Mr. Speaker, the motion proposes the introduction of what are commonly referred to as tax prepaid savings plans, TPSPs.
Hon. members may be aware TPSPs have been proposed by the C.D. Howe Institute and others as a new retirement savings vehicle to complement the existing system of registered pension plans, RPPs, and registered retirement savings plans, RRSPs.
I welcome the initiative of the hon. member for Vancouver Island North in putting forward the motion to the House. Tax prepaid savings plans are an interesting idea and worth exploring. While TPSPs may offer certain benefits they also raise a number of important issues.
I would like to review the current retirement income system and the system of tax assistance for retirement savings and touch on some of the issues surrounding TPSPs.
Hon. members may be aware Canada's retirement income system is composed of three pillars. These three pillars help achieve two basic objectives. First, to ensure a basic minimum income guarantee for all seniors. Second, to enable Canadians to avoid serious disruptions in their living standards upon retirement.
The first pillar compromises the old age security and guaranteed income supplement programs, which provide a basic minimum income guarantee for seniors.
The second pillar is the Canada and Quebec pension plans, which provide a basic level of earning replacement in retirement.
The third pillar is the current system of tax assistance for retirement savings. As hon. members are well aware this system provides Canadians with opportunities to save on a tax-assisted basis. Individuals may contribute 18% of earnings per year to an RRSP, a registered pension plan, or a combination of both, up to a maximum dollar limit of $13,500. For defined pension plans benefits are limited to 2% of earnings per year of service up to a dollar maximum of $1,722, which corresponds to 2% of $86,100. These limits allow a pension equal to 70% of covered pre-retirement earnings after a 35 year career.
The pension and RRSP maximum contribution limits are legislated to increase from $13,500 to $15,500 by 2004 and 2005 respectively, and be indexed to average wage growth thereafter. The $1,722 maximum pension limit for defined benefit pension plans is legislated to be indexed to an average wage growth starting in 2005.
The government's commitment to the pension and RRSP system is significant. According to estimates published last year the federal government will provide tax assistance of more than $14 billion this year alone on savings in RPPs and RRSPs. It is clear that the government's investment is significant.
Statistics Canada data indicates that Canadians had accumulated assets of more than $1 trillion in RPPs and RRSPs in 1999, accounting for 34% of all assets owned by Canadian households. Seventy-one per cent of all family units had assets in registered plans in 1999.
Most members would agree with me when I say that the current system of tax assistance for retirement savings has been a success, given the statistics that I just mentioned. Indeed Canada's retirement income system is regarded as an excellent system internationally and has been cited as such by the OECD, the World Bank and the IMF.
Nevertheless, this would not prevent the government from considering further measures to encourage and assist retirement savings in Canada and to make the tax-assisted savings system as fair and effective as possible, given competing needs and available fiscal resources. In this context tax prepaid savings plans are an idea worth examining.
I would like to raise some of the questions that need to be examined with respect to TPSPs but before that, allow me to explain exactly what TPSPs are, how they would work and the sense in which the tax is prepaid.
It is easier to see how TPSPs would work by comparing them to RRSPs which everyone is familiar with. An RRSP is an example of a tax deferred savings plan. Contributions to RRSPs are tax deductible. Investment income earned within RRSPs accrues free of tax. Withdrawals from RRSPs are taxable. In this sense the tax owing on contributions and investment income is deferred until the funds are withdrawn from the RRSP.
In contrast, contributions to a TPSP would not be tax deductible but investment income and withdrawals from the plan would not be subject to tax. The tax would be prepaid because contributions would be made from after tax dollars. Under certain conditions the tax assistance benefits to savers and the net costs to the government under a TPSP would be identical to those associated with an RRSP.
As some hon. members may be aware, tax prepaid plans exist in other countries notably the United States and United Kingdom. In the United States they are known as Roth IRAs. In the U.K. they are called individual savings accounts or ISAs. Since tax prepaid plans are being used in other countries hon. members may wonder why we cannot adopt them here. The U.S. and the U.K. have different systems for retirement income and tax assistance for savings than we have in Canada.
It is not clear that TPSPs should be adopted in Canada simply because they exist in other countries. We should first study fully their implications. Many questions need to be examined in assessing the appropriateness of TPSPs for Canada. First, how would a TPSP program fit in with the tax assisted retirement savings programs currently in place?
Second, what would be the impact on government revenues of introducing TPSPs?
Third, should income earned within a TPSP be taken into account in determining income tested tax and social benefits such as old age security and guaranteed income supplement benefits?
Fourth, would a tax prepaid option for retirement savings be attractive to savers given that the Liberal government has introduced the largest tax cut in Canadian history and future tax rates are declining?
The question of introducing TPSPs would have to be considered in the context of the many competing tax and investment needs for available fiscal resources. These and other issues need to be examined.
Before concluding I will take the opportunity to remind hon. members of the recent tax reductions made by the Liberal government. In the October 2000 economic statement and budget update the federal government announced the largest tax cut in our history. Canadians are already benefiting from the tax reduction plan. The tax cuts are providing significant stimulus to the economy and contributing to building a strong economy in the future.
The tax reductions will lower the personal income tax burden by 21% on average and by 27% for families with children by 2004-05. In addition, the reductions are promoting jobs, growth, entrepreneurship and innovation by creating a Canadian advantage in the taxation of businesses and capital gains relative to the United States. The tax reduction plan provided tax relief of about $17 billion in 2001 and will provide about $20 billion in tax relief this year.
Among the personal income tax reductions announced in the 2000 budget and the October 2000 economic statement and budget update were the restoration of full indexation of the tax system, the lowering of tax rates for all taxpayers, legislated increases in the tax bracket thresholds by 2004, and a reduction in the capital gains inclusion rate. These measures are putting more money in the pockets of Canadians, money they can choose to save and invest.
To conclude, it is not appropriate to support the motion when many important issues regarding TPSPs still need to be carefully examined and assessed. Furthermore, as I mentioned in my remarks, pension and RRSP limits are scheduled to increase beginning next year with limits being indexed to an average wage growth beginning in 2005 for RPPs and in 2006 for RRSPs.
Again, I thank the hon. member for putting the motion forward and giving us a chance to address it today.