Born in 1946, the first wave of Canada’s baby boom generation will be 65 years old in 2012. If they haven’t saved enough for retirement, it’s too late to start. But many workers in the baby boom generation will remain in the workforce for some time to come. The baby boom peaked in 1959 and ended in 1964, so workers born during this period have between 10 and 20 years to save for retirement.

Unfortunately, saving for retirement is becoming more difficult. From 1977 to 2007, DB pension plan membership dropped from 31% of private sector workers to 16%. Today, more than 12 million of Canada’s 17.5 million workers do not participate in a DB plan. With declining DB pension coverage, low interest rates and increasing life expectancy, pensions are harder to accumulate—and more expensive. Even workers who delay retirement will need to save more to maintain their living standards in retirement.

But can they? For many workers saving in RRSPs and DC pension plans, the answer is no, because contribution limits are too low. To demonstrate this, we developed a model that shows the retirement savings accumulations possible under Canada’s tax rules for retirement saving from 1974 through 2011. Figure 1 shows some of the output from this model.

Figure 1

The workers shown in Figure 1 retire at age 60—the midpoint between median public and private sector retirement ages—with salaries of $50,000, $75,000 or $150,000 at the end of 35-year careers. The DB values reflect the cost of pensions with 3% fixed-rate indexing and a 2/3 spousal survivor benefit, determined using group annuity purchase rates as at January 2011. Two kinds of DB values are shown, with and without the RRSP savings each plan member could have accumulated:

  1. the value of pensions actually provided to federal public sector workers; and
  2. the value of maximum DB pensions permitted under the Income Tax Act.

The values for workers saving in RRSPs (which are similar to the savings possible in DC plans) show best-case scenarios: each worker contributes annually and earns a compound net return of 5% per annum. In practice, this almost never happens because most workers saving in RRSPs experience periods of low earnings or unemployment, do not earn a 5% return over the long term, and delay contributions to later in their careers. This means that workers saving in RRSPs cannot realistically hope to accumulate even half the retirement wealth of career members of DB pension plans.

What about unused RRSP room?
Statistics Canada reports that at the end of 2010, new and carry-forward RRSP contribution room totalled $670 billion. This sounds like a lot, but it averages out to only $38,000 for each of Canada’s 17.5 million workers. Moreover, most of this unused contribution room is held by low-income workers who would be better off saving for retirement in tax-free savings accounts, to avoid claw-back of the Guaranteed Income Supplement when RRSP savings are withdrawn. The available evidence indicates that middle and higher-income workers are using all their RRSP contribution room—and do not have enough.

The solution: A lifetime retirement-saving limit
To give all workers the opportunity to save enough, Canada’s annual, income-based retirement saving limits need to be replaced with a lifetime accumulation limit that will provide all Canadian workers the same retirement saving room now available only to career members of DB pension plans. The principal features of a lifetime accumulation limit would be as follows:

  • Pension and RRSP accumulations would be limited to an indexed amount, with no annual limits on contributions or benefit accruals.
  • Contribution room would be restored by investment losses and withdrawals—as current tax rules now permit for DB plans and tax-free savings accounts, respectively.
  • Penalty tax would apply to pension and RRSP accumulations exceeding the limit.

The key benefit of a lifetime accumulation limit is that it will provide the catch-up retirement saving room that Canada’s aging workforce needs. It will also level the playing field as among members of different types of DB plans, and as between DB plan members and those who save for retirement in RRSPs and DC plans.

How much should the lifetime limit be?
A lifetime limit should allow for adequate pension income, but should not permit excessive tax deferral. Below, we suggest six benchmarks for a lifetime limit, each determined by reference to career-end pension or RRSP values for workers with 35-year careers who retire at age 60:

  1. RRSP savings for a high-income earner who contributes 9% of earnings annually.
  2. RRSP savings with annual contributions at the RRSP maximum dollar limits.
  3. The value the target pension recommended by studies leading up to the 1990 reform of Canada’s pension tax rules: 70% of 2.5 times the YMPE.
  4. The pension value for a federal public sector worker earning $150,000.
  5. The value of the maximum DB pension permitted by current tax rules.
  6. The value of a pension at the 1976 tax limit of $1,715 per year of service, adjusted to reflect wage inflation from 1976 to 2011 at 2.5% per year.

Figure 2 suggests an accumulation limit of $2 million—approximately the value of the maximum DB pension now permitted under the Income Tax Act. This will be more saving room than many workers need, but it is necessary to ensure that all workers will have enough. Lower-income workers will not use contribution room they do not need—as is now the case with unused RRSP contribution room. Of course, a lifetime limit could be set at a lower amount (e.g., $1 million) but this would prevent many current DB plan members from continuing to accumulate pensions.

Figure 2

It is clear that that Canada’s current tax rules are preventing many workers from saving enough in their RRSPs and DC pension plans to maintain their living standards in retirement. As Canada’s workforce ages, the problem will worsen. Workers will have less time to prepare for retirement, and the savings gap will increase between a fortunate minority with career membership in generous DB plans and everyone else.

Major reform is urgently needed. Replacing Canada’s current pension and RRSP limits with a lifetime accumulation limit will ensure that every worker will have an equal opportunity to accumulate a good pension.

This article is based on Legal for Life: Why Canadians Need a Lifetime Retirement Saving Limit, published by the C.D. Howe Institute on Oct. 27, 2011.

James Pierlot is a principal and lawyer with Pierlot Pension Law.

Faisal Siddiqi is a principal and consulting actuary with Buck Consultants.

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

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While the current system has faults, the lifetime limit addresses the needs of the few and likley only the wealthy.

The system created set a target of 70% at age 63 with indexing and with the J&LS having worked for 35 years. In an era where people are living longer and expecting to work longer, you have decided to reduce the retirement age to 60, seems opposite to what is seen throughout the world but beneficiail for a few who can afford to save and want tax relief.

The current system has a lifetime limit but was built on the “factor of 9” which was either the shoe size of the finance ministers involved or an actuarial calculation in the 80’s when interest rates were high.

Seems a great deal of effort was done to produce a paper which has no chance on going forward as it serves few, those who com into large chunks of money at various times in their lives who want to defer taxes.

A better approach may be to address the true shortcomings tied to the factor of 9, it should adjust as interest/annuity rates do.

There could be catch up contributions made for past as done in the US to address some of the shortcomings.

The final piece would then be a discussion of where the level of tax assisted savings should be set. A person conrtibuting at $24,000 a year for 35 years with some interest return might not be far of your level.

If not for the maximum transfer rules under DB pension plans and I am not yet 60 and lived through the rules as they existed, I would have accumulated roughly $1.2 million in retirement savings and have yet to make $150,000 a year.

Thursday, November 10 at 4:36 pm | Reply

Stephen Cheng:

It seems that this article has not been put through a spell check. If they ever talked to the Bank of Canada about their long-term monetary policy and inflation targets before drafting the current pension/tax legislation, they might have come up with bigger shoes for the finance ministers.

Thursday, November 10 at 7:11 pm | Reply


Your right, I should check my spelling, sending notes on my blackberry, I am all thumbs and riding in the backseat of a car on my way to a meeing was not the best way to respond.

Friday, November 11 at 5:45 pm

Notions of a Pensioner:

The target pension in most pension papers, including this one, seems to be based on maintaining one’s “standard of living” after retirement. Further, this standard is deemed to be related to one’s final annual salary. I believe this is the wrong approach.
Personal pension projections should be determined from 2 estimates: the general “cost of living” and the “cost of additional goods and services that a retiree may desire”.

The basic cost of living is dependent on several factors but they are all quantifiable. It will vary by region and by individual groups (e.g. those with homes fully paid for vs renters).
If you exclude any existing debt and the cost of accommodation, the basic cost of living for a couple is not a big number and, for those earning $150k at retirement, it is probably a very small number. This is the piece of pensions that everyone should be focused on. Many will be pleasantly surprised that it’s only 6 figures.

We should be encouraging Canadians to estimate all of their basic living expenses following retirement, including accomodation, to determine the bare minimum pension they will need. They can then determine the level of savings to provide this level of income.

The size of the second cost amount is variable, is totally subjective and can only be determined by the individual.
They need to cost out all the extras they want e.g. second car, annual vacation, dining out, entertainment, sports and leisure, nestegg for grandchildren, keeping 4 bedroom house in high tax area, saving, wardrobe etc. etc. and determine what amount they need to save by retirement to provide them.

Finally, I don’t think pensions need to be indexed. Any increases in the cost of living that affect retirees will be more than offset by their decreasing propensity to spend/consume as they age. Why don’t the actuaries recognize this and take it into account?
Perhaps pensions should even decrease after a certain age. This would also reduce pension costs.

Friday, November 11 at 2:03 am | Reply

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