By: Richard Shillington

  If you are without an employer pension plan - approach an RRSP with extreme caution. That's right - those who most need an RRSP get the least value from one. Our retirement supports for low-income Canadians are so perverse that, for many, a mattress is a better investment vehicle than an RRSP.
  Generally, an RRSP works for, rather than against, you, if your company pension pays at least $15,000 per year (in today's dollars). If not, don't start an RRSP unless it will accumulate well over one hundred thousand dollars.
  How can RRSPs, which double the retirement income of the wealthy, work so badly for others? Mostly this is due to a simple fact: for most of us tax rates fall at retirement, but for low-income Canadians they jump. The wealthy contribute to RRSPs when their marginal tax rate is over 50% and they withdraw funds at lower rates. In addition, taxes are paid on the growth in the fund only at the lower retirement tax rate. Low-income contributors have a tax rate of about 25%, but at retirement it increases.
 

If you are not wealthy, having RRSPs may reduce your eligibility for prescription drugs, subsidized housing, home care and other programs

  The "real" marginal tax rate for retirees is 50% minimum. For every dollar income increases, the Guaranteed Income Supplement (or GIS), the major income support for seniors, is reduced by 50 cents. You may also pay tax on that income, for a combined tax rate of 75%. As well, that additional dollar may reduce your eligibility for programs like prescription drugs, subsidized housing, home care, meals on wheels and nursing homes, to the point where a few extra dollars of income could actually make you worse off.
  Given these facts, it is surprising the number of low-income Canadians who contribute to RRSPs. Almost one million Canadians with incomes under $20,000 contributed to RRSPs in 1996. At that income, these contributions must have been quite a sacrifice. People are unaware that the major effect of their sacrifice will often be reduced government benefits at retirement.
  Advice for low-income Canadians without an employer pension plan is complicated by the variety of rules in each province. Generally the best retirement savings advice is to own your home. Eligibility for most income and asset tested programs ignore the principal residence and a reverse mortgage allows you to "spend" the equity in your home without moving and without affecting your eligibility for income tested benefits.
  Next, invest outside an RRSP (stocks, Mutual Funds, GISs), because when you cash them in, only the profit -- not the capital -- affects income tested benefits. All RRSP withdrawals are included in income.
  Fortunately, there are solutions to this mess. A thorough review of the stacking of marginal tax rates and income tested programs is needed. If low-income Canadians save for retirement, we should ensure that they get some value for it. The U.S., for example, has a different retirement account (a Roth account) which works better for low-income retirees.
  Low-income Canadians are generally unaware of this unfair treatment and the government isn't likely to draw attention to their failures. The financial press is not likely to displease advertisers with headlines which would discourage investment in RRSPs.
  Why don't the current rules work better for low-income Canadians? Why aren't their interests represented in tax policy? Why do RRSPs work best for those who already have a generous pension plan? Is it possibly because low-income Canadians don't fund political parties?

Richard Shillington, Ph.D., is a statistician who specializes in the quantitative analysis of health, social and economic policy. He appears regularly before committees of the House of Commons and the Senate, and frequently provides commentaries for television, radio and newspapers on issues of taxation, human rights and social policy. Richard's Straight Goods column will appear weekly.

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This situation was documented recently in Richard Shillington's report published by the C.D. Howe Institute (see www.cdhowe.org/pdf/shillington.pdf).

Richard Shillington can be reached at ers2@istar.ca. His web-site is home.istar.ca/~ers2.