Harper's RESP pledge: Good news, missed opportunity

Harper’s RESP pledge: Good news, missed opportunity

By Special to MoneySense on September 9, 2015
Estimated reading time: 4 minutes

Vows to double additional CESG grants for low-income contributors

This article is 9 years old. Some details may be outdated.

Prime Minister Stephen Harper recently announced that, if his party is re-elected, it would enrich the additional Canada Education Savings Grant (CESG) as a way “to help hard-working families save for their children’s post-secondary education.” There seems to be some confusion about what exactly this means, and what effect it will have. Most Canadians seem to be aware of Registered Education Savings Plans (RESPs). RESPs allow parents of kids under the age of 18 to invest after-tax dollars into a fund to pay for their post-secondary education. One of the main advantages of investing in RESPs is that the federal government (and some provincial governments) provides matching funds, up to a maximum, called the Canada Education Savings Grant. There are two components to the CESG. The basic CESG, which has not changed, allows all parents, regardless of income, to get a 20 per cent matching grant on all contributions up to $2,500. So every parent in Canada who has a child under the age of 18, and opens an RESP and invests money into that RESP, gets an additional contribution paid for by taxpayers. If you invest $2,500, you get the maximum grant, which is $500. The additional CESG (A-CESG), which is what Tuesday’s announcement is about, is a means-tested additional grant that applies to the first $500 in contributions. The current A-CESG is such that an additional 20 per cent grant is added if your family net income (the sum of the amounts reported on line 236 of you and your spouse’s—if applicable—tax form) is below $43,953. If your net family income is above that but below $87,907, then an additional 10 per cent grant is added. The announcement today proposes to double these rates to 40 per cent and 20 per cent, respectively. This proposal certainly helps low- and middle-income families (defined, in this case, by the aforementioned net income thresholds) that already invest in RESPs. The latest CESP Annual Statistical Review shows that in 2013, the A-CESG provided $54 million in grants to 860,000 children. This means, on average, each beneficiary received a total of $62.79 in 2013. That is not a bad average, given that the maximum A-CESG in any given year is $100. RESP money left over after graduation » It’s certainly nice to see the Harper Conservatives targeting their support toward those most in need of it. But the problem with RESPs and the matching grant is that you need to know about it, and you need to have the funds available to contribute. Both these hurdles pose challenges to families targeted by this announcement. In fact, the participation rate among low- and middle-income families in RESPs has been shown to be very low. So this announcement predominantly targets those already investing in RESPs, and not those who could be investing in RESPs. Then again, that seemed to be the point of the announcement, since the headline read, “Prime Minister Harper announces further support for families saving for their children’s education.” There are several solutions to these problems. We could enrich the National Child Benefit Supplement and Child Tax Benefit, a means-tested monthly payment to parents with children, so that low- and middle-income families have more money for child care, and which could be used to supplement educational savings. The research shows that families who are provided with this money do indeed use it to invest in education, among other “responsible” activities. Of course, this does not address the threshold that needs to be overcome before investments can be made: that of having an RESP account. That threshold could be overcome by moving from the opt-in system that we currently have to one based on RESP auto-enrolment, as recently recommended in this post by Tyler Meredith and by me regarding the B.C. Training and Education Savings Grant. After all, the government knows about nearly every child in Canada shortly after its birth. This is because of the nearly automatic registration of children into the UCCB and NCBS/CTB programs. There are many advantages to auto-enrolment, especially to low-income parents. This is because of the Canada Learning Bond. Where to open an RESP » In 2004, the then-Liberal government created the Canada Learning Bond (CLB) to help overcome low participation rates in RESPs among low-income Canadians. Any parent who qualifies for the National Child Benefit Supplement qualifies for the CLB. The CLB provides $2,000 in funding for a child’s RESP, with no requirement that the parent provide any of her own money. Unfortunately, the participation rate in the CLB is only 29.4 per cent, which is a take-up rate that, according to the research on the take-up of benefit programs, is shockingly low and is a significant cause for concern. Auto-enrolment in this valuable program would increase that rate to 100 per cent. So while today’s announcement certainly is of benefit to those low- and middle-income families who already participate in the RESP program, it does not benefit those who do not. When it comes to achieving the goals of the RESP, CESG and CLB programs, the extensive margin (how many people participate) is as important as the intensive margin (how much those who participate contribute). And it’s time to focus our education-savings policy on the extensive margin. This article orginally appeared on Maclean’s.

Comments Cancel reply

Canadian using his cell phone to check our Best robo-advisors in Canada ranking for 2024.

Investing

Best robo-advisors in Canada for 2025

Find out which Canadian robo-advisors offer the lowest fees, best support, top returns, and more, with MoneySense’s 2025 guide.

Best robo-advisors in Canada for 2025

Investing

Stock market news for investors: Transat, Empire and Algoma report earnings

The tour company, grocer and steel maker are feeling the effects of U.S. tariffs. Here are the details for...

Stock market news for investors: Transat, Empire and Algoma report earnings

Investing

Stock market news for investors: Tariff talk, economic uncertainty feature on Q4 earnings reports

KP Tissue, Target and more companies all reported earnings this week. Here are the details for Canadian investors.

Stock market news for investors: Tariff talk, economic uncertainty feature on Q4 earnings reports

Investing

Stock market news for investors: Canadian banks report Q1 earnings

BMO, Scotiabank, National Bank, RBC, TD, CIBC and Laurentian Bank all reported earnings this week. Here are the details...

Stock market news for investors: Canadian banks report Q1 earnings

Investing

Stock market news for Canadian investors: Loblaw, Walmart and more

Gildan Activewear also reported earnings this week. Here are the details for Canadian investors.

Stock market news for Canadian investors: Loblaw, Walmart and more

NY Stock Exchange with U.S. flag, and its index can be heavily weighted with tech.

ETFs

How to stay invested in U.S. stocks without the tech overweight

Concerned about the heavy tech weighting in U.S. stock indexes? Explore ETF alternatives for balanced exposure to U.S. equities.

How to stay invested in U.S. stocks without the tech overweight

Investing

Stock market news for Canadian investors: Cineplex, Sun Life Financial and more

Restaurant Brands International, McDonald’s and Canadian Tire Corp. also reported earnings this week. Here are the details for Canadian...

Stock market news for Canadian investors: Cineplex, Sun Life Financial and more

Investing

Questrade trading fees: Good news for Canadian investors

Canadians now have three zero-commission brokerage options, including Questrade, to trade stocks and ETFs.

Questrade trading fees: Good news for Canadian investors

Investing

Stock market news for Canadian investors: Eli Lilly, BCE and more

Eli Lilly, BCE, Suncor, Canada Goose, Bombardier, Thomson Reuters and Lightspeed reported earnings this week. Here are the details...

Stock market news for Canadian investors: Eli Lilly, BCE and more

ETFs

ETF strategies to help Canadian investors combat a weak loonie

Do you need to do anything to protect your portfolio from a weak Canadian dollar? Certain ETFs may help.

ETF strategies to help Canadian investors combat a weak loonie

Harper’s RESP pledge: Good news, missed opportunity

Comments Cancel reply

Related Articles

Best robo-advisors in Canada for 2025

Stock market news for investors: Transat, Empire and Algoma report earnings

Stock market news for investors: Tariff talk, economic uncertainty feature on Q4 earnings reports

Stock market news for investors: Canadian banks report Q1 earnings

Stock market news for Canadian investors: Loblaw, Walmart and more

How to stay invested in U.S. stocks without the tech overweight

Stock market news for Canadian investors: Cineplex, Sun Life Financial and more

Questrade trading fees: Good news for Canadian investors

Stock market news for Canadian investors: Eli Lilly, BCE and more

ETF strategies to help Canadian investors combat a weak loonie