Banker, will work for food

Financial planners line up for government subsidy after RRSP contributions decline for third year in a row

By: Jim Stanford

  After years of restructuring, downsizing, and rationalization, Canada is supposed to be a lean, mean, market-disciplined place. Gone are the days when failing industries could go to governments, cap-in-hand, begging for subsidies and bailouts. From the coal mines of Cape Breton to the shipyards of the West Coast, if you can't make in the free market today you're out on your ear.
 

When the going gets tough, ask for government aid

  How strange, then, to read the heartfelt appeal for more government subsidies on behalf of Canada's downtrodden financial investors, recently issued by Derek Holt, senior economist for the Royal Bank ("RRSP era may be over", Globe and Mail, May 4). Holt wants big increases in allowable RRSP tax deductions, in hopes of injecting renewed life into the flagging mutual fund industry.
  To be sure, times could be better on Bay Street. RRSP contributions have declined for three years running. Net mutual fund sales this RRSP season were half their 1997 level. Money managers are under pressure to justify their existence from increasingly cost-conscious investors.
  Yet for all the wealth and power he represents, Holt's response to these problems is surprisingly similar to the weak-kneed neediness traditionally expressed by distressed industries and depressed regions. When the going gets tough, ask for government aid.
 

The RRSP system is one of the most costly social programs in the country, removing more than $12 billion from government tax revenues every year

  In fact, the mutual fund industry is already a big recipient of government largesse. According to the Finance Department, the RRSP program will cost the federal government over $12 billion this fiscal year in foregone tax revenues - even after collecting $2.6 billion in deferred taxes on RRSP withdrawals. The program costs provincial governments more than $5 billion, for a total bill of at least $17 billion per year.
  This makes the RRSP system one of Canada's most expensive social programs. In comparison, we'll spend a mere $11 billion on employment insurance benefits this year, and much less than that on welfare payments for poor people.
  Unlike most social programs, however, the RRSP program delivers most of its benefits to higher-income families. After all, these are about the only folks in Canada who've got spare cash sitting around when RRSP season rolls along, and are thus able to take advantage of this lucrative subsidy to personal investing (which offsets about half of the total cost of a financial investment by a high-income taxpayer).
  According to Revenue Canada data, about half of all RRSP contributions are made by the top tenth of taxfilers. Worse yet, we subsidize the RRSP savings of those taxfilers at a higher rate than the savings of lower- and middle-income Canadians. Since the RRSP subsidy is delivered through a tax deduction (rather than a tax credit), it is actually worth more to higher-income taxpayers. It is safe to conclude that a full two-thirds of the annual cost of the RRSP deduction is claimed by the highest-income 10 percent of the population.
  On the other side of the tracks, the lowest-income 50 percent of taxfilers pocket less than 5 percent of the total value of the RRSP subsidy. Talk about Robin Hood in reverse. After years of tough talk on deficits and excessive government spending, I'd thought that Bay Street was opposed to government handouts. How silly of me: it's only handouts to poor people that are the problem.
 

Maybe the time has come for us to demand that the mutual fund industry start to stand on its own two feet, to impose some of the same tough-love thinking that we've been showering upon the rest of our economy

  Holt is wrong to blame the RRSP ceilings for the falloff in mutual fund business. By his own statistics, Canadians earning less than $40,000 account for two-thirds of all unused RRSP room. It's a lack of income, not a lack of tax room that explains their low contributions. The overall personal saving rate in Canada fell to an all-time low of barely 1 percent last year, caught between the rock of rising living expenses and the hard place of stagnant incomes.
  Moreover, the bumpy performance of mutual fund investments in recent years is clearly part of the problem, as well. Who wants to invest in overvalued shares, subsidy or no subsidy, when the cash could be wiped out overnight by the coming "correction"?
  Maybe the time has come for us to demand that the mutual fund industry start to stand on its own two feet, to impose some of the same tough-love thinking that we've been showering upon the rest of our economy. Far from expanding expensive RRSP subsidies, they should be reigned in. The RRSP limits should be frozen at existing levels. And the government should explore ways of restructuring the program so that it delivers equal assistance to the savings of lower- and middle-income Canadians instead of perversely continuing to provide maximum benefit to the upper-income taxpayers who need it the least.
  Of course, it will take time for the financial industry to overcome its long-standing dependence on government handouts. We'll have to help money managers learn new skills to cope in a restructured economy. And, if at the end of the day, they still experience lower incomes as a result of a falloff in their government-subsidized business, well, at least they'll have the self-esteem that comes with knowing they worked an honest day's work, free from the discreditable handouts of the nanny state.

Jim Stanford is an economist with the CAW - www.caw.ca

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