June 4, 2014 – Many retirees face dramatic erosion of their savings due to outdated government rules, says a new C.D. Howe Institute report. In “Outliving Our Savings: Registered Retirement Income Funds Rules Need a Big Update,” authors Alexandre Laurin and William Robson urge the government to re-visit its rules requiring mandatory minimum withdrawals from registered retirement income funds (RRIFs) and similar accounts, to protect Canadians from outliving their savings.
“The reality is that Canadians are living in a very different environment than they did in the 1990s when these rules were written,” said Robson. “The good news is we’re living longer; the bad news is that we’re getting low returns on secure income-yielding investments.”
Life expectancy at age 71, when holders of all such accounts must start drawing them down, has risen by about 3 years since 1992. Even more dramatic, real yields on a representative portfolio of government of Canada bonds dropped from 5.7 percent in 1992 to a paltry 0.25 percent in 2014.
Since 1992, the Income Tax Act has obliged holders of RRIFs and similar accounts to withdraw annual amounts, dictated by an age-related formula, that rise until holders must withdraw 20 percent each year. But in 1992, the federal government was deficit-ridden and hungry for cash. Now it is close to surplus, and the timing of receipt of those taxes matters less to the government.
To the RRIF holder, however, the minimums pose a threat. They oblige the holder to run tax-deferred assets down rapidly. The average 71-year-old man holding government of Canada bonds faces a 1 in 7 chance of seeing the real value of his tax-deferred assets fall by 90 percent. The average 71-year-old woman faces a 1 in 4 chance of the same alarming decline.
Laurin concludes, “Obviously, the government should make the minimum drawdowns from RRIFs and similar vehicles smaller, or even eliminate them entirely. Reforming the withdrawal rules for RRIFs and similar accounts would help retirees enjoy the post-retirement security they are striving to achieve.”
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. It is Canada’s trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review. It is considered by many to be Canada’s most influential think tank.
Click here for the full report.
For more information contact: Alexandre Laurin, Associate Director of Research,C.D. Howe Institute; or William B.P. Robson, President and Chief Executive Officer, C.D. Howe Institute. Phone: 416-865-1904; E-Mail: jfleming@cdhowe.org.