A smarter way to retire

We have this big – and now, unfortunately, growing yet again – National Debt. We're collectively getting older and many people, though not nearly enough, are saving for their retirement through RRSPs. It seems to me that, with some creative thinking, we could do something that would help a whole lot on both issues.

The change in the near term would be to grandfather all RRSPs to date, and start a new RRSP system. We would do away with income tax deductions for RRSP contributions, requiring contributions to be made with money that had already been taxed. The next point is critically important to my proposition: The tax the feds get on RRSP contributions would go straight to national debt paydown.

Heresy, you say? Not at all, because at the other end when the RRSP is withdrawn, the federal government would NOT tax withdrawals, or the growth the RRSP had produced.

In 2007, Canadians contributed $34.1 billion to their RRSPs (regrettably,only 6% of the actual contribution 'room' they had). Figure the average marginal tax rate at 22%, and under a new regime, the additional tax revenue available for debt paydown under this new regime would have been $7.5 billion. With that amount applied directly to national debt, in the following year, we would have paid about $450 million less in debt interest than we did. In 2009, we'd save $450 from 2008's paydown, PLUS yet another $450+ million 2007's paydown. And so on...

A more quickly disappearing national debt would free up progressively more more of our taxes to actually be used for the delivery of government programs instead of debt interest and principal payments. The overall effect would be to reduce, or keep the lid on, tax rates over the balance of our earning years. (As the debt goes down in progressively larger chunks over the years, perhaps our leaders could decide to spend some of the interest savings either on enhanced programs for increasing numbers of seniors, or at least to stop the erosion of such programs!) They could also decide to actually reduce personal income tax rates.

The new system would also guarantee that if future governments do, God forbid!, raise taxes to spend even more than the interest savings, those increased taxes will not be applied to any of our future retirement income deriving from RRSP contributions under the new system.

Think of it as an insurance policy against politicians!

Obviously, the government would have to maintain the current system for all pre-existing RRSP contributions.

But wait...there's more!

I'm a strategic communication consultant. Under the new regime, I can also make a case for the feds to spend an enormous amount of money over several years on a marketing campaign to convince more of us to contribute, and to contribute larger amounts, to our RRSPs. Achieving a total shift in national attitude toward retirement saving would perhaps cost a couple of billion dollars over a decade or so. In magnitude, the campaign would have to be be akin to the WWII effort to convince people to buy war bonds.

But just for a moment, imagine that today we were contributing an average of, say, 50% of the RRSP room we already have, instead of just 6%. In 2007, that would have produced $284.2 Billion in contributions. At even the lowest marginal tax rate of 15%, under a new RRSP regime the federal government would have collected an extra $42.6 Billion in income tax in 2007 and applied it all to paying down the national debt, saving us something like $2.6 Billion in 2008 interest payments.

The interest savings over the years would be additive (using the same figures for simplicity, in 2009 we would again save the original $2.6 Billion from the 2007 paydown, plus $2.6+ Billion from the 2008 paydown, for a total interest saving exceeding $5.2 Billion). And so on. At that rate, we'd pay off the net national debt in 10 or 12 years! Imagine...without a national debt we'd have $42 billion extra to spend every year – $1200 for every single citizen – without raising taxes.

One other aspect of achieving a 50%-of-room RRSP level would be a massive infusion – close to a third of a trillion dollars every year – of extra investment capital into the economy. Assuming that RRSP contributions were left ‘at work’ in the economy, after just 10 years, we’d have $3 trillion fueling the economy that we don’t have now. Not bad when you consider that our entire current GDP (2007) is just over $1.2 trillion. All that investment capital would produce a real whack of increased federal income taxes – with which we could pay the debt down even faster.

So undertaking a long-term attitude-shift marketing campaign with sufficient strength to motivate a change of RRSP contribution behaviour would pay for itself many, many times over. If there was a new RRSP regime, and the marketing campaign succeeded, it would likely be the second-wisest investment ever made by the government of Canada, outclassed only by the decision to build the CPR.

Sometimes I wish you could explain stuff like this in 20 seconds or less.

Pity the English language (3)

Yep, there are less calories in whatever it is, and supposedly intelligent people spend millions telling us so.

What we need are fewer examples like this.

Pity the English language (2)

I'm obliged to say that I'm not obligated.