RESP RIP?: Education saving plan missing the mark, C.D. Howe suggests

(December 13, 2002) Registered education savings plans are missing the mark, doing little to improve access to post-secondary education for most Canadians, says a paper commissioned by the C.D. Howe Institute. The study concludes that RESPs should be phased out and rolled into the existing RRSP program.

The study, authored by Kevin Milligan, associate professor of economics at the University of British Columbia, argues that RESPs are needlessly complex and a poor way to support post-secondary education.

“Through RRSPs and other forms of tax-advantaged savings, Canadians already have access to tax-exempt accrual of income,” Milligan says. “The addition of extra contribution room through RESPs may attract savings that were destined for another tax-advantaged form, but is unlikely to generate new household saving.”

Under the RESP program, Canadians can contribute up to $4,000 a year, to a maximum of $42,000, to a savings plan dedicated to future post-secondary education. But Milligan says the program is poorly targeted, appealing primarily to higher income households who have already maxed out their RRSP contributions.

In addition, high-income households are less likely than lower income households to need to borrow to fund their children’s education, so RESPs “miss the mark,” Milligan argues.

Milligan is also critical of the federal government’s Canadian education savings grant program, designed to encourage investment in RESPs. The CESG provides a 20% grant, up to $400 a year, for those contributing to an RESP.

“The CESG payments end up in disproportionately in high-income households,” he says, noting that the $423 million Ottawa expects to spend on the program this year could provide free tuition for more than 120,000 university students in Canada, based on Statistics Canada’s tuition averages for 1999.

Milligan recommends discontinuing the CESG and reallocating those funds directly to post-secondary education.

Milligan admits that the creation of an account specifically for education savings may help keep funds isolated from everyday saving. He also believes the promotion and advertising of RESPs and CESGs may help boost awareness of the importance of saving and the high future cost of education.

“However, this evidence does not necessarily make a strong case for the existence of RESPs and CESGs,” he concludes. “Students, families and taxpayers deserve more effective programs.”

Eliminating the CESG and replacing the RESP would improve access to post-secondary education for disadvantaged Canadians and increase the efficiency of Canada’s tax system, the study concludes.

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Are RESPs missing the mark, as Milligan’s report states? Should the RESP and CESG go the way of the dinosaur? Share your views in the “Free For All” forum of the Talvest Town Hall on Advisor.ca.

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

(12/13/02)

Doug Watt