moved:
That, in the opinion of this House, the government should create a personal retirement account whereby Canadians may be given an after-tax option for pension savings.
Madam Speaker, I started working on this motion back in 1998 and it has been a long dusty road to get it here. I am delighted to speak to my private member's Motion No. 357.
What I am recommending is that another vehicle for retirement income be added to the array currently in existence in the Canada retirement income system. I call this the personal retirement account. It is not unlike the Roth IRA, which was recently introduced into the U.S. tax system for Americans wishing to save for their retirement by contributing after tax money into an individual registered account in which any growth is sheltered from all future taxation. Americans have had this popular new alternative at their disposal since 1998.
This savings vehicle offers no immediate tax benefit. Instead, interest dividends or capital gains income earned in the retirement account accumulate free of tax. The intention would be that withdrawals of principal and earnings after a specified age, for example age 60, are free of tax as long as the plan has been in existence for five years.
Most Canadians understand the basic concept of our current retirement income system which consists of public and private components. The public component consists of old age security and guaranteed income supplement for Canadians with lower incomes and the Canada and Quebec pension plans.
The private savings component is in the category of registered retirement savings plans, otherwise known as RRSPs, or registered pension plans, RPPs. I am proposing is a Canadian alternative for private savings under a personal retirement account which will utilize after tax money as opposed to the RRSP which defers current taxes until withdrawals are made from the RRSP and treated as income later. This income is then taxed.
Since the Roth IRA was offered to Americans in 1998, it has proven to be very popular. I believe the option I am presenting to put after tax money into a personal retirement account where all future growth in income would be sheltered from taxation, would be popular with Canadians and would offer them an alternative which would encourage them to save for their retirement.
A simple analysis clearly indicates that both an RRSP and an after tax personal retirement account are preferable to saving in an ordinary bank account. It is important for the government to encourage private savings for retirement. The federal government must plan for its tax revenues based on projections of changes to revenue based on people's retirement savings behaviour. RRSPs tend to defer taxes more than reduce taxes so what the government loses in revenues upfront, it tends to gain later.
If Canadians were offered a choice of an after tax personal retirement account, as I am recommending, and if it became as popular as it apparently is in the U.S., federal tax revenues would easily increase by several billion dollars in the next few years. Furthermore, if, as the Americans have done, Canadians were given the option of converting funds in existing RRSPs into these after tax personal retirement accounts, the federal government would enjoy a further tax windfall. The government would want to offer both RRSPs and personal retirement accounts and would have to take into account the impact of when taxation of revenues would be received.
The current demographics indicate that between 1995 and 2030, seniors, as a percentage of the working age population, will increase from 20% to 39%. This makes it essential that private savings be encouraged to enhance the public portion of retirement income which will obviously be seriously under strong pressure with current projections indicating a shortfall.
The aging of the population will have a profound impact on the ability of the government to provide programs to allow retirees to maintain a reasonable standard of living. Some of the characteristics that I would suggest as being appropriate for an after tax personal retirement account might look like the following description although the details are obviously flexible and specific details should not be used as ammunition to support or criticize the concept since they are not part of my motion and would be subject to the design of the government. I am merely offering suggestions to allow for clarity of understanding as to how an after tax personal retirement account might work.
First, the after tax personal retirement account should be created regardless of other recognized retirement schemes then in effect. Contributions allowed to the after tax personal retirement account should not be linked in any way to the contributions allowed for other retirement plans or schemes.
Second, the money contributed to the personal retirement account should consist of after tax dollars. Any contributions made to the account should not be tax deductible. However, any income earned and any withdrawals made from the personal retirement account should not be taxable.
Third, an individual may contribute a maximum of $5,000 in after tax dollars in each taxation year to personal retirement accounts.
Fourth, the individual contributor may use the unused portion of each year's allotted $5,000 in subsequent years.
Fifth, individual contributors may contribute their money to an after tax personal retirement account that belongs to their spouse or child as defined in the Income Tax Act.
Sixth, an individual may contribute to any after tax personal retirement account regardless of whether or not that individual is an income earner.
Seventh, there should be no age restrictions whatsoever on the after tax personal retirement account. Any individual may contribute after tax dollars to any personal retirement account at any time. Any individual who owns or is the beneficiary of an after tax personal retirement account may withdraw funds from his or her account at any time.
Eighth, the individual owner or beneficiary of an after tax personal retirement account should be able to invest in any investment vehicle provided that a record is kept of the invested funds of the income earned on the said investment.
Ninth, all after tax personal retirement accounts should be fully transferable on death with no tax implications for the funds retained within the account, including any income earned within the personal retirement account. Personal retirement account owners should be able to transfer their account to any other individual they choose. An individual transferee in this context should only include natural persons.
Tenth, withdrawals of principal or interest from an after tax personal retirement account should not be treated as income for any purpose.
There are obviously a host of other details and administration that would be required, but certainly the PRA would prove to be no more cumbersome to administer than a registered retirement savings plan account. For many people the certainty that all income generated would not be subject to future taxation at some uncertain rate of tax would be a huge incentive. It is my belief that it would encourage a substantial number of people who do not currently save through RRSPs for retirement because they do not see any certainty of advantage to saving subject to future taxation with the uncertainty of future rates of taxation.
Just as with the Canadian system of registered retirement savings plan modifications over time, there would be modifications in design of the after tax personal retirement account. For example, the Roth individual retirement account in the U.S. allows contributions to be used, up to $10,000 if it has been in the plan for five years, to purchase a first home. The U.S. has also built in an education savings component.
Many Canadians who put money into an RRSP during the 1970s, 1980s and 1990s would have been better off with an after tax personal retirement account because in many respects they are facing tax rates upon retirement that are higher than when they were making the contributions.
My proposal for an after tax personal retirement account would be a private retirement savings vehicle in addition to RRSPs and registered pension plans and not designed to replace any of the current retirement income vehicles.
Most RRSP contributors would, in all likelihood, choose to contribute to an RRSP and also contribute to the new after tax PRA. Many people are looking for as much certainty as possible for their retirement planning and the after tax PRA would certainly be appealing from the standpoint that revenue would not be taxed after taken out after a certain age.
In the U.S., 59 and a half years of age has been designated as the age after which non-penalty of withdrawals occurs. It is my belief that any negative long term revenue impacts to the government would be offset by the fact that retired persons would be more self-supporting. The principle that the after tax PRA and earnings within it would belong to the taxpayer and could be withdrawn without the huge penalty normally associated with the early withdrawal from an RRSP would be a real advantage.
The U.S. applies a 10% early withdrawal penalty for any withdrawals of earnings before reaching the age of 59 and a half when withdrawing from a Roth IRA. Contributions however, not earnings, may be withdrawn from a Roth IRA without penalty at any age. This kind of flexibility would be very attractive to a great number of people.
The government has not had a significant reform to the retirement income system for Canadians for many years. The after tax personal retirement account that this motion is advocating would be a positive and exciting addition and alternative for Canadians who are increasingly concerned about how to structure their financial affairs for their senior years. For example, in 1998 fewer Canadians contributed to an RRSP than in 1997. This trend is worrisome. In 1998 only a minority of tax filers under age 65 contributed to their RRSP account. This worked out to 40% for men and 30% for women.
I offer this motion as advocating what could be an exciting addition to the retirement income vehicles available to Canadians.