PROPOSALS TO STRENGTHEN THE ECONOMY WITH TAX-SHELTERED MONEY ARE ON SHAKY GROUND
THE RRSP TEMPTATION
PROPOSALS TO STRENGTHEN THE ECONOMY WITH TAX-SHELTERED MONEY ARE ON SHAKY GROUND
Timothy Green and Kimberley Pape want to buy a townhouse. Married for just over a month, the two 25year-olds, he a security guard and she an assistant in a legal-aid firm, are trying to take advantage of depressed house prices in the Toronto area to buy their first home. But even though they have set themselves a modest top price of $160,000, they are still short of the $16,000 in cash that they feel they need for a 10-per-cent down payment. But that may soon change. If Ottawa yields to growing political pressure and allows home buyers to dip into their tax-sheltered Registered Retirement Savings Plans for down payments, Green and Pape could soon be a bit closer to owning a house. Still, Pape’s father, personal-finance analyst Gordon Pape, says that the prospect makes him uneasy. His concern: that relaxing the rules governing RRSPs could leave many Canadians without adequate income in their old age. Despite that risk, said Pape, “Politicians are feasting their greedy eyes on the $100 billion in accumulated RRSP savings in this country.”
Certainly, the money in Canadians’ RRSP accounts has attracted the interest of at least some politicians—and that of Canada’s recession-battered home builders. Last week, five of the nine provincial premiers who attended a meeting with Prime Minister Brian Mulroney in Ottawa to discuss the economy urged the federal government to allow Canadians to tap into their RRSPs to help them buy or renovate homes. Support for the plan transcended party lines: the Liberal premiers of Newfoundland, Prince Edward Island and New Brunswick, as well as Ontario New Democrat Bob Rae and Alberta Conservative Donald Getty, ah argued that it could provide a kick-start to the economy without increasing government spending. Housing industry groups, including the Canadian Real Estate Association, have urged similar changes. But despite the display of political support, many experts—and even some advocates of the proposal—caution that opening up RRSPs to other uses would have only a minimal impact on the economy.
There is a more serious concern as well. Many critics echo Pape’s alarm that any easing of the existing rules governing RRSPs could
dangerously erode the funds that many Canadians rely on for their financial security after retirement. Said James Rogers, a Vancouverbased financial adviser for more than two decades: “I am terribly distressed to think that once more we are going to borrow from the future to solve a current problem.”
Finance Minister Donald Mazankowski and his officials appear to share those concerns. As they prepare for the upcoming federal budget, expected some time in the next few weeks, those officials say that they are still considering easing the rules on RRSP withdrawals. But one official, who asked not to be identified, acknowledged that such a move could lead to more radical—and contentious—departures later. Said the official: “Why not use it for re-training or starting small businesses?”
The competing plans for tapping RRSP savings are uniformly complex and often at odds with each other. But in essence, all of them would accomplish the same objective: allow some Canadians to use a portion of their savings as part of the cash down payment on a residence. The proposals differ mainly over what limits and conditions would apply. Most proposals would limit the amount that individuals could remove from their RRSPs to $10,000
or 10 per cent of the value of the home they wish to buy, whichever was less. And most of the proposals would prohibit home buyers from actually withdrawing money permanently from their RRSPs. (Rae, however, would allow a onetime withdrawal of $2,500.) Instead, buyers would borrow from their own tax-sheltered retirement savings account— repaying the loan later in instalments or when they sold their house.
Plans for implementing the proposal diverge over who would be eligible to tap their RRSPs. The Canadian Real Estate Association, which has been lobbying for relaxed RRSP rules since 1989, wants access to the retirement accounts limited to first-time home buyers. But Rae and many construction-union leaders favor wider access—including provisions for homeowners to borrow from their RRSPs to pay for renovations to their present house. Rae predicts that such reforms could free $2 billion from RRSP accounts between now and the end of 1992, generate 40,000 new
housing starts and create 47,000 new jobs.
But to many experts, those assumptions appear wildly optimistic. Even Canadian Real Estate Association president Michael Ziegler acknowledges that allowing first-time buyers alone to tap their RRSPS will not significantly aid the economy. Ziegler says that his group’s proposal is targeted instead at a comparatively small segment of about 300,000 people who now live in rented accommodation. He added: “It has always been intended as a long-term initiative to improve housing affordability for modest renters.”
At the same time, there are strong indications that Canada’s housing industry, which slumped last year to a seven-year low of 156,197 new housing starts, will pick up later this year, even without a boost from RRSPs. Indeed, one Toronto-based housing economist, Frank Clayton, predicts a 10-per-cent increase in nationwide housing starts this year—reaching 175,000—fuelled by lower interest rates and a slowly improving overall economy.
And in any case, few first-time home buyers have enough money in RRSP accounts to benefit from any of the proposals. Richard Hashie, a 24-year-old salesman for Loomis Courier Service in Halifax, for one, plans to complete the purchase of a $75,000, three-bedroom, semi-
detached house 15 km south of the Nova Scotia capital this week. Hashie says that he and his wife, Tammy, who now live in a one-bedroom apartment with their five-year-old son, decided to buy a house last summer when they saw prices and interest rates declining. But Hashie added that relaxing RRSP rules would not have helped his family, nor would it help many other young couples that he knows. “I don’t have any money in an RRSP—not a penny,” he says. “The people who do are in their 40s, and they already have a house.”
Hashie’s assumptions are borne out by hard evidence. According to a survey conducted last year by the polling firm Decima Research for Toronto-based Royal Trust, fewer than half of all Canadians over 18 have RRSPs. As well, Royal Trust executives and other financial planners say that even if young families do have an RRSP, they often contain much less than $10,000. Said Paul Starita, a managing partner for investment services with Toronto-based Royal Trust: “Allowing those people access to that money just won’t kick-start the housing market or the economy.”
Even if Canadians did withdraw large amounts of cash from their RRSPs, it is far from certain that diverting the money into housing would produce many wider economic bene-
fits. For one thing, noted Vancouver’s Rogers, most of the money at stake is already invested in the economy—much of it indirectly in home mortgages. Rogers says that he was annoyed to hear Rae imply that the retirement accounts could be drawn down without economic damage. “He makes it sound as if the money in RRSPs is sitting there in mattresses,” Rogers said. “This is not passive money. It is already invested by financial institutions in mortgages, businesses and many other things.”
Aside from the undetermined effects on the economy, many economists and financial advisers express very strong reservations about using the tax-sheltered investment accounts for anything other than their originally intended purpose; they consider the idea highly risky. Ihor Kots, managing director of the Canadian Bond Rating Service in Montreal, predicts that governments will find it difficult to maintain public pensions at their present levels. As a result, Kots said, whether or not they have paidup RRSPs may determine if many retired Canadians will live in comfort or reduced circumstances in the years ahead. Many potential home buyers share Kots’s concern. Said Neil
Cameron, a single, 35-year-old Toronto actuary who has been house-hunting for the past year: “It is never prudent to put all your eggs in one basket. If you need to use your RRSP for a down payment, you cannot afford a house anyway.”
That is an issue that federal finance officials will have to deal with quickly if the changes that Rae and others seek to make to RRSP rules are to be contained in the next federal budget. Those officials may conclude that Ottawa went far enough towards stimulating the housing industry two weeks ago, when Mazankowski announced that first-time home buyers would qualify for a federally guaranteed mortgage with down payments of as little as five per cent—half of the old requirement. But in the end, with so many young Canadians eager to buy their first house, Ottawa may find
the siren song of $100 billion simply too hard to resist.
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