There is a general consensus that Canadians are not saving enough for retirement. On the face of it, the statistics on registered retirement savings plan (RRSP) contributors would seem to bear this out. Out of 27.9 million tax-filers in 2020, just 6.2 million contributed to an RRSP – less than 25 per cent. But in fact, the number of RRSP contributors is very close to optimal because there are a number of very good reasons for not contributing to an RRSP.
First, we can rule out some tax-filers on the basis of age alone. Contributing to an RRSP makes little or no sense in the case of the oldest and the youngest cohorts. In the case of the 6.7 million tax-filers who are age 65 or older, their saving days are presumably behind them.
At the other end of the age spectrum, the 3.1 million people under age 25 should be in no hurry to start saving for Canadians. For several more years at least, they will usually have higher priorities, such as paying off student loans, trying to save up to buy their first home or simply getting established in the labour force.
Second, Canadians at lower income levels are generally better off not contributing to an RRSP. The bottom quartile of Canadian income-earners can expect to enjoy more after-tax income from CPP, OAS and the guaranteed income supplement after they retire than what they earned while working. Why would they depress their preretirement income even further by contributing to an RRSP? Of the Canadian tax-filers between ages 25 and 65, 6.1 million have income less than $35,000.
Third, many Canadians are better off contributing to a TFSA rather than an RRSP. This is especially true in the case of workers whose incomes are rising since they might find themselves in a higher income tax bracket in retirement than they are currently. Besides, some of the people in this category might simply prefer to contribute to a TFSA even if an RRSP might be a little more tax-effective.
It is difficult to quantify the size of this group with any accuracy but an educated guess is that 25 per cent of the workers who are earning more than $35,000 and who are age 35 to 65 would be TFSA contributors. We can therefore reduce the number of potential RRSP contributors by another 3.2 million.
Finally, there are the participants of employer pension plans who are between ages 25 and 65 with earnings of more than $35,000. The roughly 2.5 million people in this category do not need to contribute to an RRSP.
When all of these subgroups are subtracted from the total number of tax filers, we find that the number of people who should be contributing to an RRSP in 2020 is about 6.2 million (see chart). As it happens, this is almost exactly the number who did contribute to an RRSP in 2020.
Does this mean that every Canadian is saving enough for retirement? Of course not. First of all, the contribution that some are making to an RRSP or other vehicle may not be adequate. As a good rule of thumb, people should be saving about 10 per cent of pay in their 30s, 15 per cent in their 40s and 20 per cent in their 50s and beyond.
In addition, the 6.2 million tax-filers who are contributing to an RRSP are not necessarily the same 6.2 million who should be contributing to an RRSP. Some pension plan participants and TFSA contributors are also putting money into RRSPs and are perhaps saving more than they need to. At the same time, some Canadians who really should be saving for retirement are not contributing to any vehicle.
The real takeaway, however, is that Canadians have generally got it right. Most people who should be saving are generally fairly diligent in doing so, whether it is through an RRSP or another vehicle.
Frederick Vettese is former chief actuary of Morneau Shepell and author of Retirement Income for Life.
