The RRSP turns 50

Canada’s favourite retirement savings option, the RRSP, turns 50 on Thursday. It is probably no coincidence that 50 is the age of those in the middle of the boomer generation because, for the most part, the rise of the RRSP has paralleled the growth and wealth accumulation of the boomers.

In 1957, then finance minister Walter Harris ushered in the RRSP with his federal budget speech in the House of Commons.

The plan was simple enough. You take a portion of your earnings and invest it in an RRSP. While the money is no good to you immediately, it will grow tax free, and you can deduct the contribution from your federal income tax.

Investors Group vice-president of advanced financial planning support Debbie Ammeter says that in 1957, the maximum contribution for an RRSP was 10% of a person’s annual income and could not exceed $2,400. By 1986, that amount had risen to slightly less than 20% of annual income, up to $7,500. Today, it’s 18% of earned income, up to $19,000 dollars.

It’s really been in the last 20 years, possibly buoyed by the tremendous wealth accumulation of the baby boomers during this period, that RRSPs took off, with a much greater percentage of the population investing in them.

“It does seem that the period from 1984 to 1999 saw a big increase in RRSPs because you went from 29% in 1984 to 57% ownership,” Ammeter says. “The median amount held in an RRSP more than doubled, as well. In 1984, it was $9,459 and in ’99 it was $20,000.”

In 2005, 6.1 million Canadians contributed more than $30 billion to their RRSPs. By 2014, Investor Economics predicts total assets under management in RRSPs will exceed $1 trillion. Still, only about 31% of eligible Canadians contribute annually to their RRSP.

Still, Ammeter points out that the growth of the RRSP’s popularity has been astounding.

“There certainly are several factors that contribute to [its popularity]: the aging of the population, increased participation of women in the labour force and increases in flexibility within RRSPs might have something to do with it,” she says.

Ammeter points out that in the 1990s, there were a number of regulatory changes to RRSPs that improved their flexibility.

“In 1991, there was a big increase in limits and the start of this system where unused RRSP room could be carried forward. At the time, it was only for seven years and [there was] an over-contribution limit of $8,000. In 1994, that seven-year cap was lifted, but there was a reduction in the over-contribution cap to $2,000.”

Other landmarks include a 1992 home-buyer program that didn’t penalize amounts taken out of an RRSP to purchase homes. This was followed by exceptions to withdrawals for education and training in 1999. More recently, in 2005, the foreign-content restrictions were removed, allowing investors to include foreign holdings in their RRSPs, leading to an unprecedented number of Canadians investing outside of the country.

Boomers are aging and will eventually — when they turn 69 — be forced to dismantle their RRSPs and turn them into RRIFs. The RRSP will be 70 when the majority of boomers reach that milestone, and even still, Ammeter doesn’t see any end in sight to the appeal of RRSPs.

“I think the whole value of the tax deduction that you receive and the tax-deferred growth within the RRSP is going to continue to be attractive and maybe even more so as people get closer to retirement,” Ammeter says. “Maybe the government will look at more flexibilities and enhancements within RRSPs to make them more attractive because of the increased interest by people to have sufficient assets to cover their retirement years. With longevity increasing, we certainly have the possibility of a much longer retirement than those a few generations ago did.”

Filed by Mark Noble, Advisor.ca, mark.noble@advisor.rogers.com