As the federal government prepares to table the 2010 budget early next month, it’s facing pressure from financial services industry groups to take action on the retirement savings shortfall.

Pre-budget submissions by the Investment Industry Association of Canada, the Investment Funds Institute of Canada, the Canadian Life and Health Insurance Association Inc. and other groups, call for urgent changes to Canada’s retirement savings system.

“The ability of millions of Canadians to afford a secure retirement is at risk,” said Ian Russell, president and CEO of the IIAC, in remarks to the House of Commons Standing Committee on Finance.

The groups applaud the establishment of the federal-provincial working group on Retirement Income Adequacy, but encourage the government to use the 2010 budget as an opportunity to move forward with more specific solutions.

The Canadian Bankers Association calls for existing savings products to be evaluated and improved. “We would welcome the opportunity to explore options for evaluating the current suite of tax-advantaged savings products — principally RRSPs, RRIFs, and TFSAs – to assess how these products could be modified to help Canadians save more for retirement and to consider other options to reduce the risk of inadequate income,” says the CBA.

CLHIA recommends that the government approach the issue by expanding participation in the pension system. It suggests removing the requirement for an employment relationship between pension plan members and the sponsor of a pension plan, which would allow far more small employers and self-employed individuals to participate.

Improve tax rules, increase flexibility for retirees: IFIC, IIAC

Meanwhile, the IIAC and IFIC are each calling for specific tax and policy changes that would provide retirees with more preferential tax treatment and more flexibility to manage their savings in retirement. Both groups call for changes to the minimum annual withdrawal rules pertaining to RRIFs.

“The minimum withdrawal factors established in 1992 in Regulation 7308 mean monies funding retirement may be withdrawn and taxed earlier than they otherwise would be, reducing savings for later on when they may be more needed,” IFIC explains in its submission. It recommends a reduction in RRIF minimum withdrawal factors to reflect an older population.

The budget should also include measures to help Canadians rebuild their retirement portfolios that were hit hard by the market downturn, according to the IIAC. It suggests replacing the annual RRSP contribution limit with a defined lifetime tax retirement savings allowance, which would give investors flexibility to recoup market losses in their portfolios; as well as allowing retroactive contributions to TFSAs for older Canadians.

To improve the tax treatment of retirees’ income, IFIC calls for the government to allow individual RRSP or RRIF annuitants to claim a dividend tax credit on eligible dividend income.

Other recommendations on the tax front include allowing more Canadians to take advantage of income-splitting from age 55 — by offering this option for all retirement-related plans, including RRSPs — and reinstating a policy allowing individuals to offset up to $5,000 of net capital losses against any other income.

“In the wake of the significant market downturn in 2008, relief for some investors could be provided by reintroducing this rule,” IFIC says.

Enhance Canada’s tax competitiveness

Beyond solutions for the retirement system, financial services industry groups are looking for the budget to include measures that improve the efficiency and competitiveness of the Canadian tax system.

“A competitive tax regime attracts business investment that is crucial to improving Canada’s productivity, raising incomes and stimulating economic growth,” says CLHIA. It recommends such measures as providing a comprehensive group taxation regime, improving access to liquidity and capital available in foreign subsidiaries, and repealing or suspending the capital tax on financial institutions.

Similarly, the Canadian Bankers Association urges the government to improve Canada’s international tax regime, to make it more efficient, competitive and fair.

IE