Parliament buildings at sunset

The federal government should consider eliminating annual mandatory minimum withdrawals governing RRIFs, says the C.D. Howe Institute in a report set to be published Thursday.

The current rules that require retirees to draw down their RRIFs according to a schedule, set by age, exposes them to the risk of outliving savings, particularly when factoring in longer lifespans and the low real rates of return associated with safer investments appropriate for seniors’ portfolios.

“Forcing people to take income that will push them into higher tax brackets and trigger clawbacks they might otherwise be able to avoid is inequitable,” wrote the report’s authors, William Robson and Alexandre Laurin.

“A retiree with an indexed annuity from a defined benefit pension plan could have a higher cumulative income in retirement than a RRIF holder, but escape higher income-tax rates and OAS clawbacks because the real value of the annuity’s payments is level over time. The RRIF holder’s front-loaded withdrawals could subject [them] to higher rates and clawbacks, even though [their] cumulative income in retirement would be less.”

For the government, eliminating mandatory minimum RRIF withdrawals would represent only a deferral of taxation, not an elimination of it, the authors said.

“Income tax will be due at some point – either when the RRIF holder would have voluntarily withdrawn the savings, or when she or he died. In that sense, the deferred taxes in these accounts are implicit assets for governments.”

The authors argue that “assets that provide inflation protection are in short supply,” an issue that will worsen if the government goes through with its promise, announced in Nov. 2022, to cease issuing real-return bonds.

Seniors who search for higher returns by holding, for example, publicly traded shares risk losses that they are ill-placed to endure, the report said.

“Mandatory drawdown amplify the consequences [of losses], since they force asset sales regardless of the state of the market.”

If the government is unwilling or unable to eliminate mandatory minimums, it should consider changes to the withdrawal schedule to reflect Canadians’ longevity and economic realities, the authors argued.

“Ages at which saving must stop and withdrawals must start and accelerate should be higher,” they said. “Minimum withdrawals below a certain threshold could end, and the whole regime of minimum withdrawals could disappear. All these options would give Canada’s seniors a better chance of enjoying long life and prosperity.”

The Department of Finance is currently undertaking a study of RRIFs, reviewing “whether the underlying assumptions regarding rates of return, inflation and longevity continue to be appropriate.” It will report its findings to the House of Commons in June.