Blogs & Comment

The RRSP debate

This RRSP season we have the rather interesting situation of mainstream media outlets, such as the Financial Post and Jonathan Chevreau, publishing articles critical of RRSPs. I say its interesting because I would have predicted the media outlets would have been more supportive of RRSPs given the ad revenues they receive from RRSP providers.
So I applaud the independence of thought if only because it shows financial journalism in Canada does not appear to be dictated by the cheque-book.I can also see evidence of the same independence of thought over at the Globe and Mail, particularly in the way Rob Carrick tells it like it is when it comes to the mutual fund industry and ETFs.
Whats also interesting about the RRSP furor is financial bloggers coming to the defense of RRSPs. They believe media complaints mainly reflect (as I understand) a desire by retirees to avoid paying taxes on their withdrawals when the time comes to pay the piper.
I can also see, however, some objective reasons for the disenchantment at least from feedback Im getting from readers. One big complaint is RRIF withdrawal rates starting at 7.38% for 71 year olds and rising to 20% by the age of 94. They were set in 1992 when the average rate on long-term Government of Canada bonds was 8.7% and 3-month commercial paper was 6.7% (as Im told).
Interest rates are now a lot lower and people are living longer, so there is some concern about running out of funds too soon. So some seniors feel minimum withdrawal rates should be lower. So does a study by the CD Howe Institute (in fact, they are also open to abolishing them).
Of course, current retirees may have known about the RRIF withdrawal rates at the time they made their RRSP contributions, but like the designers of the RRIF, they didnt anticipate yields on bonds and GICs falling so low. Perhaps when the withdrawal rates were determined, the designers should have included a feature to allow them to adapt to changing market conditions.