January 1998

Seniors Benefit Decreases
RRSP Income 27% to 40%

© Talbot Stevens

This is the first of two Strategy Sheets detailing highlights of my recent research that shows how the proposed Seniors Benefit legislation will decrease most Canadians' after-tax income from RRSPs 27% to 40%.

Recognizing that RRSPs are the cornerstone of voluntary retirement savings in Canada, Strategic Value Corp. has sponsored this research to understand the legislation's full impact on investors and the financial planning industry.

Retirement planning essentially boils down to producing enough income to last from retirement until the death of the last spouse. More specifically, the objective is to maximize after-tax income, or ATI.

The table below attempts to depict the situation for a typical baby boomer who invests for 20 years, retires, then withdraws income for 20 years.

Assuming that $4,000 a year is invested in RRSPs for 20 years, the table shows the after-tax income (ATI) that can be withdrawn over a 20 year retirement period leaving nothing left over. RRSP growth is assumed to average 10% before and after retirement. Neither the withdrawals or annual contributions were indexed to increase over time.

The top half of the table shows the 20 year ATI from RRSPs under the current Old Age Security (OAS) system for someone that faces the same tax bracket before and after retirement. For example, the 20 year ATI for someone in the middle 40% bracket now and later is $16,150 a year.

Impact of Seniors Benefit "Hidden" Tax on RRSP After-Tax Income
OAS System: Tax Now, Later 27%, 27% 40%, 40% 50%, 50%
20 yr ATI 19,650 16,150 13,450
SB System: Tax Now, Later * 27%, 47% 40%, 60% 50%, 70%
20 yr ATI 14,250 10,750 8,050
%Change -27% -33% -40%
* for those facing the 20% SB clawback

The lower half of the table shows the impact on those facing the 20% Seniors Benefit (SB) clawback. The result is to effectively increase tax rates 20% for individuals with total income after 65 of $26,000 to $52,000, or a total combined income of $26,000 to $78,000 for couples.

It is important to clarify that only these income ranges are negatively affected by the SB changes. Those who earn less than $26,000 will receive slightly more under the new system. Those who earn more than $52,000 ($78,000 for couples) will have lost all of their SB and thus their total tax rate does not change.

Next month's Strategy Sheet continues the analysis of the table and how the Seniors Benefit legislation affects RRSPs and their ability to produce after-tax income.

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