The recent federal budget will affect pensions and seniors in several ways.
The measure with the most direct (though not immediate) effect is the increase on the maximum Guaranteed Income Supplement (GIS) for low-income seniors – an extra $18 per month for singles, and $29 per month for couples as of January 1, 2006 and a further $18 and $29 as of January 1, 2007.
There are about 1.5 million Canadian seniors receiving the GIS. To be eligible for any GIS, you need to earn less than about $17,000 a year (for a single) or about $29,000 (for a couple), so all GIS recipients are living near or below the poverty line. While the budget increases are small (and less than is needed to bring all Canadian seniors out of poverty), every little bit helps. The increase is predicted to cost $700+ million a year.
The Liberal budget also provided a gift to higher income Canadians by raising tax-deductible contribution limits for Registered Pension Plans (RPPs) and Registered Retirement Savings Plans (RRSPs). The budget will increase RRSP/RPP contribution limits (before indexing) from $18,000 a year to $22,000 by 2009/2010. Since the current limits only affect people earning over $100,000 a year, this little perk, estimated to cost about $180 million a year, will only help people earning more than 2 _ times the wage of the average worker.
The budget also changes the rules governing money transferred by people who have left federally-regulated pension funds (e.g., airline workers) to locked-in personal RRSPs. The current rules require that this money (which is transferred on retirement to Life Income Funds or LIFs) must be converted to an annuity by age 80. The budget will remove this requirement and allow a retiree to continue to invest the funds and draw from the LIF on a flexible basis until he or she dies.
The most unexpected, and probably the most significant, budget measure affecting pensions is the decision to remove the current 30% cap on foreign investment by RPPs and RRSPs. Investment managers have been pushing for this change for many years, arguing that it will allow these plans to enhance their returns by picking the best markets to invest in worldwide, without restriction.
The argument for limiting foreign investment by RPPs and RRSPs is that these tax-subsidized vehicles should contribute to Canadian development by requiring that most of the funds be invested here. While this has probably had limited value -investment in the stock of theoretically Canadian companies does not necessarily lead to real job-creating investment in Canada – and many funds have used derivatives in recent years to circumvent the rules, abolishing the foreign investment cap takes away any future ability to direct our tax-supported pension funds for Canadian benefit. Allowing $1.2 trillion to move out of Canada without restrictions, also makes Canada, and particularly our dollar, more vulnerable to speculative attacks, and may have serious economic consequences in the future.
From the point of view of individual pension funds, it is important to recognize that foreign investment necessarily increases risk. Since Canadian pension liabilities (promised pensions) are Canadian dollar liabilities, foreign investment adds a exchange rate speculation risk to other investment risks.
The pressure to cruise the globe seeking maximum returns will also put an additional burden on pension trustees and individuals investing their RRSP money. It is not easy to keep track of domestic markets, let alone critically assess foreign market risks (and the sales pitches of investment advisors promising global panaceas).
For Canadians looking to be more cautious with their RRSP investments, another change in the budget may be more important. The limit for federal insurance for bank accounts and Guaranteed Investment Certificates will rise from $60,000 to $100,000.
