A new paper from Ryerson University’s National Institute of Ageing is calling for the creation of workplace tax-free pension plans to better support Canadians’ financial security in retirement.
Under the current workplace registered pension plan model, noted the research, lower to middle income Canadians are essentially discouraged from saving for retirement due to the potential financial penalties from income tax treatment and senior social benefits calculations.
Registered pension plan contributions are tax-deductible at the point of contribution, but payouts in retirement are taxable as income, which negatively affects lower income earners who collect guaranteed income supplement and other government programs that have an income-tested clawback, stated the research.
“We know there is a difference between the value of registered savings between a lower income Canadian and a higher income Canadian,” says Bonnie-Jeanne MacDonald, the NIA’s director of financial security research and author of the report. “Just from a tax perspective, we know deferring taxes would be a lot more advantageous to a higher income Canadian because it’s not only that they’re going to be in a lower tax bracket later, there’s also this idea that they have a lot more flexibility for the timing of their income.
“Overall, there’s just much lower financial incentives to save for retirement,” she adds. “It was deliberately done to make people defer their income, which made sense. But the way the system works together, it ends up being a lot more valuable to a higher earner than a lower earner.”
This is one of the reasons tax-free savings accounts have come along, notes MacDonald. “For some people, it would be a lot better to just pay the tax and then start saving and get some sort of tax-sheltering at that point. But at the same time, people find it hard to save.
“There are a lot of benefits of being in an employer pension plan, because there’s a fiduciary responsibility where the plan sponsor is looking out for your best interests, there’s employer matching of contributions, there’s economics of scale because you’re in a group . . . . So we marry these two things together to say, can we take what we’ve learned from the TFSAs but also apply it to workplace pension plans?”
The paper suggested tax-free pension plans would operate in a tax-free environment like TFSAs. Similar to a TFSA contribution, contributions would use after-tax dollars and wouldn’t receive a tax deduction. It would grow free of tax, and withdrawals wouldn’t be taxed or added to taxable income, so pension income from these plans wouldn’t be considered when determining eligibility for federal or provincial income-tested benefits, credits and subsidies.