November 1997

Lobby to Exempt RRSPs From
Seniors Benefit Clawbacks

© Talbot Stevens

As a few articles on the issue have started to appear in the media, the public is starting to become aware of the impact of the Seniors Benefit (SB) legislation and how it could fundamentally change retirement planning.

In my educational presentations to both the public and financial advisors over the last year, I have tried to expose the full significance of this legislation.

Because of how the “hidden” tax increases were cleverly disguised as a clawback, very few people are aware that under the SB system, most middle-income Canadians will see their tax bracket increase 50 to 74% after age 65!

Any individual or couple earning over $26,000 after age 65, will face a 20% clawback of their SB payment. This has the same effect as increasing their tax rate 20%.

An individual with $35,000 of income, currently in a 40% tax bracket, will effectively face a 60% tax rate under the SB system — a 50% increase in tax levels.

Because the clawback is based on total family income, the situation is worse for couples. A senior couple with a combined income of $40,000 ($25,000 and $15,000) are each currently in a 27% tax bracket. Under the new system, they would each be in a 47% tax bracket. This represents a tax bracket increase of 74%.

My view on this legislation, as painful as it is, was basically one of acceptance — until recently. I have concluded that the government must not overlook the human nature aspects of the proposed legislation.

If changes aren't made to exempt RRSP/RRIF income from the clawbacks, the Seniors Benefit system could backfire.

RRSPs form the foundation of average Canadians' voluntary retirement savings. If the benefits of RRSPs are significantly eroded, middle-income individuals will save less on their own and have the difference made up by the guaranteed SB payments. This could actually increase the government's retirement obligations, clearly not what they intended or can afford.

I strongly encourage all concerned individuals and organizations to join me and lobby parliament to exempt RRSP and RRIF income from the clawbacks to maintain RRSPs' incentive for individuals to finance their own retirement.

Pensions and CPP/QPP payments need not be exempted because these are generally not voluntary. Unregistered savings need not be exempt, because, given the appropriate contribution limits, the RRSP system provides the desired retirement standard of living.

Write Paul Martin and your Member of Parliament and explain that RRSP income must be exempted, not because of our self-interest in protecting our retirement savings, but because unless the public's incentive to save is maintained, the government will not achieve their necessary objective of cutting the cost of retirement funding.

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