Last updated: August 09 2016

Knowledge Bureau Poll: Over 80% Prefer TFSA to CPP

In the end, it was a philosophical battle that tested who is best responsible for the future of retirement savings in Canada: only 18.6% of respondants to Knowledge Bureau’s July poll question answered yes when asked, “In your opinion, is the enhanced CPP a better retirement savings plan than putting the equivalent amount of premiums into a TFSA?” The remaining 81.4% voted no—in favor of the tax-paid contributions to a tax-exempt savings vehicle over mandatory, partially deductible contributions to a taxable fund.

Some interesting comments emerged:

For the yes side, from Amin Adatia: “The TFSA needs money from after-tax income. CPP contribution is at source and hence the contribution does get made, plus there is an employer portion . . . . In my work, I come across many people who have a difficult time finding any money to put aside; they all have heard and read about the benefits of investing. It is just that when it comes to finding the money to actually put aside there is none. So a better CPP is also for a better society.”

Don Bieber added this: “A balance between annuity-type pensions and your own savings, whether in RRSP or TFSA (tax driven), should be [the] objective for a sound financial plan. So yes, enhanced CPP will be of benefit to many Canadians to ensure they have a good base of guaranteed income for life.”

From James Leventakis: “I voted yes because it is forced savings, and I would guess that those that rely on CPP as a large part of their retirement income probably didn’t do much of savings other than the CPP contributions. The reality is that we don’t know if we could do better at investing the funds in our RRSP, TFSA, etc, than those that look after the CPP investments.”

For the no side, Brian Fraser added some numbers to the argument: “I am saying no for the simple reason that CPP contributions are not treated like other types of retirement/savings options. Assume that a person contributes $1,500 per year to CPP and that their employer does likewise. After 40 years the total contributions are $120,000. Let’s say the same person contributes $1,500 to either an RRSP or TFSA every year and is able to average a growth of 5% per year. At the end of 40 years the accumulated amount will be about $200,000 or $80,000 more than the combined amount of the person’s and their employer’s contributions. Now, let’s assume that the person dies one day before their CPP pension is to start. How much does their estate receive as a death benefit? From CPP, $2,500; from their RRSP or TFSA . . . $200,000. What would your beneficiaries want?”

Malcolm Palmer thought we were comparing apples and oranges: “The CPP is an investment fund with low overhead costs and a good track record, plus the payout is automatically indexed for inflation. Very few private investment funds do this. The TFSA is a vehicle that you put your investments into. As a tax-free retirement income account it is dynamite, plus the in-and-out feature means that my income this year becomes part of my contribution room next year, which means I have a vehicle that guarantees me growing income in retirement.”

From Peter Coles: “The problem with TFSAs is that they can run out. The CPP will pay you as long as you are living, which provides a welcome layer of security. However, I would have preferred it if the enhancements were voluntary (with perhaps even higher maximum limits on contributions) and employers off the hook for matching the additional amounts.”

From Don, a perspective from a self-employed taxpayer: “An enhanced CPP would be a great benefit provided the first $36,000 of annual benefit was not taxable and this amount was annually adjusted for inflation. As a self-employed contractor, had I been aware of just how much tax (including clawback of OAS) I would be assessed on my mandatory RRSP withdrawals, I would have invested all my retirement funds outside an RRSP. If I was starting over, I would invest the maximum allowable contribution into an TFSA and the rest in a stock portfolio.”

Martha Veel felt the enhanced CPP was too expensive: “As a small business, this really adds costs to us and no benefit to us. Would be nice if people in government were everyday people like us—not all of us get nice cushy pensions. Their pension money shouldn’t come from the taxpayer—they need a reality check!”

David Bishop weighed in on the problem with savings discipline: “I agree with the sentiment that people should be responsible for their own retirement savings. Unfortunately, that doesn’t work because most of us do not set aside sufficient funds for our retirement. As a result, unless we are prepared to have a significant portion of society living in poverty and being dependent on charity, a mandatory retirement savings plan appears to be the only solution. Since the CPP is already in place, it makes sense to use it rather than yet another scheme. The choice between RRSP and TFSA, for most people, is academic since both of these require savings and it’s the lack of savings that is the root cause of the problem.”

Helen Aldersley took exception to comments that the TFSA is for ”rich people:” “In theory, adding to the TFSA is the better choice because low-income retirees can withdraw from the TFSA without incurring income tax and losing income-tested benefits. Unfortunately there is nothing to stop them from withdrawing the funds before retirement. If I have a client whose income is within the lowest income-tax bracket, I suggest that they max their TFSAs before RRSPs. Withdrawing from the RRSP may incur income taxes in a higher bracket than was saved when they were deposited. And they may limit income-tested benefits. TFSAs don’t do that.”

This, from Mitzi-Lynne Morgan: “I say ‘no’ simply because it is run by the government, and governments of all stripes have a history of raiding these kinds of government-run schemes and putting the money into general revenues, where it gets stolen or wasted or both. Since our last election, this scenario has become even more likely. At least we have some control over a TFSA, although I would not be surprised to see Trudeau get rid of it altogether.”

Some interesting final points from Annie Markmann: “I agree with the forced savings; my concern is the additional taxes to be paid by all taxpayers for the employer part of the CPP (which funds) all those paid by governments. We the taxpayers pay for the employer portion. And these individuals already have good pension plans so they do not need more CPP income. The enhanced CPP should only be for those employees and employers without pension plans; not everyone.”

Knowledge Bureau wishes to thank all who contributed their opinion to this important question on retirement security options in Canada. For August, we are shifting gears to education funding, given that it is already “back to school” time! Please let us know your opinion:

Many people fund their children’s post-secondary education; others think these young adults should pay. In your opinion, is it the parent’s responsibility?

 

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