Seniors are not a good reason for doubling TFSA limit
Apr 7, 2015

Seniors are not a good reason for doubling TFSA limit

After years of being promised whenever the federal books got balanced, it looks like the next Harper budget is indeed going to double the contribution for Tax Free Savings Accounts. This policy has long been criticized - including by me - for being a policy that disproportionately provides advantages for the rich. Indeed, the number of people capable of putting aside over $10k in savings per year while working are fairly limited.

Today in parliament, Finance Minister Joe Oliver has hit back against these criticisms, effectively pointing out that there is another big group of people who are already maxing out their contributions: seniors. 71% who max out are over 55 and 46% are seniors. 

The reason for this is fairly simply: most seniors live entirely off their savings. It is very likely that a good chunk of these will max our their contributions when it is doubled, too. As they are saving already, whatever savings plan is introduced will undoubtedly be used extensively be them. So fair enough, the point that it isn't just rich people using it is well taken, clearly there is this big group that takes advantage of it.

However, this doesn't fit as neatly in with the objectives of the TFSA in the first place. The main point of a government backed savings program is to encourage savings in the population. The argument is that a population with a higher savings rate is thus going to experience less dramatic recessions (since they can spend their savings during a recession) which will be better for all of us. I'm totally in favour of savings plans in general, just not this one in specific, as I will get in to.

Seniors, however, are not encouraged to save based on increasing these contributions. Seniors are already not working and thus living primarily off savings and can not save more. They will use this policy and benefit from this policy but they won't be contributing to the primarily goal of the policy: increasing net savings in our society. What is happening here is something of a wealth distribution towards seniors.  That's okay. I think there are solid reasons to distribute wealth towards seniors who often suffer, but it comes back again to whether this savings method is a good way to do that.

The fundamental problem with a savings incentive system based on tax breaks is that it is inherently regressive (as it undoes a tax code that is inherently progressive taxing higher earning people more). Someone earning very little pays a low tax rate and so doesn't benefit from the same dollar value in savings as someone who is richer. It isn't just that it exacerbates systemic inequality, it also undoes the putative goal of a government saving plan: to encourage savings to dampen recessions. This is because the poorer people are those most sensitive to the pressures of recessions and thus in most need of savings to be able to continue spending through the recession which keeps the economy good for all of us.

Even if we just restrict to seniors, this helps richer seniors who have high investment income more than it helps poorer seniors, those who we might care to distribute wealth to in the first place. If the goal is to help at risk seniors, this is the worst way to do that. So while it certainly doesn't help the main objective of the plan - increasing net savings -it is also a poor way to implement this sort of secondary objective. And everything it does, to seniors and working age people alike, is done in a highly regressive way.

Contrast this with, say, a savings plan that includes direct government contributions in a progressive way (ie government adds x% on first thousand saved, y% on the second thousand saved, etc). Perhaps combined with a separate wealth distribution to seniors if needed, also done in a progressive way. There are many ways to do this that can be debated. Unfortunately, there didn't seem to ever be a substantive debate on the best kind of savings policy in Canada. TFSAs are what we got, and we are about to double down on them, criticisms be damned.

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