Here’s an idea you probably won’t hear touted in the boardrooms of Canada’s big financial services institutions: roll back the RRSP tax break and fund a more robust, basic retirement income system instead.

Nevertheless, that’s the suggestion in a paper published recently by the Canadian Centre for Policy Alternatives. It argues that current basic retirement-income programs — old-age security and the guaranteed income supplement — are insufficient. In fact, a single senior relying on these programs as his or her sole source of income is currently left sitting well below the poverty line.

Currently, the maximum that a single individual would receive from both programs is about $14,000 a year, far below the urban poverty line of $18,373. (The situation is a bit better for couples. A couple with no other sources of income would receive up to $22,748, which would put them right at the poverty line.)

The report notes that there are other small benefits and tax breaks that seniors can receive, but these aren’t enough to change the underlying conclusion: “The fact that 14% of senior women, on their own, have incomes below the [poverty line], even after taking all these programs into account, indicates an urgent need to address their low incomes.”

The report suggests that increasing the GIS for single individuals could solve the problem.

In addition to raising the GIS for singles, the report recommends indexing the OAS/GIS programs to wages instead of prices; modifying the residency requirements to make it easier for immigrants to qualify for benefits; and removing provisions from the allowance program (an income-tested benefit for low-income seniors) that discriminate on the basis of marital status.

More controversially, the report suggests that these improvements could be funded by rolling back some of the tax incentives for private savings, RRSPs and registered pension plans: “A reduction of the tax subsidies to the third tier of the retirement income system … would free up funds to improve benefits in the first tier of the system.”

The report points out that the cost to government tax revenue of these deductions currently exceeds the total amount paid out in OAS by more than $1 billion — the net cost of subsidies to pensions and RRSPs in 2010 is estimated to be $28.9 billion, compared with the total cost of OAS benefits, which is expected to be $27.6 billion for the 2009-10 fiscal year.

If RRSPs and pension plans were utilized by most — or even the majority of — Canadians, this subsidy might be considered equitable, says the report. But only about 38% of Canadians have pension plans, and RRSPs aren’t universally employed, either.

According to the latest data from Sta-tistics Canada, only about 31% of eligible Canadians made RRSP contributions in the latest taxation year. That’s not to say that the other 69% haven’t made contributions in previous years or won’t do so in the future; but only about 6% of total contribution room has been used up, suggesting that these savings vehicles are far from being universally useful, and only a small segment of high earners can afford to max out their contributions.

As a result, the report’s author, Monica Townson, a pension expert and independent consultant who contributes frequently to Investment Executive, says: “I would not see eliminating the RRSP and pension plan tax breaks completely. But I think there may be room to review/restrict these tax subsidies.”

Townson points to the $500 billion in unused contribution room as evidence that RRSP deductions are largely benefiting high-earning households. “The argument we hear is this [unused contribution room] represents lower and middle-income taxpayers who don’t contribute. If that’s the case, then it perhaps makes the argument to restrict the tax subsidies even more compelling, as the tax subsidies are apparently helping mainly higher-income earners.”

Townson estimates that raising the GIS for singles by 15%, as she recommends, would cost about $847 million — although, she notes, it would be much less than that if the government decides to beef up the Canada Pension Plan, as some have been suggesting.

Even so, a more generous CPP wouldn’t solve the OAS/GIS problem completely, the report maintains, pointing out that even if the CPP replacement rate is doubled from the current 25% of covered earnings to 50%, that won’t do much to help people with low earnings — namely, women who didn’t work outside the home.

@page_break@The idea of limiting the RRSP tax break to fund these improvements to government-sponsored retirement-income programs will be a tough sell to the financial services industry, which has long lobbied for ever-higher contribution limits, Townson concedes. She recalls that the industry also lobbied hard against the introduction of the CPP back in the 1960s, and that it was successful in persuading policy-makers to limit it to 25% of covered earnings, with the idea that private savings could make up the rest of people’s retirement savings needs.

“It seems that approach has failed,” Townson says, “given declining coverage of RPPs and the dwindling interest in RRSPs.”

Nevertheless, the Canadian Bankers Association has come out in defence of RRSPs in a recent report of its own: “The issue is not an inherent flaw in the reliance on individual tax-assisted savings plans … but rather out-of-date restrictions that act as a disincentive to Canadians making the most effective use of these retirement vehicles.”

The CBA report points to the new tax-free savings account as an example of how a better-designed vehicle can promote greater savings. But Townson remains unconvinced: “It always puzzled me that if you couldn’t get lower and middle-income earners to contribute to RRSPs when they could get an immediate tax break, why would you think they would contribute to a TFSA when the tax advantage would not appear until 20 or 30 years down the road?”

Most, she suggests, just don’t have the extra money to save. IE