By Evelyn Jacks
Controversy has erupted in the news over the potential lost government revenues 50 years from now, due to the prospect of doubling of Tax Free Savings Account (TFSA) limits in the future.
That certainly requires prudent study. Here’s why:
The real harm in sensational headlines like this is their potential to confuse the public away from real and powerful tax free savings opportunities to secure their financial future. Unfortunately, part of the negativity around increasing in TFSA limits from $5,500 to $10,000 or $11,000 is the view that this will only help the 16% of Canadians topping up their contributions now – most commonly thought to be the ‘rich.’
We perhaps need to add a grain of salt to that flavouring, because this 16% may certainly include any financially savvy adult who makes it a priority to save in the TFSA. This can include anyone with extra money to invest: working university students who add their income from tips to the plan, and seniors who can no longer contribute to their Registered Retirement Savings Plan (RRSP) by virtue of age.
To be clear: the TFSA helps those who pay taxes on investment income. In Canada today, that’s about 30% of Canadians, but in time, it will be many more, thanks to the TFSA. That’s where the effect on government coffers brings concern.
In fact, if all those Canadians retiring 50 years from now decided to save for retirement in a TFSA instead of an RRSP, government revenues would actually increase immediately, and by billions of dollars.
Here’s a closer look at that:
Canadians have saved just under $1 trillion in their RRSPs. The latest Stats Can figures show $37.4 billion was deposited in RRSPs in 2013 alone. The tax figures1 appear below:
Registered Retirement Savings Plans
Canadians are now contributing close to the same amount ($32.4 billion) to their TFSAs. Lost revenues (in millions of dollars) from the TFSA savings are much lower (with 2013 and 2014 being projections):
Tax Free Savings Accounts
These costs are estimated to be over $1 billion for 2015, according to a recently released report by the Office of the Parliamentary Budget Officer. The RRSP, however, is costing governments many times more, as the charts indicate. One might conclude that if the TFSA has the potential of replacing the RRSP as a viable and preferred retirement income vehicle, it wouldn’t be all negative for government.
In addition, retiring boomers are living longer than ever, and those boomers will do more withdrawing from their RRSPs than contributing over the next 40 years. Government coffers fill now, too, as those withdrawals are taxed. Those taxes will offset at least some of the costs of the increasing TFSA contribution limits.
The real message average Canadians should take from bombastic headlines? Keep topping up your TFSA as long as you can; top up your RRSP too, to get the immediate tax savings. And if you’re amongst the 84% of Canadians who haven’t yet topped up the TFSA, do so quickly, because if the current climate prevails, these jewels may soon be gone.
Retiring boomers are living longer than ever, and those boomers will do more withdrawing from their RRSPs than contributing over the next 40 years. Government coffers fill now, too, as those withdrawals are taxed. Those taxes, will offset at least some of the costs of the increasing TFSA contribution limits.
But here’s the bigger strategic impact: today, two-thirds of all TFSAs are held by taxfilers making less than $60,000 according to Finn Poschmann, vice-president of policy analysis at the C.D. Howe Institute, (as reported in the National Post by Garry Marr on February 24, 2015).
This is important.
According to research on wealth inequality by Credit Suisse in their Global Wealth Report 2014, “tax shelters for retirement savings give the middle class more incentive to accumulate assets. This will tend to reduce the top wealth shares over time, although the shares of bottom wealth holders may fall as well.”
Enabling a significant savings opportunity for the middle class, in other words, reduces the wealth inequality gap, a greater financial independence over the longer term, which increases the ability to service household debt. Both of these issues are of concern to governments struggling to manage all the demands on them.
In Canada, in fact, the wealth accumulation picture is currently very bright. The gains in value of household net worth have been impressive, when you consider that between 1999 and 2015, the most significant financial crisis of our era occurred.
While a small portion of total wealth, 30% of family units own TFSAs;
$66 Billion has been saved; Median $10,000 in 2012.
Estimated value in mid 2014: $132 Billion
* Source: Environics Analystics
Asset-rich Canadians share financial confidence and peace of mind. They also pay more taxes when they put their savings to work in other investments, and use discretionary income to stimulate the economy with their spending.
Indeed, it might well be argued that incenting Canadians – especially middle income Canadians – to save more in their higher-limit TFSAs will increase future tax revenues for governments. Further, if governments indeed need more money 50 years from now, it’s easier to get it from the newly wealthy: through increased sales taxes, income surtaxes, a myriad of opportunities to tax accumulated capital, and by incenting community philanthropy.
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