June 22, 2023 - Simple changes to tax rules can improve retirement security for Canadians, as well as make the retirement system more equitable among different classes of savers, according to a new report from the C.D. Howe Institute.
In “Strengthening Retirement Income Security: Fairer Tax Rules and More Options Needed,” authors Alexandre Laurin and George Turpie propose retirement-related tax changes that impact members of capital accumulation plans (CAPs), which are divided into the accumulation and decumulation phases of retirement planning.
“Simple changes to tax rules would improve retirement security,” the authors argue. “They will also make the retirement system more equitable among different classes of savers and more efficient in terms of managing decumulation risks, such as longevity, price inflation and market volatility.”
The authors propose key changes to the accumulation phase, such as more equitable tax-deferred registered wealth accumulation limits, changes to the tax recognition of administrative expenses in group RRSPs and the creation of a new tax-prepaid option for long-term retirement capital accumulation. In terms of the decumulation phase, the authors recommend adding annuities to the list of investment products that can be held in a TFSA and increasing the age to which individuals can defer their public pensions.
“It is crucial for private sector workers to prioritize savings, as they often struggle to save enough,” the authors point out. “To address this issue, we propose several tax-related policy changes intended to enhance the accessibility and adequacy of retirement savings. We are confident that these changes will greatly benefit the majority of private-sector workers.”
The study also shows that many seniors are, or will be, primarily relying on accumulated savings in registered plans, and do not have access to private-sector defined-benefit (DB) pension plans. Those whose principal source of retirement income is not guaranteed for life need to protect against outliving their savings, which may translate into excess precautionary savings and a lower retirement lifestyle than may have been possible.
The Variable Payment Life Annuity (VPLA), for example, holds tremendous promise in assisting the mounting population of retirees in CAPs to navigate longevity risk at an affordable price. Presently, however, the efficacy of the VPLA as a large-scale decumulation solution is considerably curtailed because VPLAs can exist exclusively within specific types of pension plans.
“The new regulatory framework should avoid overly prescriptive and burdensome administrative requirements, allow for pooling of members across different jurisdictions, and allow for simple registration process to transfer funds,” they conclude.
For more information contact: Alexandre Laurin, Director of Research at the C.D. Howe Institute; George Turpie, Senior Vice-President, Group Retirement Savings & Investments, Canada Life, and Gillian Campbell, Communications Officer, C.D. Howe Institute, 416-479-9520, gcampbell@cdhowe.org
The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. Widely considered to be Canada's most influential think tank, the Institute is a trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review.