A recent C. D. Howe report titled, Cutting Through Pension Complexity: Easy Steps Forward for the 2010 Federal Budget, recommends that the Federal Government raise the contribution limit for RRSPs from 18 percent to 34 percent of earned income (and correspondingly, the maximum dollar amount from $22,000 to $42,000) in the upcoming budget. Recommendations such as this makes you wonder which planet the C. D. Howe Institute inhabits. On Planet Earth, contribution room isn’t an issue at all but using up already available contribution room is.
According to Statistics Canada, a mere 31% of eligible tax payers actually made a contribution for the 2007 tax year. The average contribution to a RRSP was $5,412 but the median contribution was only $2,780. The contributions used up just 6.0% of total contribution room available. The data suggests that the vast majority of Canadians have accumulated vast amounts of RRSP contribution room. Only a tiny fraction of Canadians have used up all their contribution room and would benefit from any boost in RRSP limits.
The C. D. Howe report is silent on the fact that the introduction of the Tax-Free Savings Account has already essentially boosted contribution limits to a tax deferred retirement savings account. Joe Canadian, an Ontario resident who earned $80,000 in 2008 would have a 2009 RRSP contribution room of $14,400. Joe can save another $5,000 for his retirement in his TFSA. While the TFSA contribution does not result in a tax deduction, it has roughly the same as effect as contributing another $8,833 to Joe’s RRSP account. If Joe maxes out both his RRSP and TFSA, he is in effect saving 29% of his earned income. The Joes of the world already have plenty of retirement savings room. But boosting contribution room will achieve little in addressing the savings problem of the vast majority of Canadians.