Should we lower RRIF withdrawal rates?

CALU has submitted its recommendations for the 2015 Federal Budget to the House of Commons Standing Committee on Finance.

The submission is based on the fact that approximately 11 million Canadians will reach age 65 by the year 2036. And longevity studies have also shown that seniors are living longer than ever before. Here are two of their recommendations.

1. RRIF withdrawal rules should be modified.

This would help seniors retain and spread out savings over their lifetimes. These rules should be adjusted periodically (every 20 years or so), based on demographics and economic conditions.

Moshe A. Milevsky, a professor at the Schulich School of Business and managing director of Longevity Extention Corporation, proposes one adjustment model. He suggests the current required minimum distribution (RMD) rates need to be changed to take lower interest rates into account, and the fact that, since Canadians are living longer, they’ll need more income. This doesn’t change the original intent of the RRIF legislation, which was to limit the deferral of income taxation, and spread personal pension payments evenly over a retiree’s lifespan. But, these rules haven’t been updated since 1992, he says.

Milevsky recommends that, each year, the RRIF holder should withdraw a percentage of the RRIF’s value at the start of the year equivalent to what a life annuity would pay at that age (see “Optimal RRIF spending rates in an economic lifecycle,” below). The numbers would reflect changes to interest rates and demographics. This would keep the RMD rates fair.

Optimal RRIF spending rates in an economic lifecycle

RRIF Value at 70: $200,000

Pension Income: $10,000

Survival to Age 95: 28% chance

REAL Interest Rate: 1.50%

Longevity Risk Aversion: High (=8)

2. A federal tax incentive for long-term care insurance should be implemented.

This would encourage Canadians to become more self-sufficient with respect to their long-term health care needs. CALU cites a recent paper by the Canadian Life and Health Insurance Association (CLHIA) and an upcoming report by the C.D. Howe Institute discussing the needs of our aging population. With Canadians living longer, they’re more at risk of contracting chronic diseases and will need support, whether at home or in an institution.

In fact, the chances of requiring long-term care are 1 in 10 by age 55, 3 in 10 by 65, and 1 in 2 by 75, according to Statistics Canada. And more than 750,000 Canadians over the age of 65 will reside in health care institutions by 2036. CALU recommends allowing long-term care insurance to qualify as an investment for an RRSP or RRIF, or letting investors withdraw up to $2,000 per year from RRSPs or RRIFs to purchase long-term care insurance.

Both issues are critical and timely. We should lobby and discuss these recommendations with our parliamentarians. We also should let clients know what our professional association is doing on their behalf. I say we should take this opportunity, in these pre-budget days, to support CALU and its recommendations.