TFSA makes progressive retirement system slightly less so: Malcolm Hamilton


Here’s my latest MoneySense blog, a followup to all the media coverage on two controversial reports that called for the Tories to renege on its promise to double TFSA contribution room once the federal books are balanced. The blog, entitled Leave the TFSA Alone, is based on an email exchange with retired actuary Malcolm Hamilton, who led off the MoneySense Retire Rich event last November. Speaking of which, another is scheduled this April.

By Jonathan Chevreau

Malcolm Hamilton (L) & Jon Chevreau, 2012,

One of Canada’s better-known retirement experts, Malcolm Hamilton, doesn’t think limits need to be doubled on Tax-Free Savings Accounts but his reason for saying so is not the fiscal consequences for Ottawa. “I just think that a larger TFSA will ultimately threaten RRSPs and that the existing TFSA is sufficiently large for most Canadians.”

In an email exchange, Hamilton said he worries about the “apparently coincidental release of two reports highly critical of the TFSA in an election year.” Given its close affiliation with the NDP party, the critique of TFSAs is to be expected from the Broadbent Institute, he said.

Feds backing away from TFSA?

But the other report, from the Parliamentary Budget Officer (PBO) is more of a concern, since “it may signal that the federal government is backing away from the TFSA.”

As MoneySense reported last week, the Broadbent Institute report (entitled Double Trouble) authored by Jonathan Rhys Kesselman found that by the time the existing TFSA framework matures in 40 or 50 years, it will cost Ottawa as much as $15.5 billion annually in lost tax revenue and over the same time would “cost” the provinces another $9 billion. Ironically, Kesselman’s early research into what were initially called “Tax-Prepaid Savings Plans” or TPSPs laid much of the groundwork for what became the TFSA program when it was rolled out early in January 2009.

On the heels of the Broadbent report last week, PBO Jean-Denis Frechette released a report projecting the fiscal impact of the TFSA program in 2015 to be $1.3 billion, or 0.06 per cent of GDP. It said two thirds of the cost — or $860 million — is borne by the federal government and a third — or $430 million — is borne by the provinces. The PBO estimates that by 2080, TFSA fiscal costs will increase ten-fold, reaching 0.57 per cent of GDP.

“On the surface both reports appear to address the merits of doubling TFSA limits, but a closer reading suggests they are really criticizing the TFSA as we now know it,” Hamilton said. “When the PBO report estimates the 2080 fiscal impact to be $116 billion in 2080 without pointing out that Canada’s GDP will be 10 times larger ($20 trillion) by then, you know they are going out of their way to exaggerate or sensationalize the ‘problem.’ ”

Fiscal impact impossible to reconcile

Hamilton – a well-respected actuary — says he finds the “fiscal impact” estimates in the reports to be impossible to reconcile. “The PBO estimates the ultimate fiscal impact to be 0.57% of GDP in 2060 (and later), or about $12 billion per annum relative to today’s $2 trillion GDP.” The estimate is “all in,” meaning it includes the impact on the federal and provincial governments, including the impact of foregone tax revenues and increased transfer payments for OAS and GIS.

Meanwhile, the Broadbent Institute estimates the fiscal impact to exceed $24 billion per annum once the program matures, including the impact on both the federal and provincial governments but excluding any impact on transfer payments. The Broadbent figure is more than double the PBO estimate.

“Neither report makes any attempt to put the numbers in perspective,” Hamilton says. An impact of 0.57% of GDP between 2015 and 2060 amounts to slightly more than 0.01% of GDP per annum, which “would normally be considered a rounding error in Ottawa.”  The most recent actuarial report for OAS/GIS shows the cost of OAS projected to decline by 0.55% of GDP between its peak year (2025) and 2060. No one in Ottawa made a big deal of that “yet a similar increase in the fiscal impact of TFSAs is being positioned as ‘mission critical.’ “

Both reports look at the TFSA in isolation rather than as a small part of a large and complex retirement system. “The TFSA is regressive in the sense it helps wealthy people with high incomes to a greater extent than it helps poor people with low incomes.”

Tax system as  a whole is progressive enough

However, Hamilton added, OAS, GIS and the Income Tax Act are “extremely progressive. Low-income Canadians pay little or no tax and get their employment incomes fully replaced by government programs largely financed by wealthier Canadians.”

Hamilton says he believes the system as a whole is sufficiently progressive and “there is nothing in either of these reports to suggest otherwise. So in the final analysis, the TFSA may make a highly progressive retirement system slightly less progressive. The same could be said about RRSPs and Registered Pension Plans. If someone wants to argue that the system as a whole should be more progressive than it is, they should do so. So far, no one has.”

Jonathan Chevreau is editor-at-large for MoneySense and runs the Financial Independence Hub. His email is








Leave a Reply