OT: Canadians are a bunch of Pansies.
You want to see a real Canadian pansie? Jim Stanford, economist for the Canadian AutoWorker's Union...
RRSPs are costly subsidy for well-off, union economist charges
TORONTO (CP) - During RRSP season, economist Jim Stanford is the skunk at the garden party, the ant at the picnic. While Canada's registered retirement savings plan system - an income tax shelter for people who put money away - is widely hailed as a great way to save and is eagerly promoted by the financial services industry, Stanford begs to differ.
"These funds benefit from a very substantial tax subsidy, and the cost of that is borne by all Canadian taxpayers," says Stanford, economist for the Canadian Auto Workers union.
"Ironically, the richer you are, the bigger the tax subsidy. High-income investors (allowed to defer tax on as much as $13,500 a year) actually get a higher subsidy than your average schmuck."
Stanford says the RRSP system costs governments $18 billion a year in forgone taxes, "and that makes it one of Canada's most expensive social programs."
Here's how he calculates the cost. Tax deductions in 1999 totalled $9 billion and the value of sheltered income totalled $6 billion. Redemptions amounted to $3 billion, leaving a $12-billion cost to the federal government. The provinces' tax loss amounts to $6 billion more.
Canadians with incomes over $50,000 a year (11 per cent of taxpayers) rake in about 65 per cent of the RRSP "subsidy," Stanford argues.
"For most Canadians, their RRSPs and personal savings are not going to cut it. It's the public pension and any occupational pension they happen to have that are going to be crucial," Stanford says.
"The only people RRSPs are going to make a big difference for are the very, very high-income earners who really save a lot."
In general, Stanford is skeptical of the privatized, individualistic approach to pension policy. But he concedes its popularity in today's pro-market culture.
"I think people have been, in a way, sucked in by the good returns the stock markets have had in the 1990s. The fact of the matter is that stock markets are notoriously unreliable and the current returns we have seen I don't think are sustainable."
The RRSP system has been "a gravy train" for mutual fund sellers and financial institutions that are spending hundreds of millions of dollars on advertising, Stanford says.
"The incredible irony here is the economic evidence that most of these money managers fulfil no productive economic function whatsoever. The evidence is very strong that actively managed mutual funds do not match the market averages.
"In other words, on average you're better off to buy a no-brain index fund than to buy an actively managed mutual fund."
Stanford says Canadians spend about $8 billion a year on money market management fees, about one per cent of the gross domestic product, "and it seems to fulfil no economic purpose whatsover."
The CAW economist is also against proposals to increase the allowable foreign content in RRSPs.
"I think a reasonable quid pro quo for that tax subsidy is that the resulting investments should be placed within Canada," he says.
"If investors don't like that idea, they're obviously free to take their money and put it anywhere they want in the world - just give back the subsidy that they received from Canadian taxpayers."
Stanford's arguments don't impress Glorianne Stromberg, author of major studies on the financial service industry.
"I think he's looking at it from the wrong end of the telescope," says Stromberg. "I think he should be looking at it from the perspective of his members, of how in this day and age they can create a pool of money that can fund their retirement needs."
RRSP expert Tom Delaney is more blunt, observing that Stanford's arguments can be expected to play well in his union constituency.
But slamming RRSPs is "totally wrong-headed" and private pensions are sweeping the world, Delaney said.
"It's taken a long time for the light to switch on, for people to recognize the significance, but uniformly all new emerging economies are creating - not public pensions - they're creating mandatory RRSPs. That's the way to go." |
