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Popular savings plans drive up costs for public pension benefits

Posted by on Feb 20, 2012 in Retirement | 0 comments

Heather Scoffield, The Canadian Press
OTTAWA
A popular savings program created by the federal Conservatives is exacerbating the fiscal pressure on public pension benefits – even as the government prepares to scale back benefits.Prime Minister Stephen Harper set up tax-free savings accounts or TFSAs in 2008 to encourage savings, allowing adults to set aside up to $5,000 a year to grow tax-free.
The accounts have surged in popularity, and in the last election, Harper pledged to double the maximum annual amount, once the budget is balanced.The fiscal problem is that when retirees start taking money out of their TFSA plans, none of that income is included in calculating whether they’re eligible for Old Age Security or the Guaranteed Income Supplement.
So there’s a big incentive for working people to save money in TFSAs while knowing they will still qualify for GIS when they retire – even if their income from their TFSA plans is high, says pension expert Keith Horner, a former Finance Department official.He says if everyone who can takes full advantage of the TFSA-GIS trade-off, the costs of the GIS would skyrocket to about 84 per cent above official projections by 2030. Horner acknowledges not everyone will take up the option.But given the tax incentives embedded in the savings plans and the fact private-sector pensions are becoming less prevalent, the take-up on TFSAs is expected to be large, and Horner’s numbers speak to the huge potential cost.
“The GIS is a real issue,” Horner said in an interview.”Governments should take these projected longer-term fiscal consequences of the current TFSA rules into account when assessing pension reform options,” he adds, in a major paper for the Institute for Research on Public Policy.Indeed, the government’s chief actuary has also examined the numbers, and issued similar warnings.In his 2009 assessment of Old Age Security, actuary Jean-Claude Menard found that the TFSA trade-off will cost the federal government an extra $4.2 billion annually by 2050.

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