Canadians are living longer and earning less on their investments, but Ottawa’s rules for Registered Retirement Income Funds (RRIFs) are “stuck in the past,” says a report from the C.D. Howe Institute.
William Robson and Alexandre Laurin argue that current age limits and mandatory withdrawals on RRIFs mean that more seniors will have “negligible income from their tax-deferred saving in their later years.”
“Government impatience for revenue should not force holders of RRIFs and similar tax-deferred vehicles to deplete their nest eggs prematurely,” wrote the authors.
Under the RRIF regime, which started in 1978, Canadians must convert their Registered Retirement Savings Plans, which defer taxes, into Registered Retirement Income Funds by the end of the year that they turn 71. Starting at 72, they are obliged to withdraw a certain percentage of that amount each year, which is taxed.
The formula has been updated several times over the years and the government temporarily reduced mandatory withdrawals twice, in response to the 2008 financial crisis and during the COVID-19 pandemic, but these short-term fixes just highlighted a chronic problem, said the report.
The problem is people are living longer yet the age at which they must stop contributing to their defined contribution pension plan or RRSPs and start making withdrawals has not kept up.
Investment returns on Canadian government bonds have also fallen to 0.65 per cent, compared to returns near six per cent in years past.
The study estimates that the purchasing power of RRIF withdrawals could decline by almost half of their initial value by the time the holder reaches 94.
“Nowadays, about one in eight men age 71 and one in five women age 71 can expect to reach age 94 — and of course, those who live past that age see the purchasing power of their withdrawals drop precipitously,” said the authors.
The most straightforward solution would be to eliminate mandatory withdrawals altogether, says the study.
Though this would delay tax revenue and clawbacks from other benefits for the government, the fiscal impact would likely be small, it said.
“For RRIF holders, by contrast, full elimination would remove complexity in financial planning, and full or partial elimination would alleviate a threat to income security in retirement,” said the authors.
At the minimum, ages at which saving must stop and withdrawals start and accelerate should be higher to reflect current realities, they said. The study recommends raising these ages by three years.
The C.D. Howe Institute authors join other calls for RRIF reform from both industry and politicians. Earlier this year the Department of Finance started a study on whether the framework continues to be appropriate after a private member’s bill. It is due to report its findings in June.