Canada urged to end ‘pension apartheid’

Posted on October 28, 2011 in Debates

Source: — Authors: – FinancialPost/PersonalFinance
Oct 28, 2011.    Jonathan Chevreau

Every Canadian needs $2-million in RRSP contribution room to achieve parity with public-sector defined benefit pension plans, the C.D. Howe Institute says.

As things stand, the system punishes those with defined-contribution pensions in the private sector and those who rely on what little RRSP room is granted them, says James Pierlot, principal with Toronto-based Pierlot Pension Law.

The $2-million figure comes from the value of public-sector DB plans for top managers earning $150,000 late in their careers. Rather than limit RRSP contributions to 18% of a prior year’s earned income, Mr. Pierlot would give every Canadian the lifetime RRSP contribution room, adjusted to inflation.

The need to redress the gap between pension “haves and have nots” has become urgent, Mr. Pierlot says. Indeed, a new book published by Wiley Canada – Pension Ponzi – makes the same point: It depicts a system of “pension apartheid” that favours 20% of workers with unionnegotiated public-sector DB plans at the expense of the rest who guarantee those pensions through their future taxes.

Most penalized are new Canadians, the self-employed, the chronically unemployed and those who have suffered market losses in RRSPs or prematurely withdrawn funds from them.

In an interview, Mr. Pierlot said his paper (titled Legal for Life) still calls for upfront tax deductions for RRSP contributions but no annual contribution limit. The only constraint would be coming up with the money. Plans would still be taxable once funds are withdrawn in retirement.

Eventually, registered retirement income funds (RRIFs) would decline to zero but would not be subjected to minimum annual withdrawal rules that may force seniors to sell at market bottoms.

An early draft advocated a “declining limit system.” So while the limit might fall from $2-million to $1.9-million the first year of a RRIF, and fall another $100,000 each year thereafter, someone with only $500,000 wouldn’t be forced to withdraw anything in the early years of a RRIF.

The paper does not discuss taxfree savings accounts, but Mr. Pierlot advocates a lifetime TFSA limit of $250,000 to $500,000. “The retirement system is intended for middleclass workers earning $50,000 to $150,000 a year,” he said, “Anyone earning less should not be in RRSPs but in TFSAs.”

His proposals were included in private-member’s bill C574, which passed first and second readings until the federal election intervened. The Retirement Income Bill of Rights was presented by Liberal pension critic Judy Sgro and supported by all parties except the Conservatives, Mr. Pierlot said.

“It said every Canadian shall have equal opportunity to accumulate pension income no matter how they are employed or where they were born. If it had passed, it would have forced changes to the Income Tax Act.”

Mr. Pierlot said he didn’t “cost” his ideas because Ottawa misrepresents RRSP and pension tax deductions as tax expenditures.

“They’re not,” he says. “Money goes into plans and accumulates tax-free but down the road, the government gets its tax with interest. Yes, it affects government cash flow in the short term, but it isn’t a tax-avoidance mechanism. It’s a tax deferral.”

Fred Vettese, chief actuary with Toronto-based Morneau Shepell, says Canadians “essentially have a lifetime limit already since unused RRSP contribution room can be carried forward indefinitely.” But it’s true average private-sector workers with RRSPs can’t replicate public-sector levels of retirement income.  “If we truly felt public-sector plans provide an appropriate level of retirement income, the author is right in suggesting a $2-million lifetime limit to level the playing field.”

But there would still be inequity, Mr. Vettese said, because contribution rates needed to generate so much income would impoverish average RRSP savers over a working lifetime.

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