Current tax policy forces seniors to make minimum withdrawals from Registered Retirement Income Funds (RRIFs) whether or not they make financial sense and these minimums should be reduced or abolished, according to a study released by the C.D. Howe Institute.

The study’s author, William B.P. Robson, notes that since 1992, when changes to the Income Tax Act last adjusted minimum withdrawals, life expectancy is up and real returns on investment are down. As a result, RRIF holders now face dramatic erosion in the purchasing power of tax-deferred savings in their later years.

Often at retirement, and no later than the end of the year they reach age 71, many savers must annuitize or put their retirement funds into a RRIF. The Income Tax Act prescribes that RRIF holders withdraw a minimum of 4% of the beginning-of-year balance at age 65, then an escalating minimum until, from 94 onward, holders must withdraw 20% of their balances each year.

Robson argues that the present-value cost to governments of tax deferral in RRIFs is not major, but for RRIF holders, being forced to run down RRIF assets poses a threat.

Running tax-deferred assets down rapidly can expose withdrawals and any returns from reinvestment to income taxes and benefit clawbacks, and holders may reach advanced age with tax-deferred assets badly depleted.

When the current rules were established in 1992, this threat was not major, but life expectancy is up since then, and real returns on investments are down. RRIF holders now face dramatic erosion in the purchasing power of tax-deferred savings in their later years, says Robson, who concludes that the minimum withdrawal rules should be liberalized, or abolished altogether.