Spinning the TFSA Increase
I’m not strongly for or against the TFSA limit increase announced in the latest federal budget (pdf here). However, the attempted spin in the budget document makes me laugh.
As Larry MacDonald observed, the budget writers tried to counter the idea that a TSFA increase mainly benefits the rich by saying “about 60 per cent of the individuals contributing the maximum amount to their TFSAs had incomes of less than $60,000.”
The first thing to observe here is that being rich is only indirectly about income. It’s really about how much money you have. I’d rather have a million dollars and an income of $50,000 than be in the hole a million dollars and have an income of $100,000. The truth is that the people who will benefit the most from a TFSA increase are those who already have significant non-registered assets, regardless of their incomes.
Even if we look at wealth in terms of income, I expect that my wife and I will likely each have incomes under $60,000 in retirement. But we’ll also get to spend some TFSA withdrawals and some of the capital from our non-registered accounts. We’ll have a great retirement, but will still fit under the $60,000 figure from the budget quote.
The TFSA increase makes little difference to those who are very wealthy; the main beneficiaries will be those with upper middle class incomes and those with enough assets that they’ve already maxed out their TFSAs and RRSPs (which tend to be older people).
So, it’s true that the TFSA increase mainly benefits those who are fairly well off. But this doesn’t make it a bad idea. Who says that all government measures have to benefit only the poor? Surely we can have different measures that help different groups. The first few thousand dollars of TFSA room certainly benefit poorer people who are better off not saving in an RRSP.
If pressed for my opinion, I’d have to say that I think we didn’t need the TFSA increase, but I don’t feel strongly about this. What bother me most are nonsense arguments for or against the TFSA increase.
As Larry MacDonald observed, the budget writers tried to counter the idea that a TSFA increase mainly benefits the rich by saying “about 60 per cent of the individuals contributing the maximum amount to their TFSAs had incomes of less than $60,000.”
The first thing to observe here is that being rich is only indirectly about income. It’s really about how much money you have. I’d rather have a million dollars and an income of $50,000 than be in the hole a million dollars and have an income of $100,000. The truth is that the people who will benefit the most from a TFSA increase are those who already have significant non-registered assets, regardless of their incomes.
Even if we look at wealth in terms of income, I expect that my wife and I will likely each have incomes under $60,000 in retirement. But we’ll also get to spend some TFSA withdrawals and some of the capital from our non-registered accounts. We’ll have a great retirement, but will still fit under the $60,000 figure from the budget quote.
The TFSA increase makes little difference to those who are very wealthy; the main beneficiaries will be those with upper middle class incomes and those with enough assets that they’ve already maxed out their TFSAs and RRSPs (which tend to be older people).
So, it’s true that the TFSA increase mainly benefits those who are fairly well off. But this doesn’t make it a bad idea. Who says that all government measures have to benefit only the poor? Surely we can have different measures that help different groups. The first few thousand dollars of TFSA room certainly benefit poorer people who are better off not saving in an RRSP.
If pressed for my opinion, I’d have to say that I think we didn’t need the TFSA increase, but I don’t feel strongly about this. What bother me most are nonsense arguments for or against the TFSA increase.
Not to be blunt but, groups defending poors are about against any decision Tories are taking anyway.
ReplyDeleteTFSA increase benefit smart people more than rich or wealthy one's. If used to put aside 41,000$ in GIC's @ 1%, it's likely a 155$ gift/year...
I wish my parents can understand how powerfull TFSA are and buy something like 50%VAB and 50%ZCN. This way, they would get the real benefit of this account.
@Le Barbu: I guess I'm one of the exceptions. I favour some policies to help the poor, but I also support many (but not all) of the Tories' positions. I try to decide what I think is right regardless of which party supports the idea.
DeleteThe metaphorical table holding the world's money is tilted toward smart people in many ways. You're right that TFSAs are no different.
Michael, I'm also in favour to help poor and middle class.
DeleteIn Canada, individuals themself are, most of the time, the #1 reason why they get ahead or not.
I mean, some related, earning much more than us, asked to review their taxes. Shit! They took no RRSP (even skip the HBP repayment) and no RESP, let alone the TFSA's!
It's easy to compare for us since we put aside 25k$ into tax sheltered accounts and almost 20k$ on mortgage principal.
What is killing them? Cars (for this item only, they spend 15k$/year more then us) and taxes (including missed subsidies, another 15k$ left on the table). This 30k$/year can turn into a 1.5M$ over 25 years @ 5%
They are both brilliants people with degrees but think I'm over inflating the shaft they are giving to themself...
Great post. Agree with your perspective completely. Everyone deserves appropriate incentives to save, build wealth and support themselves in retirement. Also makes for a strong economy.
ReplyDelete@Patricia: Glad you liked it. I like to think we can help the needy as well as maintain the incentive to work.
DeleteWith the loss of indexing, I think it might be more accurate to call this a temporary increase. By making no changes from now on, inflation will eventually reduce the value of the TFSA to less than it was before this change. Most wont notice. Kinda sneaky I say...
ReplyDeleteUse it or lose it!
@Garth: True. I'm still pondering the best way to think about the lack of indexing.
DeleteIt's very easy to think about. The new TFSA provides a benefit for 30 more years, when the old TFSA would have caught up (on a contribution room basis). assuming 2% inflation. If contributions compound, then the new TFSA would be better for even longer.
DeleteI think it's more likely that someone will revisit the TFSA before anyone has big regrets about this decision (and most people reading this blog will probably be close to death by that time, anyway).
I think that discretionary increases will become a political campaign promise.
DeleteVote for us and we'll increase your TFSA!
I think it's a great idea - especially since the RRSP system penalizes those who have low salaries, only allowing you to contribute 18% of your previous year's income rather than a flat dollar amount like they do in the US for 401K. It's a step in the right direction, but I still think the US system is better.
ReplyDeleteMichael, government can't possibly have a program that benefits one earning group and does not hurt the other, simply because governments only redistribute monies. Accordingly, when Harper & Co passes a bill that benefits richer people through TFSA, it does so at the expense of poorer people.
ReplyDelete@AnatoliN: That's partially true, but not completely. For example, the government's policy of employing people who can't do their jobs well takes people away from potentially doing other jobs where they would be more useful. This is a net detriment to our society rather than being zero-sum. Policies that prevent companies from putting poisons in foods work out to be a net benefit.
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