Taxpayer Participation under the Registered Retirement Savings Program

The Registered Retirement Savings Plan,' adopted in 1957, afforded Canadian taxpayers a new deduction from assessable income under the individual income tax. Qualified participants in this program may reduce current tax liabilities by their contributions to personal retirement savings accounts. This tax-inducement scheme was somewhat unusual, and representative taxpayer response would therefore occur only after a time lapse for individual evaluation of program advantages. Sufficienit time has now expired, however, to permit a study of program performance. Taxpayer response should be judged by reference to program objectives. Parliamentary discussions indicate that the measure had two objectives. The first was to restore an element of fairness, or uniform treatment, to the taxation of retirement funds. The second was to reinforce the social policy of fostering retirement saving in tlhe private sector. The particular construction of the retirement saving scheme and the consequent taxpaper response seem, however, to have led to a failure to achieve either objective. Taxpayer participation in 1962 is analysed in this article. Registered retirement savings deductions in that year were declared on only 1.49 per cent of all taxable returns filed by individuals under 65 years of age. Few taxpayers, then, utilize this deduction, and those who do are concentrated in the higher income classes. Different factors may contribuite to this disappointing performance: imperfect taxpayer knowledge; limited planning horizons; the impact of other formal pension programs; and uncertainties over future government action to provide income maintenance during old age. But the tax incentive itself must be evaluated for effectiveness and differential impact. Clearly the tax element is a distinguishing feature of the Registered Retirement Savings Plan. An understanding of the mechanics of income tax incentives and consequent taxpayer respionse is critical to an evaluation of the scheme.