In my column on the Tax Free Saving Account (TFSA),I ranted on about i) fees charged by TFSA providers, ii) growing complexity of the governments registered savings plans system, and iii) the cost of the bureaucracy needed to administer the plethora of plans. Just give us a simpler tax system with lower tax rates, I opined, and let us save without having to funnel money through registered plans. As index-fund guru John Bogle has said in another context, cut out the middlemen when it comes to saving and investing. A lot of direct and hidden costs can be removed — like the feesfinancial advisors charge(directly or indirectly via mutual-fundlevies) to help us navigate through the intracacies of the programs.
Other complaints could have been raised. Two are what economists call perverse incentives and regulatory risk.
Perverse incentives refer to the fact government initiatives often come with unintended consequences. For example, many economists say the OAS, GIS and other income-support programs for elderly persons reduce the incentive for those in their working-age years to work, save and generally be a productive member of society. You can always rely upon government support programs for at least a minimum standard of living in your old age. Or if you want a bit more, you can save but keep it under the amount that would claw back old-age benefits. And if you have saved too much, retire or semi-retire in your 40s or 50s and melt down your registered plans until you dont face any clawbacks or the prospect of receiving retirement income in the higher tax brackets after 65.
The TFSA adds another plank to the edifice from which such unintended effects come. Ironically, one of the primary reasons for its creation was to address the disincentive to save for retirement, especially in the case of low-wage earners. Perhaps in time we will see how the TFSA creates its own set of unwanted side-effects and requires yet another government program to patch up the leaks. The cost of the bureaucracy seems to just keep feeding on itself, taking an ever greater cut from our savings.
Regulatory risk begins with people and companies undertaking actions on the assumption government rules and regulations continue unchanged into the future. That doesnt always happen. Governments, for various reasons, often end up changing the rules of the game in midstream or just before the waterfall comes into view.
With registered plans such as RRSPs, RESPs, and TFSAs, this risk is ever present. Take the decision to contribute to an RRSP. High income persons may see it as worthwhile because their tax rate in retirement will likely be lower — assuming tax rates stay the same. Fifteen years from now when they retire, rates could behigher and wipe out much of the value to deferring taxes.
Many persons will now plow money into the TFSA believing they no longer have to worry about clawbacks or taxes in their old age. But some retirement experts say the loss of tax revenues from the TFSA could become significant in a few years and prompt the government to introduce changes to recoup revenues. Who knows, maybe the changes could include legislation that decrees taxation of some percentage of the amount withdrawn annually from a TFSA.