The proposed doubling of yearly tax-free savings account (TFSA) contributions may give people a greater opportunity to tuck away more money for their retirement, but governments and financial institutions need to do a better job educating Canadians about how to live within their means and save more of their income for retirement.
“Public policy should encourage Canadians to take more responsibility for saving for their own retirement and depend less on stressed government sources,” said Patricia Lovett-Reid, senior vice-president of TD Waterhouse.
“Government retirement benefits are more of a safety net rather than a source to fund a retirement lifestyle.”
Conservative Leader Stephen Harper promised during the election campaign to increase the yearly TFSA contribution limit to $10,000 from the current $5,000 if his government was re-elected and when the country’s books are balanced.
Lovett-Reid said the TFSA and registered retirement savings plans (RRSPs) are simple and effective retirement savings tools. But Canadians in general are not saving enough and need to be better educated about how to live within their means and improve their savings habits.
“Rather than tinker with the tools, governments and financial institutions should probably do a better job educating Canadians to live within their means and save at least 10 per cent of their income compared to the current personal savings rate of four per cent,” she said.
Since TFSAs were introduced in 2009, only 4.7 million Canadians have opened accounts, which now have a combined market value of $18 billion. Further, only about 31 per cent of Canadians contribute to their RRSP and use only six per cent of the total contribution available to them.
Part of the reason Canadians are not saving more is because they have taken on more debt.
“Education needs to focus on advocating debt management and financial planning,” Lovett-Reid said. “Classes should be worked into our education system, teaching our youth about prudent debt management. Since debt is a major hindrance to the ability of people to save, some benchmark and guidance around how much debt people should have at various life stages should be published by the Bank of Canada.”
One idea being touted in the Canadian retirement debate is to boost the Canada Pension Plan (CPP) and Old Age Security (OAS).
“This could actually benefit those who are not saving enough the most,” said Lovett-Reid. “This may actually encourage people to save even less than they currently are in the belief that the government will take care of their retirement.”
Increasing government programs like CPP and OAS will put an extra financial burden on the smaller, post-boomer generation.
“As an aging society, you don’t want to burden them with funding the retirement of boomers,” Lovett-Reid said. “Demographic trends of the baby boomer generation mean that this is not the most opportune time to implement any such measures.”
For those who do not have the discipline to save for their retirement, however, a boost to the CPP/OAS may be an option to explore.
“Through this strategy, the government would automatically deduct a greater amount out of your paycheque and set it aside for your retirement,” Lovett-Reid said.
Another idea being proposed is the pooled registered pension plan (PRPP), which is targeted to the estimated 3.5 million employed and self-employed Canadians who currently have no registered pension plans. They would be managed by a third party and would offer defined contribution benefits. They represent another savings vehicle for Canadians with the added benefit of economies of scale that come from pooling individual investments.
“Each individual chooses the lifestyle they want to lead in retirement, and it should be up to them to save up enough to fund it rather than some ad-hoc government formula which determines your income in retirement,” Lovett-Reid said.
Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors. He can be contacted at boggsyourmoney@rogers.com.