Should early access to retirement funds be allowed due to coronavirus?
BY Yaelle Gang | March 27, 2020
With many people around the world facing layoffs due to business shutdowns caused by the coronavirus, financial stress is pervasive.
In Australia, the government is allowing individuals affected by coronavirus to access up to $10,000 of their superannuation savings tax-free in both 2019-20 and 2020-21, subject to restrictions, including that they must be unemployed or have had their working hours reduced by 20 per cent or more.
“It looks to me very creative and very sensible,” says Malcolm Hamilton, a senior fellow at the C.D. Howe Institute, speaking to Australia’s decision.
These are extraordinary times and people are under extraordinary pressures, he notes. “Telling people you’ve got to leave your money in your pension plan so you have enough money later, when you don’t have enough money now is really stupid. . . . Who, given a choice would, elect to be hungry now instead of hungry later? You have to deal with the immediate needs first.”
Fred Vettese, actuary and author of Retirement Income for Life, agrees that Australia’s move is a good one. “Why not do this? What they’re doing is simply giving people access to their own money sooner. And I don’t see anything wrong than that. And they’re not giving them all their money; it’s fairly limited and it’s also under fairly strict conditions.”
Generally speaking, there’s a good argument for allowing people to access their retirement savings as emergency funds up to a point, adds Keith Ambachtsheer, director emeritus of the International Centre for Pension Management at the University of Toronto’s Rotman School of Management.
He points to the National Employment Savings Trust in the U.K., which, even before the coronavirus crisis, started looking into creating a sidecar savings model for emergency funds that would live alongside people’s retirement savings.
“NEST is actually doing research into how to design such a model and they’ve got a test case going already which is not finished yet,” Ambachtsheer says. “But I expect what comes out of that is that they’ll actually redesign their program so that people don’t necessarily put all their money into their retirement savings fund, but they put also a little bit of money into this emergency fund called the sidecar fund, up to some maximum amount.”
However, allowing people to draw on retirement savings in the effort to support those impacted by the coronavirus does have its downsides, says Hugh O’Reilly, an executive in residence at the Global Risk Institute and a senior fellow at the C.D. Howe Institute.
For example, those who take money out of their retirement plans will be suffering a financial loss because they’re taking money out when markets are down, but the economy will start up again. “And I think it’s going to do it much more rapidly than in a typical bear-market scenario.”
Bonnie-Jeanne MacDonald, director of financial security research at Ryerson University’s National Institute on Ageing, agrees this measure may be short-sighted. “The idea is that this will pass and, if we can get beyond it without tapping into our nest egg, then that’s the better approach because life will need to go on and we won’t be retiring.”
While O’Reilly appreciates that people are in difficult circumstances and they might need money now, they’re also going to require this money in retirement, so he doesn’t think a similar measure would be wise in Canada. “It’s that difficult balance and then it’s the fear of locking in your loss,” he says.
Plus, other policy tools, besides drawing down savings, are available to help people who can’t pay their rent or bills, he adds, citing as examples, moratoriums on evictions, extending mortgage terms and getting cash out to people so they can afford necessities.
The Canadian context
A provision like the one Australia is introducing wouldn’t have the same effect in Canada, cautions Vettese. In the Canadian context, the equivalent would be allowing people to withdraw from their registered retirement savings plans, but only a small percentage of Canadians contribute to these savings vehicles in any given year.
“There are two differences between here and Australia,” he says. “[In] Australia, almost everybody puts money in, anyone who’s got a job puts money into the superannuation fund. Whereas, in Canada, . . . a lot fewer people are putting money into RRSPs. So it wouldn’t be as universal a solution here as it would be there.”
Also, it’s been a long time since Australians had defined benefit plans, but there are still many DB plans in Canada, and it would be challenging to come up with a measure that would be equivalent for DB plans where there aren’t individual accounts.
“Actuaries can always figure out a way to make it look like it works by simply giving them access to their pension earlier and then maybe not making them pay for it,” Vettese says. “That’s the kind of thing I would be afraid of. But I’m not sure how you get people in their 30s and 40s their pension early. So it would be difficult to make it work, no question about it. And it would be even harder to make it work in a way that’s fair and reasonable.”
Further, at a national level, a measure like this one wouldn’t work because the Canada Pension Plan is a DB model, not a DC arrangement with account balances, Hamilton says.
In Canada, since most workplace DC plans are provincially regulated, the relevant locking-in requirements are provincial. “[In] Australia, it’s one government doing something for the whole country, whereas in Canada it would be multiple governments doing variations on a theme,” he adds.
In addition, MacDonald highlights that most provinces already have rules in place for people to unlock savings from DC plans for financial hardship.
And, generally, people can take money out of their RRSP at any time, they’ll just be taxed on that withdrawal, MacDonald adds.
For those who may have lost income due to the coronavirus, they may have a lower marginal tax rate if they withdraw money now. In those situations, with careful financial planning, people could withdraw money from their RRSPs and reinvest it in tax-free savings accounts, she added.
In Canada, there are already some reasons Canadian can draw on their RRSP early, Ambachtsheer notes, pointing to the first-time home buyers’ program and the lifelong learning plan, both of which have tax-free withdrawals. However, both of these programs require that the money withdrawn is repaid.
Providing people with emergency access to their retirement savings up to a set amount could be an additional measure alongside other measures created by the government in response to the coronavirus, he adds. “And the rules are already there in terms of being able to do this for home ownership and for higher education, so extending that to the notion of an emergency access, in addition to the two reasons that already exist, is something that could easily be considered.”
The best laid plans
Overall, the current financial situation is a good example of why limitations are placed on how accurately people can plan for retirement, Hamilton says, noting many reports state how much Canadians should be saving. “And for anybody retiring now, this is like an alien landscape. You’ve now got zero interest rates, stock markets collapsing, even if you save more than enough and invested it sensibly. Now, it’s not looking near as good as it did.
“The reality here is, when you’re saving for retirement, you can have as long a term perspective as you want; you don’t have a clue what’s happening in the long term and the risks are large. That’s why, more than ever before, people need to think not in terms of having a plan and sticking with it, but in terms of having a plan, but recognizing that the assumptions underlying the plan are very unlikely to come true.”