Not All Benefit From RRSPs

"A Registered Retirement Savings Plan is an essential part of any sound investment strategy," trumpets a recent pamphlet from RBC Financial Group.

"Call or visit us to find out about our great RRSP options to best fit your needs," says the letter from VanCity.

But for low-income people nearing retirement, a registered retirement savings plan could be a serious investment mistake.

That's right. Contrary to what the bank ads claim, and contrary to the advice of many financial advisers, RRSPs could actually reduce your benefits at retirement.

RRSPs are a government scheme for privatized pensions and an inequitable way to encourage retirement savings. They allow middle- to high-income Canadians to save for retirement while their tax rate is high, get about half their contribution back as a tax refund, and take the money out at a lower tax rate when their incomes fall. But for the 21 percent of Canadians approaching retirement without any savings, the RRSP is useless. For people with a bit more money who still remain in the lowest tax bracket (under about $30,000), RRSPs are no good for two reasons.

First, if a person is in the lowest tax bracket when they buy the RRSP and the lowest bracket when they cash it in and pay taxes on it, there are no savings. Second, RRSPs are a bad investment for low-income people because cashed-in RRSPs are treated as income when determining eligibility for government programs like Guaranteed Income Supplement, Medical Services Plan, PharmaCare, transit passes, and social housing.

Richard Shillington, an Ontario-based policy analyst who is well-regarded in the social-justice community, has put all of this together in a paper published, somewhat surprisingly, by right-wing think tank the C. D. Howe Institute. In "New Poverty Traps: Means-Testing and Modest-Income Seniors" (available at, Shillington calls imminent retirees who have saved less than $100,000 "futile savers", because their savings simply reduce the amount the government spends on Guaranteed Income Supplement and other programs and don't benefit the saver. He says about 32 percent of Canadians nearing retirement are in this predicament. Meanwhile, according to Shillington, the government lost about $15 billion in 2000 because of RRSP tax rebates (a portion of which will be recouped as people's RRSPs mature). These rebates mainly benefit those in the higher tax brackets, the very people who need the least help saving for retirement.

The Guaranteed Income Supplement is a federal income-support program that serves some 37 percent of low-income seniors in Canada by providing a top-up to Old Age Security. GIS amounts range up to about $500 a month for single and $300 for married pensioners. For every dollar of income above a certain amount, the GIS is reduced by approximately 50 cents. Redeeming an RRSP increases your income and can reduce or even eliminate your GIS. But if you redeem a plain old term deposit, the money you get is not treated as income and will not reduce your eligibility for the GIS.

Three-zone transit passes that cost $45 a year--as opposed to the TransLink concession price of $40 a month--are available from the Ministry of Human Resources to people who get the GIS. If cashing in an RRSP makes someone ineligible for the GIS, it also makes them ineligible for that special discount.

In B.C., Medical Services Plan premiums costs a family of two $1,152 a year. But if their net income (including deductions for having a spouse and being over 65) is below $16,000, MSP is free. Cashing in an RRSP increases your income and can increase MSP fees.

If you live in social housing, you might get a subsidy to ensure that your rent is kept below 30 percent of your income. When you cash in an RRSP, however, it is counted as income and your rent can go up. If you take the money out from under your mattress, the income rule doesn't apply.

Three steps could help alleviate this situation.

Financial institutions and advertisers should be required to inform low-income clients of the real impact of RRSPs on their retirement income, taking into account their eligibility for the GIS and other programs.

The government should stop treating the RRSPs of low-income people as income.

In the long run, the government should use the $15 billion a year it loses by providing RRSP tax breaks to pay for a decent public pension system that would bring low-income retirees--including those who couldn't afford to save--a reasonable standard of living.

In the meantime, if retirement is approaching and it looks like you're going to have less than $100,000 in savings, don't buy RRSPs.