Labour Market Matters - August 2013

The Guaranteed Income Supplement (GIS) has contributed significantly to the reduction of senior poverty in Canada, but prospective GIS recipients should think twice at age 64 about making an RRSP contribution. In many cases, the best move may even be withdrawing the whole RRSP. This is because once GIS payments start, RRSP withdrawals are subject to a GIS phaseout of at least 50 cents on the dollar – as well as surprisingly frequently subject to personal income tax as well. Previous research1 has estimated that 32% of near-seniors have made Registered Retirement Savings Plans (RRSP) contributions in error as their asset holdings are low enough that they will likely be Guaranteed Income Supplement (GIS) recipients and thus their RRSP contributions would likely be subject to GIS phaseout. A CLSRN study entitled “Estimating the Number of Guaranteed Income Supplement Recipients Who Have Mistakenly Saved in Registered Retirement Savings Plans and Registered Pension Plans†(CLSRN Working Paper no. 119) by Michael Veall (McMaster University) reconsiders this estimate by analyzing anonymized taxfiler data to count the number of GIS recipients who actually were subject to phaseout on RRSP income. While his estimates are somewhat lower than those in the previous research, his main conclusion is that this issue clearly affects a very significant number of low-income seniors. The recession of 2008-2009 had a devastating effect on the Canadian economy.Between the second quarter of 2008 and the first quarter of 2009 the Toronto Stock Exchange (S&P TSX) composite index fell 51%. Over the same period house prices fell by 6%. By themselves, these and other asset price changes over the same period reduced the average wealth of Canadian families by 11% and average retirement assets by 14%. Without the subsequent recovery in prices, defined contribution (DC) plans would have lost 27% of their value, and registered retirement assets would have dropped 26%. While the economic recovery neutralized some of the losses, not everyone benefited equally. In a CLSRN paper entitled “Impacts of Cyclical Downturns on the Third Pillar of the RIS and Policy Responses†(CLSRN Working Paper no. 113) James B. Davies and Xiaoyu Yu (both of the University of Western Ontario) analyze unemployment and early retirement effects of recessions and find that some pension and retirement plans are more vulnerable than others in instances of cyclical downturns.