Promoting Personal Financial Security
Strengthening Canada’s Savings Culture
In an era marked by economic uncertainty, the imperative of bolstering personal savings cannot be overstated. Despite an array of federal initiatives aimed at fostering savings for key life milestones, such as retirement and post-secondary education, Canadians are saving less — a trend that demands urgent attention.
Looking back at past decades, Canadian households once set aside approximately 14% of their income during the 1980s — a figure that has dwindled to a mere 3% in the 2000s. In 2018, the average Canadian household saved a meager 1.5% of disposable income, according to OECD data.
Why is a robust savings culture beneficial for individuals, families, and the government?
Self-Reliance: Greater savings afford individuals autonomy, reducing dependence on debt, government aid, or familial support. Financial freedom empowers individuals and families to make decisions aligned with their aspirations, free from external pressures.
Financial Resilience: Enhanced savings fortify individuals against economic shocks like job loss or unexpected expenses, fostering resilience without the need to accumulate substantial debt.
Financial Benefits: Savings offer financial advantages, such as securing lower interest rates on loans, affording higher insurance deductibles for reduced premiums, or facilitating cash purchases to avoid debt and its associated costs.
Wealth Accumulation: Through prudent investments, savings grow over time, augmenting familial wealth and fostering a cycle of self-reliance and financial stability.
While the personal and familial benefits of increased savings are evident, broader societal and governmental advantages also abound.
Reduced Government Intervention: A robust savings culture mitigates the need for government intervention, reducing reliance on programs like employment insurance, welfare, and other income supports.
Tax Relief: Reduced dependence on state support translates to lower tax burdens, allowing individuals to retain more of their earnings for personal savings.
Access to Capital for Businesses: Increased domestic savings unlock lower-cost capital for businesses, catalyzing investment, job creation, and productivity-driven wage growth.
To cultivate a culture that prioritizes personal financial security, I propose the creation of Canada Savings Plans (CSP) for each Canadian aged 18 and older. CSPs would incentivize personal savings, benefiting individuals, families, businesses, and society at large.
CSPs should replace Tax Free Savings Account, Registered Disability Savings Plan, Registered Education Savings Plan, and First Home Savings Account schemes. The number and complexity of schemes in Canada could be replaced by CSPs and bring more benefits to a wider segment of Canadians. Below is a summary of how CSPs could be implemented.
Government Grants: The federal government should make annual deposits into CSPs. This would overcome inertia from people to create CSPs, with the government in essence creating the accounts and making annual deposits. The government deposits could be set at a low % of the person’s previous federal income tax (in essence self-funded saving through the tax system) with an annual floor of $1,000 to enable meaningful savings for low-income individuals.
Government Matching: The federal government should match personal contributions, to provide an extremely compelling incentive for saving. The government should match contributions until the cumulative match is six months’ worth of the Canadian median personal income — about $22,000. This matching would result in widespread participation and increased savings and be capped at $22,000 over a lifetime, to avoid abuse.
Tax Incentives: Making CSP contributions tax-deductible up to 10% of the previous year’s income would amplify the allure of saving via CSPs, particularly when coupled with government matching. This dual benefit would make saving through CSPs incredibly attractive and part of prudent financial planning.
Investment Growth: 25% of all funds would be held in cash, earning interest at the Bank Rate (currently 5.25%). The account holder could then select from a small number of pre-approved low-cost managed funds to invest the balance in, including keeping funds all in cash earning the Bank Rate. The default fund would be managed by the CPP Investment Board to mirror the Canada Pension Fund’s portfolio. This would ensure that CSP account holder had ready access to cash in emergencies while providing them with the opportunity to grow their savings.
With a culture of personal saving through CSPs, governments could consider making changes to existing social security programs. This would enable them to reduce taxes and payroll deductions by making individuals responsible for more of the costs of life’s ups and downs through their CSPs.
Given the government grants, matching, and tax benefits of CSPs to avoid them being used by the wealthy, withdrawals from CSPs could be limited to specific life events such as:
Children: Upon the birth or adoption of a child up to 25% of a CSP could be withdrawn.
Education: Up to 25% annually of a CSP should be eligible to be withdrawn to cover education-related costs for the CSP account holder or dependent child.
Disability: Up to 50% annually of a CSP could be withdrawn if the account holder of the CSP was deemed disabled in line with existing government disability guidelines (e.g. CPP).
Housing: Up to 50% of a CSP could be withdrawn to purchase a primary residence or 25% to pay a damage deposit for a rented primary residence.
Unemployment: Up to 50% of a CSP could be withdrawn while the account holder is receiving employment insurance or welfare payments, to supplement income and waiting periods that these government programs don’t replace.
Retirement: Once a person reaches the Canadian retirement age, any balance remaining in the CSP would automatically be transferred to a Registered Retirement Savings Plan account for the account holder to access to fund their retirement.
I can’t ignore that creating CSPs would be expensive for the federal government, in the tens of billions or more annually. However, the federal government could make major reductions in spending around employment insurance, child benefits, income supports, and transfers to provinces to fund post-secondary education and welfare. The federal government could also eliminate some programs as the ability of Canadians to rely on their CSPs would make some of them redundant. The government would also save by eliminating the administration and tax expenditures by getting rid of the alphabet of existing government-managed savings schemes (e.g. Tax Free Savings Accounts, Registered Disability Savings Plans, Registered Education Savings Plans, and First Home Savings Account).
In addition, to safeguard against abuse and ensure affordability, the $22,000 lifetime cap on government matching needs to be in place. However, tax relief would persist, incentivizing continued savings replenishment following a withdrawal from a CSP.
In a rapidly evolving economic landscape, the benefits of CSPs should be irresistible to Canadians and governments. This solution offers a pathway to resilience — a future where individuals, families, and society stand stronger together.
