Canadians are in better financial shape than the pessimists think

Posted on in Social Security Debates

TheGlobeandMail.com – Globe Investor/Personal Finance/Retirement
Jun. 07, 2015.   Ian Mcgugan

Conventional wisdom holds that Canadians are in miserable financial shape – addicted to debt, allergic to saving and ill-prepared for retirement.

Conventional wisdom is mistaken.

Two reports over the past week provide fresh evidence that Canadians are reasonable savers, with strongly rising levels of wealth and good prospects for enjoyable retirements.

The reports aren’t exactly an all-clear signal from the financial medics but, on balance, they present a far more encouraging diagnosis of the state of the Canadian family than you will hear from the normal naysayers.

The best proof of that are the new figures on household wealth published by Statistics Canada. The data agency estimates that the average net worth of Canadian families surged to $554,100 in 2012 from an inflation-adjusted $319,800 in 1999. (Net worth measures the total assets owned by a family – real estate, pensions and other investments – less debt and other liabilities.)

The 73-per-cent jump in wealth should reassure those who worry that the nation is careening toward the poor house. Better yet, the Statscan study demonstrates that the increase in wealth isn’t entirely the result of the housing boom. Non-real estate assets – things such as pension plans and other savings – account for slightly more than half of the wealth of a typical middle-income earner.

To be sure, the survey isn’t all sunshine. As fans of the economist Thomas Piketty might expect, the numbers reveal growing inequality. High-income earners, for instance, made far bigger gains than other groups in net worth during the period under study.

However, substantial gains in wealth were recorded by every level of society. The overall concentration of riches budged only slightly. The top 20 per cent of income earners controlled 45 per cent of total wealth in 1999. Thirteen years later, their holdings had inched ahead to all of 47 per cent. So, yes, the wealthiest Canadians control a disproportionate chunk of the nation’s riches – but that’s not exactly breaking news.

Taken as a whole, the Statscan numbers provide substantial grounds for optimism. So does a fascinating report by actuary Malcolm Hamilton for the C.D. Howe Institute. The study’s title asks “Do Canadians save too little?” It concludes that, despite all the hand-wringing to the contrary, there is no need to worry about a looming retirement shortfall.

Much of the anxiety around the topic is based on the notion that Canadians need to replace 70 per cent of their incomes in retirement to live as well as they did while working. But as Mr. Hamilton argues, the evidence suggests that many people will be satisfied with a figure closer to 50 per cent.

During our working lives, a big chunk of our paycheques are gobbled up by mortgages, child-related expenses and saving for retirement. By the time we retire, those expenses are typically in the past, leaving us able to live equally well on much smaller incomes.

There is no evidence of widespread financial distress among the aged, and no signs that people are in desperate straits as they near retirement. “Most [people] retire voluntarily before the age of 65 … ” Mr. Hamilton writes. “They continue to save, to donate to charity and to financially support children who need help.”

One of the study’s most impressive feats is its smackdown of the savings-rate bogeyman – the frequently repeated observation that Canadians’ savings rate has plunged from 20 per cent in 1980 to 5 per cent today.

Despite what most people think, the household savings rate is not “a straightforward ratio of retirement contributions to employment income,” Mr. Hamilton writes.

Instead, it reflects the difference between what the entire population – both workers and retirees – receive in disposable income (including income from investments and pensions) and what they spend on consumption.

“This means that the household saving rate is not a measure of the amount workers collectively contribute to their retirement accounts,” Mr. Hamilton says. “It is not what they set aside for retirement. It is a measure of the net amount flowing into savings.”

The distinction is subtle but important. Imagine a scenario where retirees are withdrawing savings at a rate that exactly offsets the new contributions of those still in the labour force as well as the investment income on accumulated savings. The household savings rate would then be zero even if the average working-age person were stashing away money at a ferocious pace. But in this situation the low savings rate would be no reason for concern.

Despite the low household savings rate, working Canadians are actually putting away about 14 per cent of their paycheques toward retirement savings when you include the amounts that employers contribute to retirement plans on behalf of employees, Mr. Hamilton calculates.

“Canadians are reasonably well prepared for retirement,” he concludes.

That is a sentiment you do not hear that often. But for once the numbers are on the side of the optimists.

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This entry was posted on Monday, June 8th, 2015 at 10:18 am and is filed under Social Security Debates. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

One Response to “Canadians are in better financial shape than the pessimists think”

  1. While the optimism presented in this article was refreshing, I must disagree with this article.To start, this article stressed on families and their net worth and how it is increasing. My issue with this is that there are other Canadian citizens who do not fall into that category. What about students? What about single parents? Or what about single people? I believe that these 3 categories of people are amongst those who face poverty most. I can personally attest to the poverty of student life. With yearly academic fees such as tuition ($7000.00), textbooks ($1000.00), and a parking pass ($500.00), that is essentially where all of student’s money goes. And that is not considering transportation fees to get to school, and rent/residence fees for those who do not go to school in their hometown or are not living at home. On top of that there are car insurance payments, utility bills, etc. Even with loans from OSAP most students do not find themselves with any disposable income after paying these fees and bills. Even after graduation for as long as five-ten years any disposable income we make is likely going towards repaying student loans. This article then acknowledges the top 20% of income earners now control 47% of Canada’s total wealth…. and dismiss it by saying this is not breaking news. The dismissal of what I believe to be a strong counterargument to the argument being made in this article reinstates my disagreement in what is being said. It is impossible to ignore the fact that the price of living is becoming more and more unattainable and that Canadian’s across the country are struggling with this. As refreshing as the optimistic picture attempted to be painted with this article, I cannot help but question how realistic it is.

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