The Rideau Canal in Ottawa, Canada
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The federal government needs to change tax rules to account for longer life expectancy and the risk of retirees outliving their savings, the C.D Howe Institute says in a memo with policy proposals for the 2019 budget.

Life expectancy in Canada has risen more than two years per decade since the 1960s, the memo to Finance Minister Bill Morneau from author Alexandre Laurin says, and rules need to change accordingly. Laurin is the institute’s research director.

Canadians stop contributing to tax-deferred savings plans at age 71 and start drawing down on their RRIFs. Changing the contribution age to 72 and then increasing it at regular intervals to correspond to advances in life expectancy could encourage Canadians to work longer, Laurin writes.

“Retirees invested in RRIFs still face a material risk of outliving their tax-deferred savings due to the mandatory minimum withdrawal schedule, despite the 2015 budget improvements,” the memo says.

Laurin also brings attention to income-tax rules limiting the amount Canadians can accumulate on a tax-deferred basis.

“Because people are living longer and, even more important, yields on investments suitable for retirement saving are now very low, the cost of obtaining a given level of retirement income has risen,” the memo says.

The rules for calculating RRSP limits or the equivalency between DB and DC pension plans are “badly out of date,” it says, disadvantaging those not in DB plans.

The assumptions underlying the “factor of nine” equivalency factor—which uses a hypothetical defined-benefit pension plan in which saving 9% of annual earnings will let a person buy a retirement annuity equal to 1% of pre-retirement income—need to be updated, it says, or annual savings limits could be replaced by a larger lifetime accumulation limit.

Tax changes are also needed to allow for more innovative longevity insurance products, which could provide more retirement security, it says, or governments could even develop their own public longevity insurance scheme.

Read the full memo here.