Saving for a rainy day let alone saving for future retirement are luxuries few can afford on low and modest incomes. The current system is set up to benefit higher income earners who are greatly rewarded for their contributions in the short and long term to TFSAs (Tax-Free Savings Accounts), RRPs (Registered Pension Plans) or RRSPs (Registered Retirement Savings Plans), of which only 65% of Canadians contribute to. And though the Guaranteed Income Supplement (GIS) has been acknowledged for playing a role in reducing overall poverty in seniors, lower income earners don’t stand to gain much and can incur a significant penalty on their GIS when they draw on those savings in retirement. The decline in workplace pensions also means many are lacking an adequate cushion in later life; only 15-20% of those retiring without pension will have enough. What’s more, the reformed CPP (Canada Pension Plan) seems to be of most benefit to the middle class. People are also living longer and focus on retirement readiness has lacked attention for modest income Canadians.
But what if there were a more targeted initiative to make savings easier and support those on limited or moderate incomes to build wealth? A recently released report by Common Wealth and Maytree introduces a practical policy solution. The report highlights that household debt levels have risen to nearly 170% and more than half of Canadians have less than $10,000 in savings. Most recent data suggest that one third of Canadians are asset-poor (lacking savings to allow them to live above poverty for three months). This asset poverty, a measure of financial vulnerability, sparks the importance of stimulating more action to help address the persistent savings and wealth gap among Canadians.
The Canada Saver’s Credit (CSC) is not a new idea, but it has been reworked. It proposes a way to increase savings by incentivizing contributions without being penalized; the design suggests matching deposits dollar-for-dollar into TSFAs up to $1000 a year (translating to $2000 annually). And TFSAs, unlike RRPs or RRSPs, provide accessible funds when people need them, without having to pay tax on the withdrawals or growth. TFSAs, since their introduction in 2009, have generated interest and uptake from a broader economic spectrum, though not as much so on the lower end. Applying the CSC to TFSAs, based on qualifying income, offers a pragmatic way to save for short, medium- and long- term requirements.
Though more work may need to be done for appropriate implementation, including building it into financial empowerment, a case for the CSC has been made for policy-makers to consider its adaptation. On the heels of government announcing historic progress in poverty reduction this is an important tool to help redress the inequitable distribution of benefits, for the TFSA to stay true to its intentions and better enable all Canadians to prosper.
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