Low-income RRSP savers victims of bad advice, C.D. Howe says

(April 22, 2003) RRSPs are a terrible investment for lower income Canadians nearing retirement because most of the proceeds will be lost to taxes and clawbacks, according to a study released today by the C.D. Howe Institute. Study author Richard Shillington calls the situation “perverse” and urges financial advisors to stop spreading the myth that RRSPs are good for everyone.

Using 2001 information from Statistics Canada, Shillington found that 32% of households near retirement (aged 55-64) have total retirement savings of less than $100,000, which would likely make them eligible for the Guaranteed Income Supplement (GIS). Those same households have accumulated an average of $23,000 in RRSP savings. Withdrawals from RRSPs are treated as income in determining eligibility for GIS benefits.

“The primary beneficiary of this saving will be the federal and provincial governments because most of the income will be confiscated by income-tested programs and income taxes,” Shillington says.

GIS recipients have a total of about $12 billion in RRSPs, $5 billion in RRIFs and $20 billion in private pensions, the study says. “After the GIS clawback and income taxes, many of these individuals receive at most 29% of their retirement funds.”

“Clearly, many Canadians — mostly those with lower incomes — are making sacrifices to save in RRSPs, although better advice would have them save elsewhere,” Shillington adds. “Sadly, no one seems to have much interest in informing these people of the futility of their savings.”

Shillington feels that because little advice specific to lower income Canadians exists, that group tends to accept the universal claim that RRSPs are the most effective vehicle for retirement saving. “An informal survey of various Web sites offering assistance on retirement planning uncovered none that mention the GIS,” he adds. “A little honest advertising could greatly improve the situation.”

The federal government must shoulder blame also, Shillington says, for failing to develop alternative retirement savings mechanisms, such as tax prepaid savings plans, an idea C.D. Howe has been championing for years. TPSPs would make sense for low-income seniors, the study says, because withdrawals in retirement would not be taxed as income and would not reduce GIS entitlements. In the last federal budget, Finance Minister John Manley raised RRSP contribution limits and promised to examine TPSPs.

Shillington also suggests that Ottawa review the design of its income support systems to ensure seniors who have saved money receive some advantage.

What do you think of the findings of the C.D. Howe study? Are lower income Canadians getting “bad advice”? If so, what can be done for this demographic from a financial planning viewpoint? Share your thoughts in the “Free For All” forum of the Talvest Town Hall on Advisor.ca.

Filed by Doug Watt, Advisor.ca, dwatt@advisor.ca