Rethinking Limits on Tax-Deferred Retirement Savings in Canada
By William B. P. Robson (C.D. Howe Institute)
Tax rules limiting the amount of tax deferral available to Canadians in various retirement saving vehicles need some measure of equivalency among them. Since 1990 this measure has been the Factor of Nine, based on the proposition that saving 9 percent of annual earnings will let a person buy a retirement annuity equal to 1 percent of pre-retirement income. A quarter century later, the flaws in the Factor of Nine are glaring and the case for change is compelling. The Factor of Nine is the result of calculations based on one particular type of defined-benefit pension plan operating under one specific set of demographic and economic circumstances. It is a crude measure. It neglects features that can make wealth accruals under different defined-benefit plans larger or smaller. It affects people of different ages differently. And it is badly out of date. People are living longer and – even more important – yields on investments suitable for retirement saving are very low. These changes have raised the cost of obtaining a given level of retirement income. The unchanged factor specifying equivalency puts people saving in money-purchase arrangements such as defined-contribution pension plans and RRSPs at a major disadvantage relative to people in defined benefit plans.
Source: SSRN
