Prime Minister Stephen Harper put pensions on the front page with his announcement on Jan. 23, 2012, that the federal government is considering reducing the costs of the Guaranteed Income Supplement (GIS) and Old Age Security (OAS).

According to the Feb. 8, 2012, report of the Parliamentary Budget Office (PBO), the cost of elderly benefits will increase from $36 billion (or 2.2% of GDP) in fiscal 2011 to $142 billion (or 3.2% of GDP) in fiscal 2037, assuming “some enrichment” of benefits. Without such enrichment, the PBO’s estimates of the cost of elderly benefits are lower and consistent with projections made by the Office of the Chief Actuary, which assume that elderly benefits will increase in step with price inflation only.

The PBO report concludes that elderly benefits are sustainable but that there is also fiscal room to increase them—by 0.4% to 0.8% of GDP, depending on whether existing benefits increase annually by one-half of the real increase in GDP or only in step with the Consumer Price Index. With Canada’s GDP now at about $1.6 trillion, that translates into a lot of fiscal room—between $6.5 billion and $12.8 billion in 2012. Moreover, the PBO’s estimates don’t make any allowance for planned reductions in program spending, which could increase the federal government’s fiscal room by an additional 0.5% of GDP, or $8 billion.

Although each provides modest benefits, the GIS and OAS operate very differently. The OAS pays a maximum benefit of $540 per month to a single individual, reduced by 15% for income exceeding $69,562. The GIS pays a maximum of $732 per month, reduced by 50% of non-OAS income: GIS is fully clawed back when non-OAS retirement income exceeds $16,368, with the result that average GIS benefits are only $491 per month. A typical GIS recipient, therefore, has only $4,600 in annual non-OAS income and a total annual income of about $17,000, including GIS and OAS. This suggests that many of the 1.82 million Canadians who the Office of the Chief Actuary predicts will receive GIS benefits in 2012 will live in relative poverty.

Due to the combined effect of the GIS clawback and income taxes, low-income seniors pay higher “effective” tax rates on their income than all other Canadians. A C.D. Howe Institute study published in January 2010 shows that an Ontario retiree with a taxable income of about $15,000 per year pays a marginal effective tax rate of 80% and an average effective tax rate in excess of 50%. These high effective tax rates make it largely pointless for many low- and middle-income workers to save for retirement in pension plans and RRSPs. As the study points out, they would be better off saving for retirement in tax-free savings accounts (TFSAs) because TFSA withdrawals do not reduce GIS benefits. However, TFSAs are not the best vehicles for retirement saving because withdrawals can be made at any time, and assets are not creditor-protected.

On Feb. 10, 2012—perhaps as a result of the PBO report—Finance Minister Jim Flaherty backed away from any immediate reductions to elderly benefits, announcing that the federal government plans for no reductions before 2020, or even later. Though now apparently crash-landed, the federal government’s trial balloon on reducing elderly benefits has focused attention on the GIS and OAS and how well they serve retired Canadians. The verdict on the GIS program is “not very well” because it leaves many seniors with a life of bare subsistence and penalizes many lower-income workers who save for retirement in pension plans and RRSPs by reducing their benefits.

As the PBO report demonstrates, the federal government has fiscal room to enhance living standards for low-income seniors by improving GIS benefits. Obvious ways to improve the GIS would be to increase the dollar amount of benefits or reduce the 50% clawback rate.

Another way to improve low-income seniors’ access to GIS benefits while giving them an incentive to save for retirement would be to amend federal tax rules to allow tax-free registered pension plans (TFRPPs). TFRPPs would operate similarly to tax-deferred RPPs but with features drawn from TFSAs—contributions would not be deductible, and withdrawals would not be taxed or reduce GIS benefits. As with tax-deferred RPPs, members should be permitted to save for retirement on a DB or “target-pension” basis or in DC-style accounts. Benefits would be tax-free and could be paid as annuities or as variable payments.

Saving in a TFRPP would make it possible for low-income workers to accumulate retirement savings without facing punitive effective tax rates in retirement. To ensure that TFRPP accumulations are available for retirement, provincial pension regulators could apply the same locking-in and creditor-protection rules to TFRPPs that currently apply to tax-deferred RPPs.

The Chief Actuary projects that GIS payments will total $9.1 billion in 2012. If GIS payments were to increase gradually by 20%, 30% or even 40% as a result of TFRPP saving, the increased cost would be substantially less than the unused federal fiscal room that the PBO report identifies.

The recent media attention on elderly benefits has revealed that we can afford them, and, if it leads the federal government to improve living standards for future seniors by creating TFRPPs, it will have been more than worth it. Tax-free pension saving is an idea whose time has come, because it is clear that Canada’s low- and middle-income workers need a better way to save for retirement.

Copyright © 2021 Transcontinental Media G.P. Originally published on

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Paul Guillery:

Mr. Pierlot,
What you call “Tax-Free Registered Pension Plans” (TFRPP) would in fact be similar to TFSAs except that (i) withdrawls are only possible for retirement income purposes and (ii) are credit-proof. Is this correct?
If so, would they not be very much like Roth IRAs in the U.S.?

Thursday, February 23 at 3:59 pm | Reply


Thank you for this information, I enjoyed your article Mr. Pierlot. I’ve been fortunate to be able to save a small percentage of my income into both Locked In and Non Locked In RSP accounts for years. The thing is I still don’t believe I will or a large percentage of Canadians will be able to save enough to retire in the manner we all wish we could. I’m attempting to educate myself as much as possible on where my savings will be best distributed but it seems the options are changing all the time. I just recently opened a TFSA and have allocated different percentages of what I was saving into both this TFSA and RSP’s on a monthly basis. Can you tell me if the government was to allow this TFRPP account to be created would Canadians be able to transfer their present RSP’s into this account? Also what would the consequences be tax wise? My last question would be if I wanted to let someone know that I feel we (the government) needs to focus more on implementing better benefits for retiring Canadians who would you suggest I contact?

Ontario, Canada

Tuesday, February 28 at 8:30 am | Reply

James Pierlot:

My thanks for your interest in the article and your questions/comments.

A “Roth” Individual Retirement Account (Roth IRA) is indeed similar to the proposed TFRPP from the point of view of basic tax treatment, i.e. no deduction for contributions, investment earnings accumulate tax-free; withdrawals would not be taxable. This being said, a Roth IRA and the proposed TFRPP would operate somewhat differently because of differences in the Canadian and US tax systems. For example, it is not expected that funds could be directly transferred from an RRSP or other tax-deferred plan to a TFRPP, as is possible to a limited extent with a Roth IRA. Also, a TFRPP would offer tax-sheltering of investment earnings from both provincial and federal income tax, which is not always the case with federal and state tax with a Roth IRA.

In terms of design, a TFRPP (as proposed) would have an important difference from both TFSAs and Roth IRAs in that it would allow accumulation of DB “target” pensions, such that a TFRPP would be able to pay a lifetime pension income – i.e. an annuity. In the case of a DB-style TFRPP, there would be no limit on contributions required to fund benefits, just as there is now no limit on contributions required to fund benefits provided by a tax-deferred DB pension plan.

In view of the fact that RRSP funds are tax-deferred, it seems unlikely that the federal government would permit unlimited direct, tax-free transfers from an RRSP to a TFRPP, but a good argument can be made that transfers should be permitted at least to some extent if, at the time of a transfer, there is repayment of the tax deduction taken when an RRSP contribution was made.

The Department of Finance Canada is responsible for all matters related to retirement-saving tax policy. To make your views known, you may wish to contact the Hon. Jim Flaherty, Minister of Finance, the Hon. Ted Menzies, Minister of State (Finance) or your local Member of Parliament.


James Pierlot

Tuesday, March 06 at 3:19 pm | Reply

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