The report card on Tax-Free Savings Accounts (TFSAs) at 10 years shows that, despite being designed to assist people in lower-income brackets make better retirement-savings decisions, TFSAs are still falling short of this goal. In a recent Institute for Research on Public Policy paper, I urge policy-makers to focus on improving TFSA use among low-income savers. With a combination of improved education, default rules for savings accounts and perhaps a “savings credit,” their retirement incomes could be boosted. Further, this would spread the benefits of TFSAs more evenly across the population; at present, benefits are slanted towards high-income savers.

The value of TFSAs for low-income seniors was trumpeted in the 2008 budget speech, which noted that TFSAs “will provide greater savings incentives for low- and modest-income individuals because neither the income earned in a TFSA nor withdrawals from it will affect eligibility for federal Guaranteed Income Supplement and tax credits.”

The fact is, low-income savers who choose to save in Registered Retirement Savings Plans (RRSPs) over TFSAs are leaving money on the table. This is because, in retirement, RRSP withdrawals are taxable, and they also reduce the government benefits their holders might have qualified for if they had saved in a TFSA. Too many future recipients of the federal Guaranteed Income Supplement (GIS) — the income transfer for low-income seniors — are not getting the advice they need to shed their RRSPs, and some are still, wastefully, saving in them.

While growing numbers of low-income Canadians are using TFSAs, RRSPs still dominate. The data are clear: although a substantial minority of low-income savers have opened up TFSAs — about 36 per cent of seniors without an employer pension plan — about 90 per cent of all their savings are still in RRSPs.

Why do low-income earners still seem to prefer RRSPs over TFSAs? To some degree, the transition to TFSAs will take several decades. But a major reason is likely that financial institutions are not tailoring appropriate financial advice for low-income savers. Anecdotal information suggests that the advice that low-income Canadians obtain from banks is incorrect. Banks, and even financial-advice periodicals, tell low-income seniors they would be foolish to cash in their RRSP before age 65. This is often bad advice.

The inability to improve TFSA usage among low-income Canadians underscores legitimate equity concerns about TFSAs, where most benefits still go to higher-income Canadians. Plus, economists and the Parliamentary Budget Office have shown that the long-run cost of TFSAs in terms of federal and provincial tax revenues, mainly from this high-income group, will be large.

The data also show that inequities in terms of who benefits from TFSAs are growing. Between 2014 and 2016, the assets in TFSAs worth over $500,000 more than doubled from $45 million to $108 million, and the assets in TFSAs worth over $1 million increased from $20 million to $49 million. These inequities will continue to grow as lifetime contribution limits expand: The 2019 TFSA lifetime contribution limit is $63,500 and it will reach $100,000 by 2025.

What to do? At the 10-year mark, the federal government should focus on boosting the benefits for low-income Canadians with options to encourage more effective saving decisions. This could include a “savings credit,” which — similar to RESPs — would provide matching grants for a certain amount of TFSA contributions for lower-income savers. As well, it should investigate ways to ensure that financial advisers, especially those in banks, give better advice to GIS-bound seniors.

Of course, these fixes cost money. But the amount of money required pales in comparison to the long-run government costs from TFSAs. Should they not be addressed soon, the federal government should consider capping lifetime contributions of TFSAs — at around $100,000 to $250,000 — to avoid creating more TFSA millionaires while shortcomings persist among lower-income Canadians.