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The Policy History and Household Use of Tax-Preferred Savings Instruments in Canada

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The Policy History and Household Use of Tax-Preferred Savings Instruments in Canada Does Canada have a hidden ‘wealthfare’ system?: The policy history and household use of tax-preferred savings instruments in Canada. by Jennifer Robson A thesis submitted to the Faculty of Graduate and Postdoctoral Affairs in partial fulfillment of the requirements for the degree of Doctor of Philosophy in Public Policy Carleton University Ottawa, Ontario © 2013, Jennifer Robson Abstract Canada has account-based, tax-preferred savings instruments that are delivered through the financial services sector and that receive generous support through federal income tax incentives and direct transfers. These large tax and direct expenditures are all but are ignored in analysis of welfare policy. In this thesis, I ask whether there is adequate evidence to treat this set of tax-preferred savings instruments as a hidden welfare system, and whether the system is progressive or regressive in distributing public support for individual or household saving and accumulation of assets. I conclude that this set of policy instruments ought to be acknowledged as a welfare system and one that is largely regressive within an overall liberal welfare regime in Canada. The thesis presents three different studies of the set of tax-preferred instruments: First, I present a history of each instrument in the set under examination. I conclude that each new instrument created is informed by past policy examples and replicates many of the same problems in the policy process and design. Second, I analyze data from the 1999 and 2005 Surveys of Financial Security, using a similar methodology to that used by Kerstetter (2002) and Morissette and Zhang (2006). Consistent with those earlier studies, I find that ownership of these tax-preferred savings vehicles, like all forms of assets, is more heavily concentrated among households in the top two quintiles of the distribution of net worth, and particularly in the top quintile. I also expand on these earlier studies noting, for example, that a non-trivial number of low-wealth households hold these tax- preferred forms of saving and, among those low-income users of the instruments, the ii savings amounts are higher than one might expect. The key finding of my analysis of the survey data is that half of the total assets of households in the top net worth quintile are in some combination of the tax-preferred savings instruments, with equity in their principal residence as the largest and most important. The third study is an exploratory qualitative study based on a series of focus groups with participants of different income levels. I find that, apart from constrained budgets and low marginal tax rates, the low-income participants face multiple barriers to using and benefitting from the selected instruments. iii Acknowledgements Heartfelt thanks to the three members of my thesis committee, Professor Saul Schwartz, Distinguished Research Professor Allan Maslove (both of Carleton University) and Professor Elaine Kempson (of Bristol University). Your contributions to this thesis started well before you agreed to be on my committee since I have been fortunate to learn from each of you over several years of prior training and research. You each gave expert and constructive advice and feedback as this thesis progressed for which I am enormously grateful. Sincere thanks also to the external members of the defense committee, Dr. Michael Prince, Lansdowne Professor of Social Policy at the University of Victoria and Professor Scott Bennett of Carleton University. I would also like to acknowledge the support of the Director of Kroeger College, the Director of the School of Public Policy and the Dean of the Faculty of Public Affairs for giving me a chance to start my teaching career at Carleton University while conducting and completing the research for this thesis. Thank you to a past employer, Peter Nares who first introduced me to the field of asset- based social policy. I am grateful for your wisdom, for our sometimes creatively conflicting views, but especially for your friendship. iv I’d also like to acknowledge the help in locating documents and answering specific questions that I received from federal public servants in the Canada Revenue Agency, the Department of Finance, Employment and Social Development and Library and Archives Canada. A similar thanks to Peter Lewis who agreed to share his organization’s archival copies of public reports. Thank you to the participants who took part in the series of focus groups that were the focus of the quantitative study. I am grateful for the time out of your own lives that you took for my research project and inspired by many of the personal stories and observations you shared with me. Thank you to my extended family for asking (gently) how the thesis was coming and helping with occasional childcare. Thank you to my partner, Mark, and our three children, Morgan, Isobel and Eloise. Mark even voluntarily proofread a penultimate draft. That is real love. You have been patient, encouraging and enthusiastic about my completing this thesis, even when I haven’t been. I love you always and forever, no matter what. v Table of Contents Abstract ..................................................................................................................... ii Acknowledgements ................................................................................................... iv Table of Contents ...................................................................................................... vi List of Tables ............................................................................................................. ix List of Figures ............................................................................................................ xi List of Appendices .....................................................................................................xii Chapter 1: Introduction and aims of the thesis ............................................................ 1 1.1 The role of savings and assets in well-being ..................................................................2 1.2 Choices in policy instruments: Tax-preferred, account-based instruments.................... 11 1.3 Prior research on tax-preferred savings and household assets in Canada ..................... 23 1.4 Research questions for this thesis ............................................................................... 26 1.5 Outline of the chapters to follow ................................................................................ 32 Chapter 2: Theory on personal savings and asset-accumulation ................................ 34 2.1 Historical ideas: Saving as moral act versus saving as macro-economic goal ................. 35 2.2 More current theoretical work on saving and assets .................................................... 47 2.3 Summarizing the individualist vs. institutionalist schools of thought ............................ 64 Chapter 3: Estimating public expenditures on tax-preferred savings instruments ...... 70 3.1 A brief description of the tax-preferred savings instruments ........................................ 72 3.2 Defining a “tax expenditure” ...................................................................................... 82 vi 3.3 Measuring tax expenditures on tax-preferred savings ................................................. 85 3.4 Notes on calculations of Department of Finance.......................................................... 89 3.5 Estimates of tax and direct expenditures on tax-preferred account-based savings........ 95 3.6 Concluding thoughts regarding federal expenditures on tax-preferred savings ........... 104 Chapter 4: The start of tax-preferred savings: 1939-1971 ........................................ 108 4.1 Aims and approach ................................................................................................... 108 4.2 Contributions from the historical study and overview of key findings ........................ 113 4.3 Compulsory savings: 1940-1944 ................................................................................ 115 4.4 Registered Retirement Savings Plans: 1956-1971 ....................................................... 135 Chapter 5: Relentless incrementalism: RRSPs and RHOSPs ...................................... 160 5.1 RRSPs from 1974 onward .......................................................................................... 161 5.2 The Registered Homeownership Savings Plan 1974-1985 ........................................... 194 Chapter 6: Registered Education Savings Plans ....................................................... 210 6.1 Launching a new private education savings plan ....................................................... 212 6.2 From private plans to public policy ........................................................................... 221 6.3 RESPs since 1996: Playing politics on private savings ................................................. 233 Chapter 7: Completing the set: RDSPs and TFSAs .................................................... 266 7.1 The Registered Disability Savings Plan ....................................................................... 267 7.2 The Tax-Free Savings Account ................................................................................... 292 7.3 Overall conclusions from the retrospective analysis .................................................. 311 Chapter 8: Survey data on household use of tax-preferred savings .........................
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