RRSP contributions to keep dropping

Canadian contributions to registered retirement savings plans (RRSP) peaked in 1997 and will keep declining in the next decade, according to a forecast released Monday.

A RBC Economics report that studied RRSP trends in Canada over the last 40 years found that "demographic factors and related distinct savings patterns among various age cohorts" are the main drivers of both the run-up in RRSP contributions ahead of 1997 and the ensuing drop off.

Historically, the savings patterns of Canadian age groups have been that those aged 34 and under are the least likely to make RRSP contributions, the report said. Contributions rise between the ages of 35 and 55, at which point they decline.

Assuming the savings behaviour of current generations of Canadians mirrors past patterns "the large number of aging boomers will likely be a key factor in overall RRSP contributions continuing to drop over the next 10 years," said Paul Ferley, RBC's assistant chief economist.

The outlook comes amid growing concern that Canadians are not putting away enough money to fund their golden years. Aging baby boomers and the slow death of the superior corporate defined benefit pension plan are among the factors that have left many Canadians without sufficient financial protection for their retirement.

Mr. Ferley says that while the RBC analysis does not prove or disprove that, the projected downturn in contributions will certainly hamper domestic investment. "This downward trend doesn't necessarily mean Canadians aren't saving enough for retirement, but decreased savings can negatively impact the overall Canadian economy by making less funds available to finance investment activity."

The "clearly negative impact" that lower retirement savings would have on overall economic activity might lead policy makers to encourage more savings by raising contribution limits or extending the age by which RRSPs need to be cashed out, the report said. Another possible tactic would be to make other savings vehicles more attractive, for example by raising the annual contribution limit for tax-free savings accounts (TFSAs).

Malcolm Hamilton, a pension consultant with the firm Mercer, expects the fledgling TFSAs will partially displace RRSPs in the coming years. "It would not surprise me if some of the money going into TFSAs in the future is money that would have gone into TFSAs. That also would cause the RRSP contributions to fall."

The RBC report is not saying that Canada's RRSP system is broken, he added.

"There is tendency for people to jump to the conclusion...that the reduction in contributions to RRSP as a per cent of pay is somehow a signal that the RRSP system is failing," says Mr. Hamilton. "When what this report is saying is that the RRSP system may be failing, but this is not proof of that. That given the decline in the over 45-year-old work force, this is something a perfectly functioning RRSP system could be showing over the next decade."

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Baby boom generation Canadians have been the greatest boosters of RRSPs, which were introduced in 1957. Starting in the late 1960s and for the next three decades, RRSP contributions grew steadily. But as boomers got older and contributed less, they shifted downward in the late 1990s and continued to fall through to 2008.

"The projections suggest that the declining trend in the ratio of total RRSP contributions to disposable income that began in 1998 will continue through 2020," the report said.

The stock market turmoil of 2009 and the slowing income growth that accompanies economic slowdowns will exert downward pressure in 2009 but some of that will be offset this year, as conditions improve, the report forecast. However, in 2011 the highest-saving age group, the 45 to 54-year-olds, will peak.

"This decline in the highest saving age cohort causes total RRSP contributions to fall through 2020, eventually approaching a share of disposable income that is comparable to that last seen in the 1970s," the report found.

The RBC report makes this forecast on the assumption that the various age groups will continue to behave in the same way as previous generations. It acknowledged, however, that the recent financial market crisis could spur the post-boom generation to raise its RRSP contributions enough to offset part of the projected decline in total contributions.

"An increase in life expectancies could drive the baby boom and post-boom generations to save more and for longer than their predecessors," the report said.