Employers could play a role in encouraging low-income Canadians to save more for retirement by offering group tax-free savings accounts, according to a report by the Institute for Research on Public Policy.
The report found that, since their introduction in 2009, TFSAs have become nearly as popular as registered retirement savings plans, and could even go on to surpass them. However, low-income savers, who would benefit from them the most, haven’t used them at as high a rate, it noted.
For Canadians making less than $50,000 a year and expecting to receive the guaranteed income supplement at retirement, a TFSA will have a greater benefit than an RRSP, the report said. Seniors who receive GIS benefits would face the double penalty of paying taxes on an RRSP withdrawal and having their income-tested benefits clawed back.
“There are a lot of people out there who will receive old-age security, GIS and Canada Pension Plan, and that’s it,” says Richard Shillington, an Ottawa-based statistician and author of the report. “It’s not a marginal group, it’s a substantial population.”
The report suggested increasing public education around retirement issues and financial incentives for low-income Canadians, such as a savers credit to match their contributions, could tilt them toward TFSAs.
It also suggested plan sponsors could get involved by offering employer-sponsored TFSAs. Canadians earning less than $50,000 a year would see greater benefits from putting savings into a TFSA, but are steered toward RRSP through employer sponsorship, noted the report. “On top of this, many Canadian employers will match a certain share of individuals’ contributions to group RRSPs, potentially further exacerbating the problem.”
The report proposed that employers offer group TFSAs as the default retirement savings vehicle to employees earning less than $50,000 per year, and employees earning more than $50,000 annually could default to a group RRSP, with both groups able to opt into the other vehicle if they chose. And like with RRSP plans, employers could choose to match their employees’ contributions in group TFSAs but wouldn’t be obligated.
TFSAs would particularly benefit members in part-time or precarious work, says Shillington. “If you don’t have the discipline of an employer pension plan to force you to save, only people who are very well off save for retirement.”