Pick your savings plan, pick your party

When a former contributor to the right-wing C.D. Howe Institute starts to agree with the critics of a federal program for which he advocated in its early years, you know the program has a problem.

A very large portion of Canadians will not benefit much from the proposed expansion of the Tax Free Savings Account. That's the nub of the agreement between economist and university professor Rhys Kesselman and critics of the program.

Is the fault for that on the program, or on us?

If raising the limit one can save through TFSA won't affect most of us why should we care about the rule changes? More, why should we care if one academic egghead or another switches sides on what for most of us is purely a theoretical debate?

Well, for one thing, the tools our government uses to encourage Canadians to save is a good meat-and-potatoes example of the policy differences of the federal parties. This may help you choose between them in the federal election coming this fall.

Which do you like better: a government that gives you tax incentives to save, or a government that just regulates a richer savings account for everyone through the Canada Pension Plan?

That's a pretty clear dividing line that may help you make up your mind on voting day.

Speaking now through a left-leaning think tank (the Broadbent Institute), Kesselman, who holds the Canada Research Chair in Public Finance at Simon Fraser University, says wealthy Canadians will gain more under the Conservative plan to boost TFSA limits. More than the rest of us. And more than previously thought.

Under the TFSA plan (I have one and in a previous life of full-time employment contributed the legal max), you buy the plan and generally put the savings in one of hundreds of group plans you can get through a financial advisor.

The benefit to you is that the money you put in is after-tax money, but the interest the investment earns comes out tax-free. That's unlike the good old RSP program, where the money you put in is tax-deductible, but taxed when you take it out.

If you plan to be in a lower tax bracket when you retire, RSPs are good. If you plan to be richer when you retire, a mix with a healthy TFSA component is good.

That's where the policy divide rests. The federal government stands to reap a huge tax harvest when us boomers cash in our RSP accounts in retirement (or dies before they empty out). The thought was that middle-class families would remain in middle-class incomes (and higher tax brackets) in retirement, allowing the government a good source of income-tax revenue from a demographic that is no longer working.

The government stands to reap a whole lot less in future years from the TFSA plan, because all that income is not taxable. Billions less, according to many estimates.

Good news for taxpayers. If they were rich enough to contribute to the limit for many years (which, alas, did not happen for me).

The Tories argue that TFSAs are for everyone, and point to stats saying 60 per cent of TFSA contributors who reached the contribution max in 2013 earned less than $60,000.

True enough, says Kesselman in his report. But that figure includes a lot of rich people giving money to a lower-income spouse or adult children.

A Globe and Mail news story adds that wealthy seniors max their TFSAs so that when the money is taken out (with tax-free interest), their taxable income stays low enough to get benefits from income-tested subsidies like Old Age Security.

About 17 million Canadians eligible to do so have not yet opened up a TFSA. Collectively, we have $600 billion in unused contribution room, says Kesselman.

Why aren't we all using this potential bonanza? Because millions of Canadians are paying off big mortgages, credit card loans, student loans and car loans, plus raising families right now. There's nothing left to put into savings, even if the benefit down the road might be huge.

Additionally, CBC reports there is a segment of seniors who are actually facing bankruptcy these days, because they're outliving their savings, and/or decided they wanted a more luxurious home to retire into, so they have another mortgage to pay.

This is where academic arguments and party election platforms meet the real world.

Do you think more Canadians would be better off long-term if the government forced greater savings through an expanded payroll deduction system like the Canada Pension Plan? This policy is favoured by the NDP and the Liberals.

Or do you think we have individual responsibilities to save, and the government should encourage individual imitative through tax-incentive programs? This is the Conservative Party's policy.

That might be the dividing line — one of them anyway — to help you decide how to vote in October.