A showdown looms if Ottawa taxes RRSPs and pension plans
A RAID ON SAVINGS?
A showdown looms if Ottawa taxes RRSPs and pension plans
Starting this week, the federal government will begin rolling out an agenda of bad news. First, Human Resources Minister Lloyd Axworthy will release the government’s social policy paper, which is bound to call for shrinking the social safety net.
Later this month, Finance Minister Paul Martin is to deliver an economic update on the deteriorating state of the government’s finances. Then, probably before the spring budget, the government will release a report on the financial implications of Canada’s aging population. The aging paper, as it is known informally in Ottawa, is supposed to assess the coming strain on Old Age Security (OAS) and the Canada Pension Plan (CPP), as well as consider changes to the tax-deferred private retirement savings in company pension plans and Registered Retirement Savings Plans (RRSPs). Now, as various options are being weighed, actuaries and pension consultants close to the debate say the government is considering easing its financial problems by making a tax grab for some of the $550 billion now stored in pension plans and RRSPs. “When the government says that it’s going to the trouble of examining the retirement system, it doesn’t take a rocket scientist to figure out that they’re planning
to do something,” said Brian FitzGerald, a principal in the pension consulting firm Towers Perrin in Toronto. Added FitzGerald: “They’re looking at ways to tax retirement savings. Clearly it’s on the table.”
Exactly what the government is planning is uncertain. Martin will say only that he is considering all options. But an actuary close to the debate says the government has indicated privately that it wants to accompany cuts in social programs with new taxes that will raise $1 billion in revenue from pension plans and RRSPs. The moves are part of Martin s effort to meet his 1995 deficit target of $32.7 billion, significantly lower than this
year’s projected $39.7-billion shortfall. A tax on retirement savings could take many forms, but the two most likely options are a levy of about onehalf of one percentage point on all RRSP and pension assets, or a tax of more than 10 per cent on the plans’ annual investment earnings. Another possible alternative, leaving the existing funds untouched but reducing the maximum level of tax-free annual pension-plan contributions, is considered less likely because it would not generate as much revenue.
There is no doubt that any attempt by the government to raid the retirement savings of Canadians would provoke strong opposition. Late last month, four of the country’s largest pension-and-benefit consulting firms held a joint news conference in Ottawa to warn the public. “We think that any tax that would act as a disincentive to saving is wrong,” said Dan McCaw, president of William M. Mercer Ltd. of Toronto, one of the four companies. “The problem is that Canadians aren’t saving enough for their retirement now.”
Despite that, the federal government is tempted by the retirement-savings pools simply because they contain so much money. According to 1992 statistics, the latest figures available, Canadians had socked away $147 billion in RRSPs and more than $377 billion in employer-sponsored pension plans—a total amount almost equal to the federal government’s debt of $550 billion. Money deposited in either kind of retirement plan is not taxed until it is withdrawn—usually when plan holders retire and qualify for a lower tax bracket because of reduced income. The government estimates that its tax income suffers by $10 billion to $15 billion a year because of tax-sheltered retirement savings.
According to pension experts, any tax on retirement savings would almost certainly embrace not only RRSPs but also the even
larger, but less visible, company pension plans. That is because recent government policy has attempted to ensure, for fairness, that all Canadians receive roughly the same tax benefits for their retirement savings, regardless of whether they use pension plans, RRSPs or some combination of both.
Another complication comes in the case of defined benefit pension plans, in which employers have promised to pay specific benefits to individuals when they retire, unlike defined contribution plans, in which employers simply contribute a fixed amount of money annually to each worker’s retirement savings plan. A tax on the assets or earnings of defined benefit pension plans will shift the cost to the employers, who will have to contribute more to the plans so that they can meet their commitments.
Despite the sensitivity of the subject, the government could muster arguments in favor of taxing pension savings. For one thing, the tax benefits for retirement savings are more generous in Canada than in many other countries, including the United States. And some critics contend that RRSPs are of benefit mainly to the affluent. Only about one in every three eligible Canadians contributes to an RRSP. Participants put $16 billion into RRSPs in 1992, the last year for which numbers are available, but that was not even a quar-
ter of the $72 billion that could have been contributed. Still, Statistics Canada says that more than 80 per cent of RRSP contributors have incomes below $60,000 and more than one-third of contributors have incomes under $30,000. Said FitzGerald: “RRSPs are not just indulgences of the rich.”
The Liberal government has already backed away once from the idea of taxing retirement savings. When Martin encountered
strong opposition to the idea as he prepared his first budget late last year, he dropped it. Instead, the government announced in the February budget that it would begin preparing for the aging of the population by releasing a paper on the financial issues that will arise by 2030, when the proportion of people over the age of 65 is expected to have doubled from current levels to 23 per cent of the population. The paper, which is being jointly prepared by the finance, human resources and health departments, is to determine what will happen as the number of people paying for retirement programs like the CPP shrinks at the same time
as the number receiving those benefits grows. The paper is also expected to consider modifications to the public pension system, including the CPP, Old Age Security, and the Guaranteed Income Supplement (GIS), which is available for poor seniors.
Some observers think that the government may use the paper as its first opportunity to begin tightening up the public pension system. Said McCaw: “I think it’s reasonable to expect that the government will make some modifications.” He suggested, for instance, that the government could begin to raise the retirement age. In fact, the Canadian Institute of Actuaries has suggested, among other changes, that the age of retirement for the purpose of CPP benefits be gradually increased to 70 from 65. That is because, if no changes are made, within 30 years taxpayers will be paying 14 per cent of their gross income to fund the CPP as the baby boom generation retires. Currently, they pay about five per cent of gross income.
But if the government is serious in its concern about the aging population, critics argue, the paper, which is intended to provoke public debate rather than make extensive recommendations, should look at even broader issues. Robert Brown, an actuary at the University of
.. Waterloo, who was one of the first
to propose a hike in the retirement age as a way of fixing the CPP’s underfunding, says that an even more important issue is the effect on the Canadian economy when millions of baby boomers stop working and begin cashing in the investments in the pensions and RRSPs. “I’m now convinced that the real issue is not whether the CPP can be pre-funded,” said Brown, “but what happens when there’s a mass transfer of wealth from production to consumption. I don’t know if the economy can handle it.” Brown says that conventional economic theory suggests that when the retiring boomers stop producing but continue consuming, they will create a new wave of hyperinflation.
Government officials would not say whether the aging paper will cover that much territory. But there is considerable speculation that disagreements about scope are one of the reasons that the officials drafting the paper routinely decline to talk about the project or give any clue about when it will be released. Some observers say that finance officials are pushing for a paper that will focus on revenue-raising goals, while human resources would prefer a more comprehensive one that
will focus on the future needs of retirees. One idea that is receiving considerable attention is the Australian retirement system model, in which employers are required to provide mandatory pensions.
Regardless of the paper’s findings or recommendations, it is likely to be controversial. FitzGerald says that he and his colleagues were surprised by the amount of interest their Ottawa news conference generated. Even beforehand, as he was flying to Ottawa, he was asked by a flight attendant who read a news release that he had on his knee whether a tax on RRSPs is coming. “She said: ‘Surely they won’t try that,’ ” he recalled. Her response is echoed by Lloyd Atkinson, the Bank of Montreal’s chief economist, who attended one of Martin’s recent pre-budget consultations. The government can expect a fight if it tampers with RRSPs, said Atkinson. “There are very few sacred cows in Canada,” he added, “but that’s one.” Until now, Jean Chrétien’s Liberal government has gone out of its way to avoid a fight, but this might be one battle it cannot afford to duck. □
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