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By: Richard Shillington
At first glance, it looks like the federal Finance Committee has something for almost everybody.
Closer inspection of the Committee's report - which often becomes the government position - is not anywhere near as fair as it seems. Beneath the politically useful image of a government willing to share the new federal surplus is the hard reality that the poorest Canadians - those too poor to pay taxes - are being given nothing. Meanwhile, the very wealthiest Canadians can expect a windfall.
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RRSPs are available to virtually all taxpayers, but the greatest benefit goes to the high end. When the limits were increased above $10,000, 34 per cent of new contributions came from the two per cent of Canadians with incomes over $100,000. |
The increase in the limits for RRSP contributions is one clear example of how upper-income earners are being given a much bigger break than people who are in greater need of a helping hand.
RRSP limits are currently set at $13,500, but that's scheduled to increase to $15,500 in a couple years. Is this a reasonable change? Are the tax-subsidized pensions of higher income Canadians being crimped because their RRSP's are maxed? Do the wealthy need more room in their RRSP's? Not to my mind.
RRSP's are available to virtually all taxpayers. About half contribute an average of $4,000. Yet higher-income Canadians are able to take greater advantage (70% contribute an average of about $12,000). The 10% who contribute more than $10,000 account for one-third of all RRSP contributions. When the limits were increased above $10,000, 34% of the additional contributions came from the 2% of taxpayers with incomes over $100,000. This means that, while RRSP's are available to everyone, the greatest benefit goes to the high end.
How was the limit of $15,500 set? It was done to equate the tax advantage of an RRSP with a registered pension of $60,000. This comparison clearly required some assumption about how well the investment would do in the RRSP. The lower the rate of return the higher the limit would need to be.
Finance assumed a 3.5% real rate of return - after inflation. So if investments were doing better, a $15,500 limit was too high. In 1989 real rates of return were significantly more than 3.5%. Instead of announcing a target limit of $15,500, based on 3.5%, the government could honestly have reported that no increase in RRSP limits was necessary. The high rates made the current limit more than 'fair'.
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Ottawa is holding a party to divide the surplus. Who's left off the guest list? Only those people relying on welfare - 40 per cent of them children. |
The average rate of return over the last 10 years has far exceeded 3.5%; the TSE300 has averaged 9.2%, long term boards 12.4%, even 90 day treasury bonds averaged 6.8% each far more than the average 2.2% CPI. No increase in RRSP limit is needed. The current limit of $13,500 is far more than fair. Yet the Finance committee recommends a further $2,000 increase in the annual limits. Why? To reward supporters? Or perhaps to divert attention from the even more generous pensions of the public sector and politicians.
Who would be able to use the increased limit? Most of us can't. First, your income would have to exceed $75,000 to contribute more than $13,500. You also need the cash. Not surprisingly most people contributing more than $10,000 to their RRSP have very high incomes. As well, the current annual limit is not an impediment if you have contribution room left in your RRSP. While 88% of us have contribution room left in RRSP's, only half of high-income contributors do.
In short, to benefit from a higher RRSP limit, you need to have a very high income, ready cash and an RRSP which is already maxed out. If you meet all those criteria, you can count yourself as part of a true economic elite.
This group does not 'need' more public support. The RRSP limit is set to supplement the individual retirement incomes which would otherwise be $60,000; the family pension could be $120,000. Finance committee wants to use public funds to increase this amount further.
Ottawa is throwing a party to divide the surplus. Clearly, it is using every excuse to ensure the high-income Canadians get their share (with more than a little extra). Who's left off the guest list? Those relying on welfare, 40% of them children. Only this group gets no benefit, no increased support and no tax cut.
As we line-up to divide the fiscal surplus I suggest that the elites get in line BEHIND welfare children - and no butting in!
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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Read the federal finance committee's recommendations at:
www.parl.gc.ca/InfoComDoc/36/2/FINA/Studies/Reports/ finarp01-e.htm
Other articles from Richard Shillington
Attn: Paul Martin: a REAL "children's budget", please
A poor measure of poverty
Are RRSPs really for you?
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