This week, the feds sent the personal finance community into a bigger tizzy than that time I flexed my pecs by letting it leak that the TFSA contribution limit would double to $11,000 per year, starting in 2016.
For savers, this is pretty good news. According to stats I found in the deepest depths of the internet (next to the horse porn), only 17% of Canadians have be able to sock away the maximum allowed contribution, which currently stands at $31,000. In fact, the TFSA is so poorly used that the average account has about $5,500 in it, most of which is stuck in either cash or GICs.
Cash and GICs? You people are boring. Get some stocks, yo.
Reactions to the news were mixed. Personal finance types lamented the change, complaining that $11,000 per year is just too aggressive of a number, and now they can’t max out said account any longer. I know, I don’t get it either.
Other people said the change was nothing more than a blatant attempt by the Conservative government — which will likely call a federal election shortly — to buy votes from rich constituents. Like every time something like this happens, the usual cries of the government “screwing the poor” arise from the usual suspects. Just take a look at this Twitter search.
But how true is this? Does the TFSA contribution limit increase really screw over the poor?
Newsflash: The poor are already screwed
I won’t pretend it’s all gumdrops and cheese sandwiches for people who are poor. Especially in a place like Vancouver or Toronto where real estate is expensive, it’s tough to get ahead. Add on things like student loan debt, child care, and credit cards, and it’s a pretty crappy existence. We can certainly make the argument that much of that pain is self-inflicted, but that still doesn’t mean it’s a fun life to have.
But this increase doesn’t mean squat for the 20 million Canadians who can’t afford (or haven’t gotten around to it) to make a TFSA contribution in the first place. They’re in the same financial situation whether the limit is $1 million, $10,000, or $1. If you’re just making ends meet, RRSPs or TFSAs don’t matter at all. Thus, you could argue that every tax advantaged account favors the rich.
But they don’t really favor the ultra-rich either. If you have a net worth of $1 million or more, $5,500 per year in extra TFSA contribution room is nice, but it’s not something you’re about to get excited about. Wealthy folks get to the point where they max out all of their contribution room and still have plenty left over. Sure, they’ll take the extra contribution room, but only because it’s easy. It’s the financial equivalent of the girl at the bar with no self confidence.
Who this really benefits is the person somewhere in the middle, but admittedly closer to the top than the bottom. But even then, it’s not a huge benefit for years.
Remember Warren Buffett talking about the difference between his tax rate and his secretary’s? That’s because Buffett gets paid in dividends, while his secretary takes home a salary.
Unless you’re in the 1%, chances are most of your cash comes from your job as well. Which means that even if someone is able to sock away the new maximum amount for years, it doesn’t really matter if they do so in a tax advantaged or a regular account.
Say year one you put away $10,000 in your TFSA, in stocks that pay a 2% dividend and that grow 6% per year. We’ll assume you don’t sell for a while.
After year one, you owe tax on a whole $200 in dividends, which comes out to $37. Compare that to a salary of $50,000 per year, which would set you back more than $10,000 in taxes. One of those numbers is bigger than the others.
Do you see how this doesn’t become a big deal until the TFSA is very large? Yeah, it’s a tax advantage, but until you keep at it for a decade or longer, it’s not a very big tax advantage.
Besides, Canada has a major spending problem. Personal debt levels keep hitting record levels. The savings rate is barely above zero. Our housing market is ready to implode. Collectively, we do a terrible job putting money away. Things like this increase encourage savings, even if it directly benefits the upper class.
There’s a bit of a circular argument at work here. We all want to encourage things that increase savings. But how do we conceivably do that without giving the folks who are most able to save tax breaks? If we gave 10 rich guys $10k each in tax breaks or 1000 McDonalds employees $100 each, I guarantee you the amount saved would be far higher with the former group. There’s a reason why the rich get tax breaks — because they won’t squander it.
Does the TFSA contribution limit increase help the rich? Sure, although I’d argue it helps the middle class more. But the fact is if you’re trying to encourage an increase in savings, these are the exact people you should be helping. They’re the ones with the ability to save. And ultimately, an increased savings rate is good for the economy.