Rules for Registered Retirement Income Funds (RRIFs) and similar retirement vehicles are stuck in the past and need revamping or removal, according to a new report from the C.D. Howe Institute. In Live Long and Prosper? Mandatory RRIF Drawdowns Raise the Risk of Outliving Tax-Deferred Savings, authors William Robson and Alexandre Laurin show that, with seniors living longer and investment returns on safe assets being lower, current age limits and mandatory withdrawals will leave too many seniors with negligible income from their tax-deferred saving in their later years.
Robson and Laurin show how the framework for RRIFs established in 1992, when life expectancies were shorter and safe assets were yielding returns much higher than inflation, gave RRIF holders a good chance of preserving the purchasing power of their withdrawals through their lifetimes. Since then, life expectancy at age 71 – the age at which savers in defined contribution pension plans and RRSPs must stop contributing to their plans – has risen, and real returns on safe assets have fallen close to zero. But the RRIF framework has undergone only one lasting change – a modest reduction of mandatory minimum withdrawals in 2015 – since then. Robson and Laurin calculate that the purchasing power of minimum RRIF withdrawals could fall to half their initial value by the time their holder reaches age 94 – which one in eight men and one in five women age 71 can expect to see.
The authors note that limits on contributions to tax-deferred saving plans and mandatory RRIF withdrawals reflect the government’s impatience for revenue, and argue that this impatience is inappropriate, since the government is immortal – the timing of receipt matters little to it – while retirees are mortal – the timing of payments matters greatly to them. They argue that abolishing age limits on saving and mandatory withdrawals would make sense. Failing that, they urge raising the age limits and shrinking mandatory withdrawals, and/or establishing a threshold below which RRIF holders do not need to make withdrawals at all.
“All these options would give Canada’s seniors a better chance of enjoying long life and prosperity – the post-retirement security they save for,” they conclude.
William Robson took office as CEO of the C.D. Howe Institute in July 2006, after serving as the Institute’s Senior Vice President since 2003 and Director of Research from 2000 to 2003. He has written more than 260 monographs, articles, chapters and books on such subjects as government budgets, pensions, healthcare financing, inflation and currency issues.
Alexandre Laurin joined the C.D. Howe Institute in 2008 and became Director of Research in 2014. From 1999 to 2008, Mr. Laurin worked for the Parliamentary Information and Research Service where he provided reports, analysis and policy advice to Members of the House of Commons and the Senate and to parliamentary committees on a non-partisan and confidential basis.