The C.D. Howe Institute has joined calls for Ottawa to review the framework of the Registered Retirement Income Funds, calling the existing rules “stuck in the past” and out of step with today’s demographic and economic realities.
According to the independent policy research non-profit organization, the framework was established when life expectancies were shorter and the investment returns on safe assets were higher. Today, mandatory withdrawals will leave too many seniors with negligible income later in life, it said.
Canadians are required to convert their Registered Retirement Savings Plans, which are used to defer taxes, into Registered Retirement Income Funds by the end of the year that they turn 71. They are then required to withdraw a certain percentage of that amount each year, which is taxed as employment income.
In its report, the Institute suggests that Ottawa consider eliminating the conversion age requirement and minimum withdrawals altogether. Alternatively, it suggests that Ottawa raise the initial age of conversion (it did not specify an exact age) or lower the required minimum withdrawals by one-quarter to one-third.
“Without lowering the withdrawal percentages further – or using the more powerful tool of raising the age at which withdrawals must start – today’s seniors have a far higher chance of living to see severe depletion of their RRIF nest-egg’s purchasing power,” the report said.
The Department of Finance is conducting a review in response to a private member’s bill put forward last summer. The study will examine population aging, longevity, interest rates and registered retirement income funds. It is expected to report its findings and recommendations to the House of Commons by June.
With its report published Thursday morning, the C.D. Howe is the latest to contribute to the debate about the rules of conversion and mandatory withdrawal, now intensifying as Canada’s baby boom population moves into retirement at record rates.
When the overarching framework was last set in 1992, the assumption from government is that retirees would use their RRIFs to invest in safe assets such as government bonds, said Alexandre Laurin, one of the report’s authors and director of research at the C.D. Howe Institute. The assumption is that RRIF holders would earn a 7 per cent nominal return on these safe investments. At the time, the compound real rate of return for these bonds was about 5.7 per cent, the report says.
However, since the framework was established, real returns on safe assets have fallen to “close to zero,” and with less income, retirees who invest in safe assets are at much greater risk of outliving their assets, Mr. Laurin said.
While RRIF holders could choose to put their assets in equities to make a higher profit, Mr. Laurin said this is beside the point, as the system was designed to allow for a reasonable return through safe investments in bonds. It is typically recommended that investors increase their balance of bonds and other safe fixed income assets as they age, as they have less time left in the market to make up losses. Moreover, RRIF holders could be required to lock in losses when they make their minimum withdrawals.
The CD Howe report also suggests increasing the age at which minimum withdrawals rise to 20 percent annually (currently, 95 years old).
In submissions, several other organizations have also urged the government to raise the age of conversion from RRSP and delay the minimum withdrawal requirements as part of a federal study examining RRIF thresholds.
Critics of this approach have noted that RRIF taxes are required by the government to pay for critical services such as health and education. To that, the Institute takes the stance that unless an extreme deficit requires immediate reduction, government’s “impatience” to collect funds – which will eventually be collected at death if not paid out during life – is “hard to justify.”
Irene Galea