Middle class embrace RRSPs: IDA

(February 8, 2005) Contrary to perceptions, RRSP investments are not the sole domain of the affluent, according to the February edition of the IDA’s Wealth Watch.

Of the nearly 6 million Canadians who claimed RRSP contributions on their 2003 tax filing, 75% (or about 4.5 million) claimed employment income of $63,100 or less. As a subset of that figure, 40% (2.4 million) earned less than $40,000.

The IDA report posits this RRSP participation results from an increasing number of middle- and lower-income Canadians who do not have a corporate-backed pension awaiting them in retirement. And despite reassurances from the Chief Actuary of the Canada Pension Plan, many doubt they will be able to rely solely on the CPP.

But while lower- and middle-income earners may make up a three-quarters majority of contributors, higher-income earners represent the lion’s share of the overall amount of contributions. Of those who contributed to their RRSP in 2003, 15% earned more than $80,000, but this income segment made 37% of the total dollar-value of contributions.

Conversely, those earning between $20,000 and $40,000 made up 31% of contributors, but only 17% of total contributions. Since lower-income earners will see less benefit from their contributions, the IDA suggests advisors might want to dissuade them from participating in the program, which could leave them facing clawbacks on their Old Age Security payments during retirement.

Another demographic split identified in the report is the gender gap. While men made up 54% of contributors, they accounted for 62% of contributions. This can be partly explained by the income disparity between the genders, with men typically earning more than women. The median contribution for men was $3,000, while the median for women was $2,100.

Despite repeated warnings that workers should start their RRSP when they are young, people under the age of 24 remain a very small group among RRSP contributors at 4%, accounting for just 2% of contributed dollars. Of course, this age group typically earns very little, and these are also “the student years” for many Canadians, who see much of their earnings going toward their education.

Still, the IDA recommends this group as a potential growth market for financial advisors.

“Advisors can build their businesses, and better service their client households, by advising parents not only on their own retirement planning, but also on the need for their working-aged children to come in and discuss setting up a retirement savings program with a financial professional.”

The largest age group using RRSPs remains those between the ages of 35-54. They made up 57% of contributors and 58% of dollars contributed.

One primary concern is still the amount of unused RRSP room. According to StatsCan, more than 18 million Canadians have empty space in their RRSP, worth a total of $350 billion at the end of 2003. In 2000, the value of that unused space was only $250 billion.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com