March 2001
The Truth about RRSPs
by Jason Clemens
Well, it’s that time of year again—time for us to tally our income and taxes and pray that we avoid an audit. It’s also RRSP time, when many of us rush out to find money to put into our RRSP, first so we can save on our tax bill, and second, so we can save for retirement. It’s also the time of the year when Statistics Canada releases RRSP statistics. Contrary to their findings that very few of us use RRSPs, the fact is that a vast majority of Canadians who should use RRSPs in fact do.
A recent Statistics Canada report stated that "about 29 percent of all tax-filers, or 36 percent of those eligible, contributed to RRSPs last year." But 29 percent isn’t all that many. Even 36 percent begs the question: why are so many people not using the RRSP system? The reason for the low RRSP usage estimates by Statistics Canada is that the estimates both ignore pension contributions, and include tax-filers who shouldn’t be contributing at all.
In 1995, two important studies were published regarding Canada’s retirement savings system: A Retirement Income Strategy for Canada by the Association of Canadian Pension Management (ACPM) and Troubled Tomorrows by the Canadian Institute for Actuaries (CIA). The ACPM report concisely describes why certain groups should be excluded from such analysis due to their demographic characteristics. For instance, the report explains why those already retired should not be using RRSPs. Similarly, it finds that those earning less than $20,000 per year, who typically pay little or no income tax, should not use RRSPs since deductions are of little help to them, and because government-provided income plans provide sufficient income for them to maintain their living standard.
Given the misleading use of Statistics Canada’s analysis, we thought it would be informative and interesting to replicate the analysis suggested by the ACPM. In 1997, the most recent year for which detailed tax statistics are available, 14.1 million taxable returns were filed with 5.9 million tax-filers claiming contributions to RRSPs, representing 41.8 percent of taxable returns. So, by just accounting for the fact that there are non-taxable returns, that is, individuals with no tax liability, the number of eligible tax-filers using RRSPs increases to nearly 42 percent.
Now, if we remove tax-filers over the age of 65, the proportion of taxable returns with RRSP contribution claims increases to 48.3 percent. On the other hand, we can take those individuals earning less than $20,000 per year out of the mix. In that case, the proportion of tax-filers claiming RRSP contributions—excluding those with income of less than $20,000—increases to 52.4 percent. These figures are substantially higher than either the 29 percent or 36 percent figures given by Statistics Canada.
More importantly, Statistics Canada’s analysis fails to state that it adjusts for individuals contributing to registered pension plans (RPP). In 1997, in addition to the 5.9 million tax filers who contributed to RRSPs, 3.4 million Canadians contributed to a registered pension plan (RPP). This means that 66.1 percent of Canadians who filed a taxable return in 1997 either claimed an RRSP and/or an RPP contribution.
If we again exclude low-income Canadians and count both RRSP and RPP contributions, the number of tax-filers increases to an astounding 84.8 percent! Alternatively, if we include low-income Canadians, but exclude those over age 65, the number of tax-filers with taxable returns who claimed either RRSP or RPP contributions rises to 75.9 percent.
Contrary to the view promulgated by those using the Statistics Canada analysis that few Canadians use RRSPs, a great majority of Canadians who should use retirement savings plans—either RRSPs or pensions—do just that. So here’s to those of you grappling with your taxes and struggling to find that extra bit of money for your RRSPs; contrary to what some people tell you, you’re not alone.
Sources
Association of Canadian Pension Management (1995). A Retirement Income Strategy for Canada.
Canadian Institute of Actuaries (1995). Troubled Tomorrows.
Revenue Canada (1999). Tax Statistics on Individuals, 1997 Tax Year. Ottawa, ON: Revenue Canada.
Jason Clemens (jasonc@fraserinstitute.ca) is the Director of Fiscal Studies at The Fraser Institute. He has a Masters Degree in Business Administration from the University of Windsor.
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