Do Registered Pension Plans (RPPs) and Registered Retirement Savings Plans (RRSPs) act as substitutes for one another in retirement savings patterns? At first glance, this appears to be so, based on a new study released recently by Statistics Canada. The big finding is that workers who are self-directed savers benefit less than their co-workers who don’t tend to save enough for retirement when RPP contributions automatically increase.
As a result, pre-retirees and their tax and financial advisors may wish to take a greater interest in changes to employer-sponsored pension plans, in measuring savings capacity for other vehicles such as RRSPs or TFSAs.
Among workers with annual earnings near the Canadian average, a $1.00 automatic increase in Registered Pension Plan (RPP) contributions results in an average reduction in Registered Retirement Savings Plan (RRSP) contributions of $0.55. The net result is that the sum of RPP and RRSP contributions increased by an average of $0.45 across workers with different propensities to save.
It can be concluded that assisted or compulsory retirement savings programs at work increase net savings for workers who save the least on their own. But for regular savers, increases in RPPs direct savings away from other vehicles; in other words, the extra money going into an employer-assisted plan simply redirected money that would have gone to self-directed savings. The study did not comment on how an automatic increase in RPP savings affected other savings opportunities, like the TFSA.
This is interesting financial behavior. Is there an actual cash-flow limit – when increased compulsory savings are implemented – that thwarts other savings opportunities which may have better benefited the client in the future – tax-free savings in a Tax-Free Savings Account (TFSA), for example? Tax and financial advisors and their clients who are concerned about the level of tax-free retirement savings their clients can accumulate for the future may want to take note of this in start-of-year investment and retirement planning.
Averaging savings into and out of the right buckets – both before and after retirement – is the objective of astute long-term retirement planning. The opportunity is to save with purchasing power – after taxes, inflation, and fees. With the annual tax filing routine that’s just around the corner, now’s the time to discuss your pension and savings situation with your tax and financial advisors.
Courtesy Fundata Canada Inc.© 2016. Evelyn Jacks is president of Knowledge Bureau. This article originally appeared in the Knowledge Bureau Report. Reprinted with permission. All rights reserved.Her latest book, Family Tax Essentials, is now available.
