OTTAWA (CP) - At age 63 and facing a very modest retirement income, Greta Doucet is cashing out what's left of her meager nest-egg as fast as she can. "I have a little bit left, but if you don't have a fairly large amount, you're just shooting yourself in the foot," said the part-time nurse and seniors advocate from New Brunswick. "You don't have enough to get yourself anywhere."
Converting her last $15,000 in RRSPs into cash and pumping the money into the mortgage of her Moncton home may sound like financial heresy in this season of wall-to-wall investment ads, when Canadians are being implored by financial institutions to max out their registered retirement savings.
But Doucet is simply following the best advice of experts who fully understand Canada's complex public pension system.
For modest income Canadians approaching retirement, RRSPs mainly benefit governments that claw back and tax their returns almost dollar-for-dollar after retirement.
"There are lambs off to slaughter as we speak," Richard Shillington, a freelance statistician, consultant and author from Ottawa says of the annual RRSP buying spree.
"The retirement planning that you're likely to get from the person in the cubicle at your bank, or from reading those articles about people who have incomes of $200,000, is wrong if you're among the half of us who don't have a pension plan.
"And nobody's going to tell you."
Shillington has been banging this drum since 1999, when he first laid out the huge tax hit on retirement savings in a study for the C.D. Howe Institute.
Looking at Statistics Canada data, he found that low-income retirees had squirreled away about $12 billion in RRSPs and $5 billion in registered retirement income funds (RRIFs).
"The greatest impact of these funds is to reduce the cost of government programs, rather than to improve seniors' standard of living," Shillington wrote.
Here's how it works.
Low-income Canadians - say, below $30,000 annually - get a relatively modest tax break on their initial RRSP purchase because of their low income tax bracket.
When they go to cash in after retirement, their RRSP income counts against their Guaranteed Income Supplement (GIS), which is clawed back 50 cents for every dollar of retirement income.
The pension income is also taxed, meaning the senior sees only 25 cents of each dollar saved.
Not only that, but many seniors programs - think meals on wheels, subsidized retirement homes, prescription drugs and home care - may also be income-based, depending on the province.
So the effective tax rate on RRSP income in some cases is more than 100 per cent, says Shillington.
And while low-income people get the worst deal, Shillington argues that even middle income Canadians who don't have a company pension plan may hold what he calls "futile savings."
"What I've said to people is, if you don't have an employer pension plan then you want to have more than $100,000 in your RRSP at retirement - or nothing. The worst thing you could have is $30,000 in your RRSP."
Some 38 per cent of seniors - about 1.5 million - qualify for the GIS at retirement. Those who hold less than $100,000 in RRSPs are saving for the public treasury as much as for themselves.
Shillington has called the current RRSP mantra fraudulent.
"I will defend the use of the word fraud," says Shillington, who does not sell financial services or advice but has a website (www.shillington.ca) and hopes to publish a book this spring entitled Retirement Planning for the Rest of Us geared to low-income households.
"People are being encouraged to save money in an RRSP on the belief that they will benefit from it at retirement. The government knows that for many of them, that's not true."
The Conservatives under Stephen Harper said as much in their 2004 election platform, when the party pitched a new registered lifetime savings plan that would be tax-free upon withdrawal.
"When retirees withdraw their RRSPs," said the 2004 Tory platform, "they not only pay tax, but often have significant portions of their old age security benefits clawed back. The RLSP would particularly benefit low-and middle-income Canadians."
The savings plan promise was dropped from the party's 2006 election platform.
Officials in two federal government departments, Finance and Human Resources and Social Development, would not comment on whether the policy issue is still actively being considered.
Shillington uses the example of a 50-year-old earning $25,000 a year with no savings.
By common financial industry calculations, he'll need 70 per cent of that income in retirement, or $17,000 annually. Using simple RRSP calculators offered on banking websites, the individual might be told he needs to save up to $392,000 over the next 15 years.
"In fact, that person has to save almost nothing to get a $17,000-a-year income at retirement, because OAS (Old Age Security), GIS and CPP just about gets them there," said Shillington.
"It's just basically wrong."
Malcolm Hamilton, an actuary with Mercer Human Resource Consulting in Toronto, is one of Canada's leading pension experts.
He believes governments have done a poor job of setting retirement policy for the poorest and the wealthiest Canadians. The difference is that wealthy people can pay advisors to help arrange their retirement finances.
"The way they've designed the system it doesn't pay low-income people to use RRSPs," Hamiltion said in an interview.
"The rational thing to do is to yank the money in its entirety before 65. You don't need to spend it, but you do need to get it out of the tax shelter before the clawbacks kick in."
Even after taking the tax hit from cashing out RRSPs, people are further ahead, especially if they use the funds to pay off credit cards or mortgages.
David Perry of the Canadian Tax Foundation, an independent public policy research forum, joked in an interview that given the tax hit and clawbacks, low-income Canadians approaching retirement would be better off buying a case of beer than an RRSP.
"Better to invest in something that you or your soul needs in retirement," said Perry, turning serious.
"Why not take that trip home to England or Latvia or China?"
Shillington says he's been accused of advising people to "scam" the system. But when wealthy people arrange their finances to minimize their tax load and maximize tax breaks, it is considered sound financial management.
Hamilton agrees.
"You really need to tell low-income people how to protect themselves from their government, so I don't see the moral qualm here," said the actuary.
For Greta Doucet, she's just making the best of a poor retirement income situation after a career spent raising three kids, working part-time and being active in the community while nursing two failed relationships.
"I guess it's just admitting that I didn't really take good care of myself, which I suppose a lot of 60-year-old women didn't do," she said with good-natured charm.
"To get my house in order and keep my house as long as I can, that's the goal I'm aiming for. The RRSPs are gone."
Government retirement programs will provide Doucet between $16,000 and $17,000 a year, which is poverty level in Moncton.
"I'll have to do with that, and I'm not the only one."
© The Canadian Press, 2007
