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Our love for tax refunds indicates we’re fine with forced savings


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Tax season is now upon us, and millions of Canadians are looking forward to refunds. Experts –  particularly those that want commissions from investing your money, even if they prosper and you don’t – will note that refunds aren’t a windfall. Rather, they indicated you paid too much tax to begin with, and the government is giving you some back … without interest, to boot.

“Canadians love their tax refunds and at this time of year many people are filled with ‘intaxication’ – a term I use to describe the short-term euphoria of getting a tax refund that fades when you realize you’re getting your own money back. A better plan is to ensure your portfolio operates as tax-efficiently as possible to keep more of your money throughout the year,” says Jamie Golombek, managing director, tax and estate planning at CIBC, which last week released a survey noting 53 per cent of Canadians have already received or expect to get some money back for the 2018 tax year.

While refunds are in fact the correction of an overpayment – and a de facto interest-free loan to the government – many Canadians like getting a lump-sum payment. In effect, refunds represent a forced savings of sorts. We don’t notice the extra loss on each paycheque, but appreciate having a windfall we use to pay down bills, indulge ourselves or do with as we will.

This bit of human nature is one of the biggest failures of the Trump tax cut south of the border. He lied about the benefits of the massive scam – it was a boon to corporations and the very wealthy, but will end up costing the average taxpayer more down the road – and more citizens are becoming aware of that reality. Particularly because the administration fudged the numbers at source, with few Americans noting small increases in their paycheques but becoming all too aware that the refunds have shrunk considerably or vanished, with some having to pay yet more.

Again, the forced savings aspect is considered a good thing.

The same argument can be made for much higher contributions to the Canada Pension Plan – the small incremental increase in deductions would largely go unnoticed, but would pay off in spades down the road.

It’s a policy favoured by the public, with surveys showing more than 80 per cent of workers support the idea of higher mandatory contributions. That would be a good thing given that more than three-quarters of private-sector employees don’t have a workplace pension. Most workers have limited savings when it comes to RSPs, for instance – certainly not enough to support themselves in retirement.

In fact, the majority of Canadian workers are concerned they won’t have enough savings to retire, let alone retire comfortably.

More than a third of Canadians say they don’t know when they’ll be able to retire, while some 40 per cent of employers believe their employees are overly optimistic in their assessment of when they will be able to retire.

According to studies by the Conference Board of Canada, concern over inadequate retirement savings has already led a good number of Canadians to delay their retirement, and the situation is not improving.

On the whole, we’re not putting enough money away to secure our future as retirees. That much is abundantly clear, as even a casual look at the topic of pension reform will show you.

For those who have no savings of their own, relying only on government sources, retirement will be a meagre affair. Or simply put off altogether.

The CPP currently provides about 25 per cent of a worker’s average annual earnings – hardly enough for a comfortable retirement. That level has been consistent since the program was introduced five decades ago. Payments for current recipients come partly from invested reserves and partly from contributions from today’s workforce. In order to ensure a more stable system and to provide a decent retirement income, we’ll have to start boosting CPP contributions.

Ideally, that 25 per cent figure would become 70 per cent, the figure most often cited as the level of income needed to preserve our standard of living in retirement.

We’re a long way from that. We’re not overly confident about getting to a comfortable retirement. About half of us, in fact, aren’t even sure CPP will be there for us in our retirement years, a number that’s been increasing over the years. Changing that impression, and making decisions about something that really matters to a wide spectrum of Canadians, will require some long-term thinking and decision-making in the public interest, not the strong suit of those at the helm.

Of course, politicians also fear a backlash from workers who would see significant increases in CPP contributions as simply another tax grab.

That’s not the case. Unlike employment insurance, CPP is an arm’s length arrangement. Contributions go directly to the plan, and are never part of government’s general revenues. The plan is generally secure, reliable, cost-effective, and well managed. Increasing the mandatory contributions would be a largely painless way to ensure a more comfortable retirement.

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