TFSA – (Perhaps Not) A Ticking Time Bomb? - Part 2

Last week, we looked at the TFSA helping those who pay taxes on investment income. This week in part 2, we will look at savings opportunities for the middle class.

Retiring boomers are living longer than ever, and those boomers will do more withdrawing from their RRSPs than contributing over the next 40 years.  Government coffers fill now, too, as those withdrawals are taxed.   Those taxes, will offset at least some of the costs of the increasing TFSA contribution limits.

But here’s the bigger strategic impact:  today, two-thirds of all TFSAs are held by taxfilers making less than $60,000 according to Finn Poschmann, vice-president of policy analysis at the C.D. Howe Institute, (as reported in the National Post by Garry Marr on February 24).  

This is important.

According to research on wealth inequality by Credit Suisse in their Global Wealth Report 2014, “tax shelters for retirement savings give the middle class more incentive to accumulate assets.  This will tend to reduce the top wealth shares over time, although the shares of bottom wealth holders may fall as well.”

Enabling  a significant savings opportunity for the middle class, in other words, reduces the wealth inequality gap,  a greater financial independence over the longer term, which increases the ability to service household debt.  Both of these issues are of concern to governments struggling to manage all the demands on them.

In Canada, in fact, the wealth accumulation picture is currently very bright.  The gains in value of household net worth have been impressive, when you consider that between 1999 and 2015, the most significant financial crisis of our era occurred. Here’s a chart that boils down asset growth over time from the 2012 Survey of Financial Security.     

NET WORTH COMPOSITION MATTERS:  Assets Owned: $9.4 Trillion;   Debt Owed:  $1.3 Trillion

  * Source:  Environics Analystics

Asset-rich Canadians share financial confidence and peace of mind.  They also pay more taxes when they put their savings to work in other investments, and use discretionary income to stimulate the economy with their spending.

Indeed, it might well be argued that incenting Canadians – especially middle income Canadians – to save more in their higher-limit TFSAs will increase future tax revenues for governments.  Further, if governments indeed need more money 50 years from now, it’s easier to get it from the newly wealthy: through increased sales taxes, income surtaxes, a myriad of opportunities to tax accumulated capital, and by incenting community philanthropy. 

For in-depth studies on tax efficient retirement income planning, take the certificate courses in the MFA-Retirement Income Services Specialist Programs.