Federal tax rules are preventing many Canadians – especially in the private sector – from saving enough for retirement, according to a report released Thursday by the C.D. Howe Institute.

Workers relying on RRSPs cannot accumulate even half the retirement wealth of career members of defined-benefit pension plans, says the report, Legal for Life: Why Canadians Need a Lifetime Retirement Saving Limit by James Pierlot with Faisal Siddiqi.

“Solving this ‘have’ and ‘have-not’ divide in the pension outlook for Canadians is becoming urgent,” says Pierlot.

More than 12 million Canadian workers do not participate in a DB pension plan. Many of these workers need to save for retirement, and must do so in RRSPs and defined-contribution pension plans. The authors demonstrate that tax rules prevent these workers from saving enough, even as career members of DB plans accumulate retirement savings worth as much as 60% of their total career incomes.

This indicates a serious problem of inequity, the prospect of low living standards for future retirees and an increasing burden on income-support programs funded from general tax revenue, says the report.

Those at particular risk of not having enough DC/RRSP contribution room include new Canadians, self-employed workers, and those who have incurred investment losses, experienced periods of unemployment or made RRSP withdrawals before retirement.

The report notes that private sector workers tend to under-save in the first part of their careers. “In the current environment of low interest rates, an aging population, and increasing longevity, these workers have less time to save for retirement and must save more. But can they?” asks Pierlot.

To answer this question, the study examines contribution and benefit limits in “tax assisted” DB pension plans, DC plans and RRSPs. These plans are intended primarily for workers with “middle class” incomes, who will not receive enough pension income from programs such as Old Age Security (OAS) and the Canada/Quebec Pension Plan (C/QPP) to maintain their living standards in retirement.

The authors find that Canadian workers with career membership in generous DB plans can and do accumulate good pensions with values ranging from $550,000, for a worker with a career-end salary of $50,000, to $2.1 million with a career-end salary of $150,000. With RRSP savings included, their accumulations of retirement wealth are even greater. The study also finds that workers with similar career earnings who save in DC plans and RRSPs are prevented from accumulating even half of these amounts.

Major reform is needed, so that all workers for whom the “tax-assisted” retirement saving system is intended can save enough for their retirements, according to the report.

To make this a reality, the authors propose that Canada’s annual, income-based tax limits on retirement saving be discarded and replaced with a uniform, inflation-indexed lifetime accumulation limit of $2 million – the value of pensions now accumulated by high-income workers with career membership in generous DB pension plans, especially in the public sector.