Institute, published a commentary paper in March 2020 in which they called for reform to the RRIF rules. Specifically, they recommended a one-percentage-point reduction to the minimum withdrawals mandated for each age.
Mr. Robson argues that the current RRIF rules put Canadians who saved for retirement for themselves at a disadvantage versus those who rely on defined-benefit pension plans, such as government employees. Specifically, those pensioners are guaranteed they will never outlive their savings.
Running out of money is one of the greater concerns with mandatory withdrawals, which escalate each year from 71 to 95, starting at 5.28 per cent and increasing to 20 per cent of the plan’s total.
Canadian life expectancy is now at 82 years of age and the age cohort of those who are at least 85 years old is growing four times faster than the rest of the population, according to Statistics Canada data.
Besides the ever-diminishing pot of funds in a RRIF, just having to handle the money is a risk, Mr. Robson says.
“What concerns me is the requirement of drawing the RRIF money down. Even though there are tax-efficient ways of redeploying it, it creates opportunities for mistakes,” he says. “And once people are getting into their later years, the possibility of accidents goes up, as does the severity of the consequences if they make a mistake.”
Bill VanGorder, chief operating officer and chief policy officer at CARP in Halifax, says the organization’s members regularly cite financial security as one of their top three concerns.
The senior advocacy organization has been pushing for an end to the required conversion date for RRSPs and the withdrawal schedule for years.
“We don’t believe older Canadians should be forced to get rid of their savings. [The age of] 71 is based on an old-fashioned concept that people, somehow, when they get to a certain age, need to divest,” Mr. VanGorder says.
Life expectancy comes particularly into play for women, who live longer than men, on average. “Women are the ignored issue in the whole area of financial security,” Mr. VanGorder says.
Kelly McCauley, a Conservative member of Parliament, introduced a private member’s bill in 2016 to eliminate mandated RRIF withdrawals. It didn’t pass, but he says he will introduce it again if this parliament runs long enough to get it on the schedule.
“No other tax program requires a forced withdrawal or forces people to act in a way that increases their taxes,” he says.
RRIF withdrawals can push seniors into a higher tax bracket, which results in clawed back Old Age Security and Guaranteed Income Supplement benefits. Mr. McCauley notes that for seniors in non-profit housing, those withdrawals may also result in increased rent because rent is tied to income.
In an answer to a request from Mr. McCauley, the Parliamentary Budget Office reported in 2020 that eliminating mandatory RRIF withdrawals could cost more than $900 million a year in lost tax revenue.
However, Mr. Robson says that figure is misleading because the tax authorities will still get their due – even if it’s after the death of the RRIF holder.
“I think it’s problematic to do it that way because it treats the deferral of taxes as though they were taxes foregone forever,” he says. “It really doesn’t matter at all to the federal budget because the money is going to get taxed at some point. It’s a matter of timing. The government is immortal. Individuals are not.”
In 2016, Francois-Philippe Champagne, then parliamentary secretary to the minister of finance, said during debate on Mr. McCauley’s bill that the policy purpose of RRIFs is to provide replacement income during retirement.
“If the gradual withdrawal of assets in a RRIF were not mandatory, it would be possible for some account holders to accumulate huge amounts of money in those accounts by the time they die. Consequently, large sums of money held in a RRIF would have to be included in income for the year of death. That could motivate survivors to press for tax exemptions for a portion of the deceased’s RRIF assets, which would be contrary to the basic principles of our fiscal policy,” he said.
Mr. Robson says a lifetime limit to how much could be accumulated in a RRIF – perhaps calibrated to the value of the pension of a mid-level public servant – might be fair.