These times of infinitesimal interest yields and greater life expectancies are dangerously increasing the chances for seniors of outliving their savings. That’s why commentators believe it is time for the Federal government to cancel minimum withdrawal payouts on RRIFs.
For Kelly McCauley, Edmonton West Conservative MP, it’s a question of principle, not only of circumstance. “It is unacceptable and discriminatory to seniors” shoots McCauley, who put forward a motion in 2017 to eliminate the mandatory minimum withdrawal limit on RRIFs. “The liberals voted it down,” he adds.
Times Have Changed
When the first minimum withdrawal limits were set in 1992, they had a certain financial soundness to them, recalls a C.D. Howe e-brief from 2017. At that time, “real yields (adjusted for inflation) on safe investments were much higher...The nominal yield on a portfolio of Government of Canada bonds with maturities roughly matching expected drawdowns... produced a prospective compound real rate of return of about 5.7%.”
In those years, a 71-year old male had about a one-in-thirty chance of surviving to age 96, a female, a one-in-nine chance; at that age, the value of one’s nest egg would be reduced by 75%. The original withdrawal curve was quite steep: at age 71, a retiree had to transform his RRSP into an RRIF and withdraw 7.38% from it the first year. The first ten years saw that minimum withdrawal limit inch up to 8.99%, then shoot up to 14.73% by age 91, and up to 20% by age 94.
The 2015 budget softened that curve, at least at the outset. This withdrawal schedule is still the one in force. For retirees aged 71, the minimum withdrawal was reset about 28% lower to 5.28%, moving up to 7.08% by age 81, then to 13.06% at age 91, and catapulting to 20% at age 95. However, in 2014, the financial context already resembled today’s. “At the beginning of that year, the bond portfolio described above yielded only 0.25% in real terms, notes the e-brief. That meant retirees would hit the thresholds for nest-egg depletion much sooner.” Every dollar of value at the starting age would have only 25 cents of remaining value by age 87, compared to age 96 in 1992, and below 10 cents at age 94 compared to 102 in 1992. And an increase in longevity of 22% “made these unsettling numbers worse,” adds the study, making depleted capital reserves in the early 90-year old group increasingly likely.
The e-brief runs numbers on a hypothetical RRIF with an initial value of $100,000 at age 71 based on the financial context of 2014. The minimum withdrawal at that age would be $5,280 and drop by about $125 annually to $2,450 by age 94; then withdrawals that jump to 20% rapidly empty the nest egg. Today’s negative yields accelerate even more this sinking to a reserve of zero.
Hastening Tax Income
“The motive for forcing holders of RRIFs and other similarly treated tax-deferred assets to draw down their savings is to accelerate the government’s receipt of tax revenue,” explains the e-brief, and likewise it serves to “bring revenue from clawing back income-tested programs such as Old Age Security and the Guaranteed Income Supplement forward in time. These payments will occur eventually – notably on the death of the account holder or her/his spouse or partner – so they amount to an implicit asset on governments’ balance sheets. The drawdowns do not affect their present value; they simply make them happen sooner.”
Does this impatience for revenue make sense? asks the e-brief, which answers: “Governments are, for practical purposes, immortal, so the timing of receipts and payments matters less to them. Retirees are mortal, so timing may matter more to them.”
McCauley opposes the measure on principle. The government doesn’t force people to sell a house nor to sell shares at specific dates to pull in tax revenue, he says in essence. Why should the government do it with the RIFF savings of seniors?
One might object that the payment of taxes was initially deferred and that the government has every right to call them in. Granted. McCauley doesn’t question that. He questions the timing. “The government will get its money, he quips. When you die, your spouse will get your money, and when s/he dies, the government will get its share, and it will be taxed at a higher rate” (as inheritance).
Another Hit to the Middle-Class
Many seniors are not indisposed by the minimum withdrawal limit, notes C.D. Howe’s Alexandre Laurin. “Individual planning can change things. Many will pay less tax if they withdraw more.” McCauley acknowledges this. Many wealthier seniors have savings in many other vehicles and are not affected by the withdrawal limits, “but a lot of lower and middle-class people have the bulk of their savings in RRSPs, he notes, and this is the type of account that’s being punished”.
An analysis performed by the Office of the Parliamentary Budget Officer at McCauley’s request indicates that the cost for the government of eliminating minimum withdrawal limits would amount to $940 million for the first full fiscal year of 2021-22, and rise to $1,016 million in the last year of the projection, 2024-25.
If the government finds this revenue loss too steep, the C.D. Howe e-brief suggests adopting a more flexible approach and making “minimum RRIF withdrawals a function of real yields and longevity. The withdrawal percentages could be updated every year to reflect the investment returns actually available….If annual changes are too confusing, establishing review at frequent intervals –every three years, say – with a commitment to avoid changes of more than a given magnitude, is a second option.”
But then, let’s do away with minimum withdrawals altogether in one definitive gesture, says Laurin. “Some consider that the shock on government revenues would be too brutal for government revenues, he says. But presently, considering that money seems to be free, that wouldn’t be so hard.”
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