Sinking Feeling Hits RRSP Contributions...But Why?

As Canada is getting older more and more people are getting to the stage where they take money out of their Registered Retirement Savings Plans (RRSP). So logically fewer and fewer people are contributing to them. Those who do contribute use less of their disposable income to do so.

And those who belong to the group that has traditionally contributed the most (adults between 45 and 54 years of age) spend more of their money on housing and related investments, rather than on looking ahead to enhance their pensions.

In fact, the Royal Bank of Canada says, appropriately alarmed, that the levels are going below what they used to be in the 1970s.

It's worth remembering that this year's deadline to contribute to RRSPs, described by Canada Revenue Agency as "one of the most popular investment vehicles for Canadians," is Wednesday, February 29.

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Is the picture REALLY that bleak?

Statistics Canada sees a different picture than the bleak report by the Royal Bank seems to show. StatsCan says six out of 10 Canadian families held RRSPs in 2005.

Of course, what one bank's report describes as doom and gloom appears as an ocean of doubt in another bank's study. Bank of Montreal claims that many Canadians who are getting close to retirement age (or who have just entered it) are saying that if only they knew what was ahead, they would have changed their ways long time ago and prepared themselves better.

In fact, BMO had Leger Marketing conduct a poll for it, starting with the 45-year-old age group. Now, polls being what they are (perfectly unreliable tools of propaganda, that is), if we do NOT accept these results as mantras carved in Carrara marble, they still offer some strange replies. Such as the statement that 42 per cent wished they had started saving for retirement at an earlier age; meanwhile, 35 per cent felt real estate investments had been the course they should have followed.

On the other hand, one quarter of the 930 respondents said they should have contributed more to their RRSPs; and about that same number was of the view they should have thought about retirement while they were still young and didn't have as many commitments as they had now.

Fancy, right? Except neither Leger nor BMO bothered to say what the margin of error could be, if there ever was any.

The Royal Bank has noted that RRSP contributions have been climbing since 1968. Why so many years after the plan's inception, nobody can say, but there it is. In any case, according to RBC, while RRSP contributions as a share of personal disposable income peaked at five per cent in 1997, they went down to just 3.3 per cent in 2010. No results yet, but the bank said it feared last year's contributions could have gone to 2.9 per cent.

If this trend continues unchanged, a simple calculation, using 10 fingers and 10 toes, indicates that the RRSP-to-disposable-income ratio will go below two per cent by 2017.

Nothing like that has happened since 1975.

What's going on?

Well, first and foremost, those of us not close enough to retirement age have been surrounded by the onslaught of for-ever-young culture. All kinds of formulas that change our graying hair into shiny black (brown, whatever other colour, your choice) mane.

All kinds of lotions and sundry potions that keep plastic surgeons on the dole and make us look younger than our teenaged children (or grandchildren, even). All kinds of movies and television shows that display romantic love affairs amongst the 60+ crowds. Whether these happen out of their creators' fear they might be accused of ageism (or any other such abuse of the dreaded political correctness) is perfectly irrelevant.

To sum up: we're taught we're going to be young so long as we shall live, and we shall live for ever.

Thus listed, the reasons might seem funny, frivolous, even. But their economic impact happens to be capable of changing the entire financial picture. Who cares whether banks are happy that they have so many millions of dollars in safekeeping as part of their customers' RRSPs? The bankers care, as they should, and that's about it.

There are two basic risks:

• Financial institutions, weakened as it is by the recent crises, might begin to feel the crunch as more people start taking their RRSP money out rather than contribute for their own future, and
• People who have never thought of getting ready for retirement might begin to start demanding better coverage from government (coverage they have never contributed to in sufficient amounts), thus ruining the well for everybody, including their children and many generations to come later.

There's another angle. Statisticians tend to be looking for links between different categories within their fields of study, and the bankers' statisticians say they have, indeed, found one such link. Home prices are going up, while RRSP contributions are going down. And all that within a fairly similar time period. Bankers, grasping at straws, seem to think that many are using real estate to have sources of income come retirement age. The RBC says that property-value gains have grown faster than the stock market. And stock market happens to be a major part of RRSPs.

The RBC predicts (and other banks concur) that between now and 2020, we can expect housing market price gains within the 3.5 per cent annual range.

What will it mean?

Perhaps more people will invest more of their money into their real estate investments than their RRSPs? Possibly.

Banks, of course, predict that doing so would be a tragedy. Filled with admirable worry for their fellow human beings, they say markets will force people into channeling their money into housing, rather than using it as part of their deliberate investment strategies.

What an awfully admirable concern! Next thing we know they will be asking for government intervention.

So, here's an advice. Don't forget none of us will stay young till death do us part. Don't think traditional pensions will make up for the inevitable drop in your income after that beautiful day when they give you a watch, or a nice book, a shawl, or, at least, a well-meant speech, together with a celebratory cake, and will ask for your entry pass key in return. Get ready for it. How? Your choice. Not your bank's.

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