Doubling TFSA limit a win for the rich but trouble for most: study

It’s been seven years since the federal Conservatives unveiledf or us a shiny new savings scheme known as the Tax-Free Savings Account.

So pleased was he at the time with the TFSA’s potential, Jim Flaherty christened it in his 2008 budget speech “the single most important personal savings vehicle since the introduction of the RRSP.”

Canadians, in turn, have responded by embracing the TFSA to save for retirement, as well as shorter-term goals such as a down payment on house, a family holiday or new car.

Now, with a new budget (not to mention an election) on the horizon, it only makes sense for the feds to consider doubling the TFSA allowable contribution limits.

Something this good can only improve when it’s super-sized, right?

Who better to share his thoughts on such a heady topic than Rhys Kesselman, the Simon Fraser University economist whose co-authored study back in 2001 paved the way for the introduction of existing TFSA.

Kesselman’s latest study, published by the Toronto-based Broadbent Institute and made public this week, paints a less than attractive financial picture for Canada in the years ahead should the government go ahead with the expansion proposal.

In the short run, TFSAs pose “deceptively” small federal revenue cost. But in his study (entitled Double Trouble: The case against expanding Tax-Free Savings Accounts) Kesselman looks down the road 40 to 50 years to predict large drains to federal revenue in the range of $15.5 billion annually. The provinces, too will suffer with a projected annual revenue loss of $9 billion.

And that’s before the TFSA limits are adjusted.

A proposal to double the TFSA limits can only exacerbate those whopping revenue costs – a decision, Kesselman told Yahoo Canada Finance, that’s “hard to describe as being fiscally responsible.”

This isn’t the first examination of the impacts of TFSA expansion, but it is considered to be the most comprehensive to date.

Finn Poschmann, a long-time advocate of the TFSA and the other half of that influential 2001 study, has praised the flexible nature of TFSAs, saying the scheme allows Canadians to better manage their savings and consumption.

“Increased contribution room will allow households to use them to a greater extent as a retirement savings tool,” he wrote recently in the Canadian Tax Journal.

The week, the Parliamentary Budget Officer is expected to publish another report examining the near and long-term impacts of the TFSA on government finances, as well as the distribution of benefits by income, wealth and age.

Kesselman said his study is intended to broaden the national dialogue “so that people will understand better that this is going to put additional billions of dollars of debt in provincial and federal revenues over the long term.”

Beyond the money issues, Kesselman also finds no real demand for an expansion to the existing TFSA limits.

The current combined contribution limits for RRSPs and TFSAs allow ample room for the lifetime saving requirements of all workers earning up to at least $200,000 annually, he wrote in his study. With the current $5,500 limit, one could accumulate between $690,000 and $4 million over a lifetime (depending on the rate of return).

And, contrary to popular opinion that doubling the limit would benefit everyone, such a move would instead heavily skew in favour of the wealthy.

The vast majority of people (nearly 70 per cent) under 60 who had a TFSA in 2012 have not fully used their existing limit, a trend that is not likely to change, Kesselman said.

Meanwhile, TFSA take-up rates and contribution levels among high earners have proven to be continuously strong.

More key findings:

• The commitment by the federal government never to consider TFSAs in the income tests for the Guaranteed Income Supplement and Old Age Security benefits means annual program costs could rise by $4 billion to several times that figure by 2050.

• On account of weak or broken linkages between household savings and domestic business investment, the existing and a doubled TFSA will do little or nothing to improve the economy’s performance.