By Goodwin Ginger
It should hardly be surprising that the quasi privatisiation of pensions in Canada is leading to increased income inequality among the retired. It does not take an economist to figure out that tax payer supported private pension schemes will necessarily have this result precisely because each individual must fund their contributions out of current income. So the less disposable income you have the less amount of money you will have to contribute.
Further as we move down towards the bottom quintile of family income we should not be shocked to find individuals contributing less and less to private pension funds as such contributions must be made out of pocket. It is no secret, as Keynes noted long ago, that the propensity to save is a function of disposable income. In other words, if you must spend 100% of your annual income on current expenses to support your family it is a “no-brainer” that you will not have money left over for tax payer assisted private pension contributions. And this is regardless of the tax incentives in place: a 50% tax reduction multiplied by zero disposable income is zero.
However as we move up the income scale towards the top quintile of households we should expect to find increased disposable funds available for contributions to tax payer assisted private pension funds. This is necessarily the case because chances are that your disposable family income exceeds what your family requires for a years maintenance. What is more, because you are in the highest tax bracket the incentive and the amount of public support in the form of RRSP tax credits increases. So all those individuals making in more than $73,000 a year receive the highest possible taxpayer assisted contributions to their private pensions.
This is why the RRSP is such a social scam because it takes money from the the bottom two quintiles and funnels it upwards towards the top two quintiles but especially the top quintile of income earners.
As the new Robbin Hoods of neoliberal policy advocacy are fond of saying: “Don’t be needy give to the greedy!” And there is nothing like a little state assisted collusion to make the whole caper run smoothly along.
We analyze the degree to which Canadian families are covered by private pension plans and document how their savings for retirement (made through contributions to tax-assisted retirement savings programs) have evolved over the last two decades. We find that two-parent families, lone-parent families and other individuals located in the bottom quintile of the earnings distribution are not better prepared for retirement than their counterparts were in the mid-1980s or the early 1990s. On the other hand, those located in the top quintile are better prepared than their counterparts were in the mid-1980s or the early 1990s. As a result, Canadian families’ preparedness for retirement, which was fairly unequal in the mid-1980s, has become even more unequal over the last two decades. This finding has important implications for the future. Recent research has shown that the maturation of the Canada and Quebec Pension Plans (C/QPPs) has led to a substantial reduction in income inequality among the elderly between the early 1980s and the mid-1990s. Part of this reduction in income inequality might be lost in subsequent years. This is because the growing inequality in contributions towards retirement among families could, in the absence of offsetting factors, make the distribution of family income among seniors more unequal in years to come than it currently is.