When good advice goes bad

This week, Imagine a City is joined by guest blogger John Stapleton, founder of Open Policy Ontario and a fellow with the Metcalf Foundation. He has some much-needed financial advice for low-income earners, just in time for Financial Literacy Month. Here, he provides a rundown of what low-income earners really need to know, and how the financial-services industry can serve them better. (For more, see his comprehensive report, “Planning for Retirement on a Low Income.”)

People living on low incomes might wonder how the financial advice they receive differs from the advice given to middle- and high-income earners. The reality? It doesn’t. That’s a problem, because it can be toxic to those facing poverty. They live in a parallel universe where most, if not all, of the rules are different.

When assisting low-income people, for instance, many advisors will tell them to max out their RRSPs, forget about Tax Free Savings Accounts (TFSAs), and wait until 65 or later to sign up for Canada Pension. They’ll also be advised to look closely at their taxes to capitalize on tax credits.

This is the same advice given (rightfully) to middle- and high-income earners, but for people making ends meet on lower incomes, it’s exactly wrong.

Low-income retirees are likely to receive something called the Guaranteed Income Supplement (GIS), paid in addition to Old Age Security. So they should actually do the following: cash in their RRSPs before age 65, load up their TFSAs (if they have any savings), and apply for early CPP, around age 60. They should also forget about the non-refundable tax credits they will likely not need.

So, why is the right advice typically not given to low-income earners?

Two reasons: The first is that the GIS is an entitlement—the dreaded “E” word—and not a tax credit. Financial advisors are loathe to tell anyone to organize their affairs to maximize entitlements because entitlements are often seen as a drain on the public purse in a way that tax credits are not. The second is that the financial-advisory community doesn’t generally know much about the GIS.

Perhaps there’s a third reason. I’ve heard it before: there simply isn’t much money to be made advising low-income earners. And that’s true if information isn’t tailored to their specific needs, but if these individuals got the right advice up front, they would have money. A lot more money. Maybe financial institutions would even be justified in charging them for it. It’s just good, useful advice, after all.