51 and Counting - Is It Time to Remodel RRSPs?

In Canada, the increasing need for private pension savings, a high level of awareness of the Registered Retirement Savings Plan (RRSP) program and yet relatively low and declining use of RRSPs may suggest that the core element of the RRSP program – the tax incentives – are no longer shaping individuals’ behaviour to the desired extent. In assessing this assumption, the paper considers the recent trends in RRSP contributions and the changing levels of tax incentives associated with RRSPs. The analysis shows that the decline in RRSP contribution and participation rates over the past decade occurred despite the positive changes in certain socio-economic factors that could have been a strong driving force for boosting RRSP investment. At the same time, the tax benefits of participating in RRSP has noticeably decreased over the past decade, particularly so for middle and high income Canadians. Moreover, the tax incentives do not seem to be strong enough for households to use the RRSP savings vehicle more extensively than non-pension financial assets.