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Canada’s RRSP Program Has Too Many Jobs

Summary: Since its inception in 1957, the Registered Retirement Savings Plan (RRSP) has been a cornerstone of Canada’s retirement system. However, the RRSP has taken on roles far beyond its original mandate, notably through the Home Buyers’ Plan (HBP) and the Lifelong Learning Plan (LLP). Although these programs provide short-term benefits, they significantly damage the long-term health of Canadians' retirement savings. This article explores how these additional roles are sabotaging retirement savings, highlights statistics about the state of RRSPs today, and discusses the disastrous impact these trends will have on future retirees. While listening to a recent economic presentation by Don Drummond, TD Bank's Chief Economist at the Mortgage Professionals Canada conference, the following stat stood out to me: "Median RRSP savings are $146K (RRSPs have been in existence for 6 decades)" I was stunned by how low this value was. Even with a government pension, in today's economic climate, to achieve a successful retirement, we need more than $146K saved. This prompted me to explore how the average value of RRSPs in Canada could be so low after some of us have had as much as 60 years to save. The average senior aged 65 in Canada receives $18,197 per year from OAS and CPP. If qualified for GIS, they would receive another $15,186 annually, for a total of $33,338 annually. This isn't much income, especially for homeowners who must pay for property taxes, utilities, upkeep, and maintenance. How it All Began At inception, the RRSP was called a Registered Retirement Annuity and was created in 1957. At the time, Canadians could contribute up to 10% of their income to a maximum of $2,500 annually. The goal was to give all Canadians the same tax benefits as members of registered employer-sponsored pension plans. Benefits of the RRSP Plan 1. Tax-Deferral: Contributions to an RRSP are tax-deductible, which can reduce your tax bill. 2. Tax-Free Growth: Your savings grow tax-free while the money is in the plan. 3. Retroactive: You can carry forward any unused contribution room to future years. The Multitasking Disaster Studies show that people are dreadful at multitasking; the same is true of government programs. Here is where the program went wrong. In 1992, the Home Buyer’s Plan (HBP) was made more flexible, which allowed first-time homebuyers to withdraw RRSP funds to buy a house. Then, in 1999, the Lifelong Learning Plan (LPP) was introduced, which permitted withdrawals to pay for education. The Home Buyers' Plan (HBP) was not introduced in 1957 alongside the Registered Retirement Savings Plan (RRSP) creation. Instead, the HBP was introduced in 1992 as a federal initiative to help Canadians buy their first homes by allowing them to withdraw funds from their RRSPs without tax penalties as long as they met specific conditions. Here's a timeline of crucial HBP withdrawal limits since its inception: Timeline of HBP and LLP Withdrawal Limits: 1992 - Introduction of the HBP • Maximum Withdrawal Limit: $20,000 per individual. • Purpose: To help first-time homebuyers purchase or build a home. 1999 – Introduction of Lifelong Learning Plan (LLP) • The annual withdrawal limit is $10,000 per individual • The lifetime withdrawal maximum is $20,000 per individual 2009 - First HBP increase • New Limit: $25,000 per individual. • The increase was introduced as part of federal budget changes to reflect rising housing costs. 2019 - Second HBP Increase • New Limit: $35,000 per individual. • Announced in the 2019 federal budget to support affordability for first-time homebuyers. 2019 -HBP Enhancement for Life Events • The HBP was expanded to allow individuals experiencing a marriage or common-law partnership breakdown to participate, even if they were not first-time homebuyers. 2024 - Recent increase • New Limit: $60,000 per individual. • The increase was introduced as part of federal budget changes to reflect rising costs. A Flawed Strategy The Home Buyers' Plan (HBP) and Lifelong Learning Plan (LLP) were introduced in Canada as tools to make housing and education more accessible. While well-intentioned, these programs effectively allow individuals to borrow from their future retirement savings—a strategy that can have significant negative consequences. Ask any high school economics student, and they will tell you that compromising two of the three main elements (principle and time) in investing growth will lead to a disappointing return. Here is the formula: principle X interest + time = compounded return. Are We Borrowing From the Future to Pay for Today? The Problem with the Home Buyers’ Plan (HBP): Addressing Housing Affordability at the Expense of Retirement The HBP permits individuals to withdraw up to $60,000 from their RRSP to buy a first home. In an environment of rising house prices, this measure may help buyers cobble together a down payment, but it drains retirement funds. The funds are unavailable to grow tax-free over decades, diminishing the compounding returns essential for retirement security. The Problem with the Lifelong Learning Plan (LLP): Financing Education by Sacrificing Retirement The LLP allows up to $20,000 in RRSP withdrawals to fund education, which can help individuals upskill. However, education often doesn’t yield immediate returns, and the withdrawn funds lose their growth potential, including the compounded returns. Why This Harms Future Retirees Issue #1: Loss of Compounding Growth Withdrawals disrupt the power of compounding, which is vital for retirement savings. For example, $35,000 left in an RRSP for 25 years at a 6% annual return could grow to over $150,000. If that same $35,000 were withdrawn 15 years ago and repaid over the same period as required by the HBP program, it would be worth $54,311, a loss of $95,689 Issue #2: Repayment Struggles While repayments are required, life’s expenses (mortgage, childcare, loans) often make it hard to repay on schedule. Failure to repay means the amount withdrawn is added to taxable income, further reducing the effectiveness of the programs. Issue #3: Insufficient Savings Most Canadians are already under-saving for retirement. Encouraging them to dip into their RRSPs exacerbates this shortfall. Two Different Problems.  One Harmful Solution Housing Affordability Rising house prices are driven by supply-demand imbalances, speculation, and policy failures—not a lack of down payments. Increasing the HBP withdrawal limit does nothing to address the root causes of affordability, but it may drive prices higher by giving buyers more purchasing power. Retirement Security Retirement savings should be preserved and grown to ensure financial stability in later years. Programs like HBP and LLP blur the line between short-term needs and long-term planning. Why Would our Government Do This? Political Expediency Housing affordability and access to education are politically sensitive issues. Allowing individuals to tap into their RRSPs is a cost-neutral policy for the government (unlike direct subsidies or programs). Policies like these help politicians get elected or stay in office. And in proper political form, these policies only tell half the story. Vote for us because we will help you buy your first home, which is a great campaign strategy. Vote for us because we will make it look like we help you buy your first home when, in fact, we will set up a program that will allow you to borrow from yourself at the cost of your retirement, which is political suicide. Short-Sighted Economic Policies Policymakers may believe that homeowners and educated individuals are more financially secure, even if their retirement savings are compromised. The logic might be that owning a home or having better job prospects could mitigate future hardship. Assuming Home Equity is a Safety Net The government might assume that homeownership ensures financial stability in retirement. However, this overlooks that rising housing costs often mean seniors have high debt levels or are "house rich but cash poor." The Bigger Problem with the HBP and LLP Programs: No Warnings or Education Given to Canadians Neither the HBP nor the LLP adequately informs individuals of the long-term consequences of their decisions. To make matters worse, the participants of these programs will likely realize the impact once it is too late to take action. People considering retirement are often in their late 50s to early 60s, past their prime saving years. Borrowing from retirement accounts may seem like “borrowing from yourself,” but this lost growth can never be recouped. Many Canadians are not well enough informed to assess these trade-offs, leading to decisions that harm their financial future. In Case You’re Thinking, These Seniors Have Inadequate Savings - But at They At Least their Homes. The HBP and LLP programs may reflect a government view that seniors would be better off owning a home than relying solely on inadequate savings. But this is flawed for a number of reasons: A home is not a liquid asset—it cannot pay for groceries or healthcare. Also,  Seniors with insufficient retirement savings often need help with financial distress despite owning property. They sometimes need reverse mortgages or sell their homes out of desperation. An Unfortunate Misguided Solution Rather than “quick fixes” that appear to solve immediate challenges while creating long-term problems, the Federal government should instead focus on longer-term, systemic solutions For housing: Governments need to curb speculative investments and provide targeted assistance for first-time buyers. Plus they need to focus on programs that increase housing supply, such as income tax incentives for homeowners to build accessory dwelling units (ADUs). These units could be rented out or used for caregivers. Or adopt a policy allowing first-time home buyers to not pay tax on their first $250,000 of income. First-time home buyers could use the tax savings as a down payment. For Education: Governments need to expand grant programs and low-interest loans to prevent reliance on retirement funds.  This will not only help us increase the number of skilled workers to fill critical gaps in vital sectors such as technology, healthcare engineering and the trades.  It will also contribute to a higher GDP and build a more sustainable tax base for future generations. Encouraging Canadians to steal from their future is not a sustainable strategy. Retirement savings should be viewed as sacred - not a piggy bank for solving unrelated issues. Don’t Retire … Re-Wire! Sue