Capstone Course

Essay Assignment

Ways to address insufficient retirement saving in Canada with

To Professor Alan Goldhar

Internal
As average life expectancy for Canadians continues to increase, many have expressed concern

that Canadian are not saving enough for retirement and likely to run out of money in their

senior years. Some experts in the industry argue that government should increase government

payments such as Canada Pension Plan and Old Age Security which is funded by increases in

personal income taxed. On the other hand, some supported other solutions such as enhancing

current programs such as RSP and TFSA to encourage more retirement savings. While increase

government payment such as OAS, CPP and GIS seem to be the most direct solution, and

impact can be seen immediately, it might not be a fair and sustainable solution by increasing

personal tax rate to support the payments. The change on saving programs can encourage

increase of saving in part of the population, yet the program requires more than change of

policy to become effective. Programs to improve company's pension plan might be also an

alternative solution as company pension is deteriorating in many cases.

In order to address insufficient retirement saving with Canadian, the most straightforward

solution is to increase government payment such as OAS, CPP and GIS and funded by increasing

personal tax. This solution is relatively easier to implement and modify technically. This allows

the government to make adjustment according to the needs and economy at the moment in a

relatively easier way.

As well, in compare to voluntary saving programs such as TFSA and RSP, increase of

government payment to address insufficient retirement saving is a solution with a predictable

outcome. As it is a forced program, analysis does not have to predict the response rate from

the public. The analysis on the outcome and cost can be done more accurately. In return, that

Internal
could be a solution which might get more support and require less time when passing the

change within the government.

Increasing government payments is one way of forced saving which reduce risk for the

community. In other words, the workforces are paying for the senior income, and they will be

the beneficiary when they become seniors. This social security program will cover most

individuals in the community, thus recognized the contribution from each class of the society.

This will also increase comfort level of residents that they will be entitle to payment when they

retired. I will argue that this applies especially to the low income class who are unable to save

on their own for retirement. They are also the group who create the biggest risk to the

community in terms of payments in support their living.

While increase government payment such as CPP, OAS and GIS can address the inadequate

retirement saving of Canadian when we are facing increasing life expectancy, it might not be

fair and sustainable for Canada to fund the payments by increase of personal tax.

It is an unfair tax program to fund growing government payments by increasing personal

income tax. In Canada, the biggest expense of the government is for retirement payments,

which is about 49% of personal tax income of government.1 Whereas, we have more than 3

million Canadian are self-employed, the prediction is that by 2020, we will have 45% of

Canada's work force will be generating self-employed income.2 We have preferred tax

1
Where your tax dollar goes, Peter Armstrong, CBC News, Feb 23, 2018
https://www.cbc.ca/news/business/tax-dollars-1.4545415

2
Must-knows for Canada's self-employed this tax season, Jeff Cates, Globe and Mail, February 23, 2018
https://www.theglobeandmail.com/report-on-business/careers/leadership-lab/must-knows-for-canadas-self-
employed-this-tax-season/article38062313/

Internal
treatment for self-employed individuals who are self-employed, and in many cases self-

employed small business individual are paying significantly less tax. I personally work at the

Bank and help clients with mortgages for over a decade, I will argue that the reported income

from self-employed small business owners are much reduced from written off of expenses or

sometimes, being in cash business. With my experience as a Banker, approving clients who

have self-employed incomes in small business are often more challenging. We used to have

'stated income' program which estimates the client's income from the business transactions,

assets of clients, financial statements. It explains to you the significant differences that stated

as reported income with CRA versus the actual income.

On top of that, Canada is an immigrant country, while we are importing a lot of immigrants to

added to our work force, we also have open our doors to the parents and grand-parents of the

immigrants to the country. In 2019, we increase the application under parents and

grandparents sponsorship program from 10000 to 17000.3 The seniors in the country will then

be recipients of the government payments. As well, we have a big portion of immigrants that

become non-residents after obtaining citizenship. Those are ones who decided to work at

other places from various reasons, In order to avoid paying personal tax in Canada while they

are not living in the country, they are claiming to be non-residents. This group of individuals

will be entitled to some government payments, such as OAS and GIS after they live in Canada

for 10 years or more. Indeed, many of them will decide to relocate back to Canada when they

retired for the benefits we have. As I live in an immigrant family myself, I have seen countless

3
Canada will now accept 17,000 applications under Parents and Grandparents Program in 2019; IRCC says
increasing annual cap by 7000 'will best support immigration goals', Stephen Smith, August 2, 2018
https://www.cicnews.com/2018/08/canada-will-now-accept-17000-applications-under-parents

Internal
examples in the community who is collecting government payments while had never worked in

Canada nor paid any personal tax ever. Therefore, the personal tax that we are receiving from

Canadian work force is to fund the retirement funding for also many who pay less or no

personal income tax. This creates an imbalance of tax policy, and fairness is in question. At

this point, CPP is relatively fairer in the program: the payments go to ones who had contributed

to it.

The problem of unfairness stated above will also create a more serious issue of increasing

personal tax to fund rising retirement payments, which is the sustainability. While we are

already spending around 49% of personal income tax to retirement income as stated earlier,

and with our current high personal tax rate, I would argue that by increasing personal tax solely

in addressing the insufficient government payments will not be sustainable. In long run, our

taxpayers are unable to fund the increasing amount of retirement payments.

At the same time, continue to increase personal tax in a high tax country poses other

disadvantages to our country. This includes discouraging ones to work and becoming less

attractive for professionals and high income earner immigrants to come to our country.

Another source of funding retirement is through savings from individuals, such as RSP and TFSA.

Some experts argue we can change the policy to allow Canadian to save more. I believe that

RSP and TFSA definitely have benefit in encourage saving, and it will be impactful when the

programs become more popular and effective. With my personal experience working at one of

the top 5 Banks in Canada, we continue to see decrease of individuals who contribute to RSP.

Accordingly to TD Bank analysis, they have only 75% of our clients who have RSP accounts with

Internal
TD Bank in Canada.4 In order to make the programs more effective, we have to examine the

advantages of the programs, the reason that it is not as popular and possible changes to make

it more effective.

RSP and TFSA are still one of the most popular ways in saving for retirement in Canada. The

preferred tax treatment of the program encourages Canadian to put aside some saving in these

programs. Ideally, this is one of the programs which cost less for government as it is voluntary.

The cost might include the taxes that is otherwise collected, the setup of the program and

administrative process. Because of its low cost nature, it is most ideal that Canadian can build

saving habits and have less chance to run into insufficient retirement saving, or even other

social issues when ones do not have emergency funds saved up. The question is how to make

the program more effective and popular in Canada.

I like to discuss some challenges of programs such as RSP and TFSA, and ways we can address

some of them. First, the knowledge of the programs in the public is still limited. A big part of

the responsibility in educating the public is through financial institutions. Sometimes it is not

resulting to the most desirable knowledge level that we wish Canadian would have. For

example, often we will hear from seminars from insurance company to stress the importance of

dissolving RSP saving to avoid the chance of affecting government payments. Instead, they

encourage strategy to replaced RSP by insurance products that might consider insurance

benefit payments instead of source of income according to taxation rule. Another example,

many still do not understand the rule about TFSA. With that, many Canadian suffer over

contribution with withdrawing the funds and redepositing it back in the same year, or simply

4
TD Canada Trust internal materials November 2018

Internal
not knowing their own contribution limits. With my own experience working in a Bank, I

encountered many situations of this and have to help clients to explain to CRA. In many cases,

Canadian has to pay the penalty purely because of lack of knowledge. With the uncertainty and

perception of the public, it discourages many to start taking advantage of it. While financial

institutions will try to promote the programs for business opportunities and social obligation, it

is not covering all Canadian; especially nowadays many do their banking online and less travel

to their Banks for advice. As well, sometimes it is the creditability in which some might believe

Banks have its own bias to the programs. Some courses are offered by government

organization but the coverage of population is relatively limited.

To make the program more effective, more impactful education to the public is critical.

Canadians have to hear the message from the government and seeing the benefits themselves.

This will address many misperceptions in the public. I have seen other countries in which many

of those programs are widely promoted on TV or other social media. Another suggestion would

be seminars provided by government to large corporations in which can be offered to bigger

group of employees of the company. In this way, more population in the community will learn

about the programs and build confidence around it.

Another challenge of saving programs is that it is a passive program; it solely depends on the

responsive of the public. The impact of change in the policy to retirement saving is frequently

hard to predict. It depends if Canadian would increase their saving rate, as if they will keep the

saving until retirement. With the uncertainty, it makes it harder to introduce changes on the

policy or investing more into the programs.

Internal
Furthermore, another challenge of relying on voluntary saving programs to help Canadian for

retirement saving is that it only impacts part of the community. Ones who already have saving

habits and capability are more likely to take advantage of the program. For example, one of the

main advantages of RSP is to defer tax, and ideally it moves ones' tax bracket from high to

lower. Therefore, ones with high income tax will benefit from the approach. Often, low

income individuals, including self-employed small business Canadian which I discussed earlier,

have less intention to contribute to RSP. Moreover, people who are has low income are harder

to manage to put additional funds aside. Back in a decade ago, I personally see more Canadians

apply for RSP loans for contribution for this reason. Nowadays, less and less individual would

see advantage of doing the same. While middle classes are more likely to have intention and

ability to save, the group that have most risk in running out of retirement saving are our low

income class, in which voluntary saving programs might have less impact to them.

There are some changes we can make to our current government payment policies and our

voluntary saving programs to address the increasing concern on retirement saving. I will argue

that part of the government payment program contradicts government saving program, which

diminish the impact of them. Often, clawback on government payments such as OAS occurs

with Canadian who has significant amount of RSP saved, and RSP / RIF withdrawals are

considered to be income. Instead of encouraging Canadian to save more in RSP, the program

actually discourage saving when ones worried about the chance of receiving government

payments. I believe the government can consider change in the impact between RSP/RIF

payments and their government payments. If RSP and RIF payments are not considered to be

income when calculating their government payments such as OAS and GLS, while they are still

Internal
subject to personal tax, this will encourage Canadian to save more in RSP. As well, it shall not

to a significant cost to the government. I also feel that this is a fairer treatment as Canadian are

not penalize by saving up. The reality is that they did not make the income at the time when

they receive OAS, instead it is income they had earned in the past, and tax is deferred.

In addition, there is also conflict between the GIS program and in encouraging individual to save.

The income from saving such as interest or dividend earned which is considered to be income

will also impact government payments such as OAS and GIS. Many Canadian avoid generating

any income as it will take away their government payments. I personally had to address a few

client concerns that seniors lost their GLS payment when the investment generated income

that went over the threshold. In my opinion, it is not a healthy situation as individuals chose

not to grow their money to ensure they receive payments from the government. TFSA program

does address part of this problem, but the limit is not as significant. The limit of $5000 to

$10000 is not addressing the issues that I am referring to. Many cases, seniors have a big

saving outside of RSP, sometimes generated from the countries they were from, sell of

properties, inheritance or even cash business. They are not eligible for RSP thus saving can only

be sheltered under TFSA. It is to Canadian's best interest that the assets are growing in funding

ones retirement. Programs like TFSA to a bigger scale might be a solution in addressing the

issue.

Further with GIS payment, I feel there is further room to examine the edibility of it in Canada.

Government can save significantly by reducing the payments to ones who has sufficient wealth

to support ones' retirement. For example, currently we are giving out GIS payments solely

Internal
based on income. I have seen many seniors who have significant liquid assets are entitled to

GLS grant, as what I had stated earlier. In my opinion, while GLS is meant to support the ones

who are most in needed, policy should also consider their assets owned that is used to fund for

retirement. I understand the personal liquid assets are a consideration for supplement income

in many countries. This way, we will save up part of the payments to address ones who are

truly in need.

Aside from government payments and personal saving, the last source of retirement saving

comes from company's pension. Companies' pension budget is becoming an issue as life

expectancy increases. Many companies have already changed to defined Contribution Plan

instead of defined benefit plans. As well, many companies are hiring more contract or causal

workers to avoid pension expenses. This is in question whether there is room for government

to interfere to protect workers' right and benefits.

To conclude, with the increasing life expectancy, retirement saving of Canadian is a concern. To

address this, we have to explore solutions with both government payments and saving

programs. I will argue that we cannot solely rely on increasing personal tax for funding

increasing government payments. Not only that it is unfair, it is also not sustainable and create

further problem in long term. Saving programs such as RSP and TFSA are the lowest cost

solutions in solving part of the concern, yet the education to the public about those programs is

the key. At the end, the programs should address mainly for individuals who truly will run into

problem of insufficient retirement saving. They are the low income families in Canada who is

unable and have less intention to save in RSP or TFSA. This group of individuals will benefit

Internal
from increasing CPP, OAS and GIS. In order to make available of funding to this group,

government can consider change of the eligible of some government program. By adjusting

those programs, we will encourage ones who can afford to save more, and to better budget for

the ones who are really in needed.

Internal