People who maximize their RRSP contributions every year might be discouraged to find that those who use defined benefit pension plans are likely to be much better off. When you use the RRSP plan, you can accumulate money for retirement on a tax-free basis; it’s supposed to be equal to pension benefits accrued in a defined benefit pension plan. But according to the C. D. Howe Institute, the truth is that saving money in RRSPs are not as advantageous as other retirement systems.


Reports recently released insist that the Tax-Deferred Retirement Savings in Canada need to be rethought because they are unfair, outdated, and put those who put their faith in the RRSP system well behind. TFSAs and RRSPs are very popular retirement programs for the Canadian audience. Currently two-thirds of all Canadian residents are making some sort of retirement contribution. 35% make contributions to RRSP, 40% to TFSA; the remaining residents use some other registered pension plan. Out of the more than 26 million Canadians who file taxes, six million have contributed well over $39 billion to RRSP collectively.

Many argue that Canadians should be allowed to contribute more to RRSP if they want to do so. The biggest problem that economists see is that the original maximums have not increased with people living longer and the current state of lower interest rates. Because more people are living well beyond retirement age, they need more resources. The limited amount of contribution maximums are putting elderly people in a position where they will run out of money.

Enacted in 1990, the laws state that you can contribute a specific amount of money into your RRSP, which is maxed out when you reach 18% of the previous year’s earned income contribution. Or, you can contribute up to $26,000 for 2017, but that is after you subtract any pension adjustments. Earned income is typically a combination of self-employment income, rental income, and pension income investments.

Where did the set limit of 18% come from?

The maximum contribution came from the notion of the “Factor of Nine,” which is a sparse outdated equivalency test used for savings and retirement plans. It uses a hypothetical equation of a defined-benefit pension plan where an employee uses nine percent of their retirement savings to buy an annuity that equals one percent of their income before they retire.

The Tax Act allows any member of the defined benefit pension plan to accrue a maximum of two percent of an individual’s final earnings without being taxed over the year. So for the average Canadian who works 35 years, that would allow them to save as much as 70% of their earnings before they retire. Therefore, when using the RRSP, you don’t get to put away as much money for retirement as you do with other systems, which simply isn’t fair.

The Factor of Nine was supposed to help out the average Canadian, but what it has done instead is to limit the amount of money that anyone using it will have to retire on, and it hasn’t kept up with the times. The basis of the whole system is tied to a notion that is antiquated and doesn’t benefit anyone.

Advocates for those using the RRSP system believe that things need to be updated to adjust for the fact that people are living longer and need more savings to exist and thrive. If they don’t plan and save for themselves, then more pressure will be put on the government to secure their financial status. Thus, it makes more sense to allow people to save more to cover their own retirement costs. The system for retirement is not fair for those who are using the RRSP saving system, which limits an entire segment of the population which is trying to be responsible and to carry their own load. Until things change, there is no real incentive for people to go to lengths to secure their own future and to manage their retirement as long as they will need to.