Many commentators have made good analyses of the advantages and disadvantages of RRSPs (for example, see Canadian Capitalist's look at the PH&N report. However, many who rail against RRSPs make a fundamental mistake in their thinking.
For the purposes of this discussion, I’ll consider a Canadian Jerry who has a 40% marginal tax rate. If Jerry makes a $10,000 RRSP contribution, he will get a $4000 tax break. If he chooses to save outside an RRSP, he will have to pay the $4000 in taxes. This means that his choice is either to save $10,000 within his RRSP or $6000 outside his RRSP. Too many RRSP bashers lose sight of this fact.
One way to think of this is that 40% of the money in the RRSP is not really Jerry’s or is some sort of bonus. Unfortunately, we’re not really wired to think this way. If Jerry’s salary were doubled, he’d be shocked initially and would feel very lucky and somewhat undeserving. Over time, though, he’d come to think that this new salary is his due. He’d probably even come to think he deserved more. This is human nature.
If Jerry has money sitting in his RRSP for years, he will think of it as entirely his money. The past tax deductions will be forgotten over time. As he comes to the age where he starts living off his savings he will resent paying taxes on these withdrawals.
Suppose that by his retirement Jerry has $500,000 saved in his RRSP. Jerry might be starting to regret having made RRSP contributions. After all, if he had $500,000 outside his RRSP he’d pay much less income tax in the future. The problem with this thinking is that if he hadn’t made RRSP contributions, the most he could have saved is $300,000 and that’s only if he somehow managed to avoid paying any taxes on gains over the years. In reality, he’d have less than $300,000 saved.
There are people who are better off without making RRSP contributions, but these tend to be those with very low incomes or who are in special situations. Most people do benefit from using RRSPs.