Wednesday, 8 October 2008

Four Personal Finance Initiatives to Consider in the Canadian Federal Election

Yesterday I reviewed what the parties in the Canadian federal election campaign are promising to voters that will directly affect personal finances. Below is my list of suggestions for what the parties should address.

Create the iCPP (Individual Canada Pension Plan), a retirement savings plan funded by the individual that will be mandatory for all workers without workplace pensions (including self-employed). This isn't my idea (except for what I think is a better name than the horrible Canada Supplementary Pension Plan) - it comes from pension expert Keith Ambachtscheer as described in this May 30th Wealthy Boomer column (see also the background paper at the CD Howe Institute).

While I generally think people should learn to fend for themselves, the plain fact is that not many Canadians are saving enough to live comfortably in retirement. The paper estimates some 5.5 million households are in that situation. A little benevolent coercion is required. Otherwise, the country will end up with a double whammy: many retirees who won't have enough and, those who did save and are ok will suffer too by being obliged to pay higher taxes to make up part of the others' shortfall. Remember the story of the three little pigs?

Instead of the piecemeal, reactionary, one-off and probably inadequate boosts to GIS such as proposed by the parties in their platforms, let's create a long-term viable fix. The UK is already doing it, planning to launch something called Personal Accounts in 2012. Look at the striking possibility of improved end investment results broken down step by step in this chart from the UK document (kudos for the brilliant graphic presentation).

Canada needs to do something similar too.

Make the Tax Free Savings Account (TFSA) the only voluntary account and phase out RRSPs, LLPs, Home Buyer's Plans and RESPs. Increase the annual (and automatically inflation-indexed) contribution limit on the TFSA to something substantial and easy to remember- $25,000? People take advantage of these existing programs nowhere near what they could, partly because they are so darned complicated. The TFSA is straightforward and is flexible to suit all goals. This will encourage people to save. The new world financial order requires a massive reduction in debt levels and a shift back to saving a good portion of income - Canadians have been gorging on personal debt, perhaps not quite as much as Americans - and they need a simple vehicle to use to save.

Uniform Rules, Regulations and Laws across Canada - since mobility is such a part of life today, make life simpler where it doesn't need to be complicated.
  • Abolish Provincial securities regulators and create a single national regulator with better enforcement
  • Alignment of laws and regulations for wills, probate, trusts and estates
  • Alignment of laws and regulations on marriage and family finances
  • Alignment of laws and regulations on income taxes
Regulation and certification of financial advisors - create a true profession with substantial educational requirements, ethics, disclosure and competency. Right now, certain functions like investment advice are regulated but holistic personal finance advice is not. Yet there is a big need. Even as a person who spends a lot of time reading and thinking on personal finance, I find it difficult to keep up with the huge amount of knowledge and information required to manage my own affairs. Most people don't want to or cannot do so but the industry lacks credibility (too many people with a pure sales orientation not in the interest of clients) and competency, with the result that needs are poorly served. Creating a proper personal finance profession should happen on a national and not a provincial level.


Anonymous said...

Interesting suggestions.

I think however that the rrsp is quite popular - just because the entire nation doesn't max out every year doesn't mean it's being ignored.

For those of us who will contribute at a high tax rate and withdraw at a lower rate - nothing beats the rrsp.


CanadianInvestor said...

Hi Mike, The differential tax rate is indeed a benefit while you use it. But since it is only a tax deferral plan when you die (or your spouse dies if you will your RRSP to him/her) all of it is taken into your income in your final return. This means it will get taxed in probably the highest tax bracket. So if you want to leave something to others, the TFSA is better since it won't get taxed at all. To me the loss of some tax reduction is worth the simplicity it brings.

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