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The Current State of Canadian Family Finances

2004 Report

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by Roger Sauvé
People Patterns Consulting
(2004)

TABLE OF CONTENTS

• Introduction And Technical Note
• HIGHLIGHTS OF THE 2004 REPORT - Good but not great
• Household incomes now flat for four consecutive years
• For families, lower income taxes saved the day in 2001 and 2002
• Income variations by family type - Up for married seniors, down for female lone-parents
• Fewest children in poverty in over two decades
• Income tax system reduces poverty burden
• Financial paralysis? Savings rate at a record-low and projected to fall even further
• Negative saving is most evident problem in BC and Saskatchewan
• Two-thirds of families are short at end of year
• Spending more on almost everything
• It's official - Household wealth numbers revised up by $38,000
• Debt still rising relative to after income tax incomes
• Bankruptcies remain near record levels
• Bankruptcies up in all provinces
• SPECIAL FEATURE - Generational Reality Check
  TWO LOST DECADES!
• APPENDIX A   Average Incomes of Families and Unattached Individuals and Low-Income Gap after Income Taxes
• APPENDIX B   Families and Unattached Individuals with Low-Incomes (Poverty) after Income Taxes
• Endnotes and Additional Details on Chart Sources

INTRODUCTION AND TECHNICAL NOTE

Roger Sauvé, People Patterns Consulting, can be reached at (613) 931-2476, E-mail (peoplepatternsconsulting@sympatico.ca), or at his web site ( www.peoplepatternsconsulting.com ).

HIGHLIGHTS OF THE 2004 REPORT - Good but not great

SPECIAL FEATURE REPORT - Generational Reality Check

Household incomes now flat for four consecutive years

Chart 1 provides the most comprehensive measure of average household (families and unattached individuals combined) incomes. This measure is after all government transfers and incomes taxes and is expressed in terms of real purchasing power.

The chart is calculated from the National Accounts, which are released every quarter. Based on the preliminary data for the first three quarters of the year, it seems that average household incomes stood at about $54,300 in 2004 or just about where they had been in 2001. This timely measure clearly suggests that average household income gains have stalled or more precisely … have come to a screeching halt over the last few years.

This finding adds further support to the income trends observed in the last few years and the conclusions that were drawn in our previous reports. The current stagnation in incomes follows a healthy income recovery from the lows of 1996, but even so, average incomes per household are still just about where they stood way back in 1989. Household incomes are up by only $2,000 from 25 years ago or a rather miniscule 3.8%. As we shall see, this is well below the increases in spending.

For families, lower income taxes saved the day in 2001 and 2002

The leveling out in incomes, specifically for families, would have been much worse if there had not been major income tax reductions in 2001 and 2002.

Table 1, dealing exclusively with families of two or more persons, reveals that market incomes per family actually declined just a bit (-0.2%) in 2002. (As discussed in previous reports, average hourly earnings have been flat or declining for about a full decade.) Government transfers to families also shrank (-1.4%) in 2002. Transfers from governments to families represented exactly 10% of total incomes in 2002. Together, this produced a small decline (-0.3%) in total money incomes per family.

While total money incomes were shrinking, so were average income taxes paid per family. Income taxes dipped by a hefty 7% in 2001 and by 2.3% in 2002. Income taxes as a share of total income fell for the second consecutive year and in 2002 stood at 17.4% of total incomes.

On a net basis, family incomes after transfers and income taxes squeaked out a 0.3% gain in 2002.

Over the period from 1980 to 2004, government transfers per family advanced, on average, by 46% while income taxes increased, on average by "only" 31%. This is all after removing the effect of inflation.

Income variations by family type - Up for married seniors, down for female lone-parents

In 2002, average incomes of senior married couples (+1.2%) improved for the second consecutive year as did average incomes of couples with children (+0.9%) and male lone-parent families (+2.2%). Incomes fell for couples without children (-0.5%) and dipped more significantly for female lone-parent families (-5.2%). It must be noted that average incomes of female lone-parents families had improved sharply during the previous two years.The average income of all unattached individuals advanced by 2.4% in 2002, with the strongest gains among unattached females (+5.4%) under the age of 65.

Fewest children in poverty in over two decades

In 2002, some 702,000 children under the age of 18 were living in families with low-incomes (poverty). This is still a far cry from the pledge to eliminate child poverty, but it is the lowest number over the 1980 to 2002 period and it is also the lowest rate (10.2%) for children over this same period. Better but still a long way to go.

The worst years for child poverty were 1995, 1996 and 1997 when over 1.1 million children lived in poverty each year and the rate soared into the 16%+ zone for three consecutive years.

In 2002, poverty numbers and rates rose a bit for both the 18-64 group (to 1.9 million or to 9.7%) and for seniors aged 65 and over (to 260,000 or to 6.9%). The rate for both groups had been at record lows (6.3% for the 65+ group) or near-record lows (for the 18-64 group) in 2001.

See Appendix B for a more complete overview of poverty by type of family or unattached individual. In 2002, over one-third (35%) of female lone-parent families lived in poverty and almost one-third (31%) of unattached females under the age of 65 lived in poverty. The least likely to be living in poverty were senior married couples where fewer than 2% were in this situation.

Income tax system reduces poverty burden

In 2002, there were 34% fewer children living in poverty on an after income tax basis compared to a before income tax basis. The beneficial impact relative to children has been especially strong over the last five years or so. The improvement may be due to the increase in child tax credits and other income tax measures.

The income tax system has an even more profound effect on the rate of poverty among seniors aged 65 and over and this tendency is growing over time. In 2002, there were 54% fewer seniors living in poverty when measured on an after income basis versus a before income tax basis.

The income tax impact (-25%) is much less for those aged 18-64 and has not been improving over time.

Financial paralysis? Savings rate at a record-low and projected to fall even further

Chart 1 made it clear that real incomes gains per household have come to a complete halt in recent years. In sharp contrast, spending per household continues to move up by about 2% per year. Part of the reason that consumption continues to grow is due to the increasingly evident reality that more and more households have given up on trying to save. During the months of July-September 2004, the personal savings rate was zero. The last time it was this low was in 1936i or during the Great Depression.

Withdrawals from RRSPs (Registered Retirement Savings Plans) can serve as another indicator of financial stress. For persons aged 20-59, the withdrawal rate of RRSPs almost doubled ⁱⁱ (+76%) from 1993 to 2001 while the number of contributors increased by a much smaller 18%.

There is a growing discussion, although still inconclusive, concerning the causes and impacts of this major decline in the savings rate.

This writer believes that the stagnation and decline in hourly earnings is a major cause of the problem. More and more people are working and more and more families are working longer hours but they just can't keep up.

Other analysts believe that a declining savings rate indicates that households are feeling confident that their jobs are safe or that the second earner will provide replacement incomes in cases of unemployment … so we continue to spend. Others suggest that rising house prices and improving stock markets are making families feel rich, and for some this is true … so we continue to spend. Some suggest that low interest rates make the return from savings too low to matter while the cost of borrowing remains very low … so we continue to spend. A December 2004 report by the RBC Financial Group ⁱⁱⁱ forecasts that the personal savings rate will slip into negative territory in both 2005 and 2006. Another December projection by the TD Bank Financial Group ^iv suggests that the savings rate will remain near the 1% level in both 2005 and 2006. And … so it seems that we will continue to spend.

A more pessimistic interpretation comes from Paul Farrell^v who claims that 80% of Americans are "paralyzed". "They are lost in ineffective short-term fixes. They don't even know they need help, or more likely, according to the Guardian study, they don't know what to do with the help already available to them. Sadly, their paralysis has made them incapable of changing." "The other 20% don't want or need much help."

Negative saving is most evident in BC and Saskatchewan

The financial pressure on households and families varies sharply by province. In 2003, households in Alberta, on average, were able to save 4.2% of their disposable incomes, with households in Ontario, Quebec and New Brunswick putting away 2%-3%. Manitobans were near the break-even point. Households in half of the provinces had negative savings … that is; they spent more than they took in after income taxes.

The situation is British Columbia may be cause for concern with the personal savings rate negative by a record of 6.1% in 2003. This follows a 3.9% shortfall in 2002 and a 2.2% shortfall in 2001. In British Columbia, the personal rate has been negative for seven consecutive years and is worsening. In Saskatchewan, the negative savings rate occurred in each of the last four years.

Two-thirds of families are short at end of year

While the concepts are somewhat different, calculations vi made for Profiling Canada's Families III found that the poorest 20% of households spent some $2,300 more than they brought in 2002. The lower-middle 20% were short some $2,600 and the middle 20% of households were short by $1,100. This means that in 2002, about 60% of households were borrowing or drawing down their savings to get by. The upper-middle 20% were able to put aside $2,830 while the richest 20% had almost $16,000 left over. This suggests that, for many Canadian households and families, the degree of financial stress is very high.

A recent Ipsos survey ^vii found that 75% of Canadians have less than three months worth of savings in the bank and that 42% of Canadians admit to having no "rainy day" money.

Spending more on almost everything

Over the last few years, the biggest spending increases occurred on housing related goods and services (furniture, furnishings, equipment and operation), which soared by 5.6% in 2004 following advances of about 3% during each of the previous two years. There have also been sharp increases in expenditures on medical care and health services, which jumped by about 4% in real terms during each of the last three years … the biggest increases were for drugs and pharmaceutical products which ballooned by about 7% in each of the last three years.

Over the longer-term, from 1980 to 2004, total spending advanced by about 29% per household while total after-income tax incomes per household advanced by a rather miniscule 4% (see Chart 1).

The largest spending increases (+108%) from 1980 to 2004 have been on recreation, entertainment, educational and cultural services. Spending on medical care and health services jumped by 69% over the same period.

Spending on food, beverages and tobacco products dipped by a hefty 16% from 1980 to 2004. Clothing and footwear expenses have crept up by under 10% over the same time span.

It's official - Household wealth numbers revised up by $38,000

Statistics Canada is the official source of most background numbers used in this report. For several years, our report has produced a detailed accounting of the sources of household wealth. We repeat this again in table 3 but with an important new twist … it is now based on market value estimates for shares and pensions. In the past, the table presented the data in what was called book value. If someone bought a stock market share worth $10 a few years ago and was still holding it, the price recorded in table 3 would have been $10 even if it were worth much more or much less today. This was inaccurate but was all that was available.

Along with many other international data collectors, Statistics Canada viii has begun to correct this shortcoming. "This is directly related to the relevance of the data as economic behaviour is based on, among other things, perceptions of wealth positions at current values."

According to the market value series and our calculations, the average net worth per household is now $322,900 or some $38,000 more than under the old method. The market value estimate is only available back to 1990 and not 1980 as in all the other tables in this report. Most of this increase in wealth comes from the upward revision in the value of stocks. The improvement in the market value of shares does not represent an advance for everyone, since in 1999 only 10% of households owned any shares outside of pension funds and mutual funds^ix . Chart 8 reveals that the market value estimate is much more volatile than when computed based on book value.

Based on this new market value measure, total debt as a percentage of net worth is lower in 2004 than it was in 1990, while the opposite was true using the old book value measure. This means that based on this single measure, households, on average are less seriously burdened by debt than was originally believed.

Of course, debt still remains a serious problem when measured against stagnant income trends and the likelihood of rising interest rates.Using this new measure, net worth per household increased by about 2.5% in 2004 following an even stronger recovery in 2003. Most of this was driven by sharp increases in real estate wealth and share values. It is noteworthy that market value of shares, for those that had any, more than tripled between 1990 and 2004.

On the other side of the ledger, real debt loads advanced by over 2% during each of the last three years.

Debt still rising relative to after income tax incomes

Households had, on average about $66,800 of debt in 2004. This average includes households with debt and those without. In 1999, about two-thirds of households carried some form of debtx and the rest had none. This suggests that those that had debt were carrying about $100,000 each.

Total debt has now risen to 121% of household incomes, up from 86% in 1980. If only consumer and mortgage are included in this total, then the debt to income ratio is now 105% compared to 74% in 1980.

For most households, this high debt load continues to be manageable due to the record or near record-low interest rates. Most forecasters see interest rates rising slowly, not abruptly, over the next year or so. According to the Bank of Canada^xi, "A more likely scenario of cyclically rising interest rates should provide households with time to adjust their spending behaviour."

Perhaps households should start to make these "adjustments" now rather than later.

A pre-Christmas survey by the Conference Board of Canada^xii found that "Optimism also diminished about the likely state of family finances in six months. The prospect of looming interest rate increases, combined with high levels of household debt, may be making consumers more concerned about their budgets."

Bankruptcies remain near record levels

All is not well. The number of consumer bankruptcies totaled about 84,000 in 2004. This is within striking distance of the record level set in 1997. The number of bankruptcies is up by a multiple of more than four times relative to a quarter century earlier. The recessions of the early 1980s and early 1990s caused an upturn in bankruptcies, as did the rising interest rates during the second half of the 1990s.

The holding pattern of the last few years may not last if interest rates rise too quickly or if the economy was to dip into recession. Professional forecasters anticipate neither of these scenarios … but that does not mean that this possibility should be ruled out entirely. If history serves as a guide, a recession is likely to occur sometime in the years ahead. It happened in the 1980s, it happened in the 1990s, and it may well happen in the 2000s. This could be brought on by a rising Canadian dollar, soaring oil prices, economic weakness elsewhere in the world or global financial problems. This would cause bankruptcies to rise sharply once again. It may well be a matter of when and not if.

Bankruptcies up in all provinces

Over the long-term, from 1980 to 2004, the number of consumer bankruptcies has ballooned in New Brunswick (+1472%), Newfoundland (+1189%) and Nova Scotia (+1123%). The smallest increases are for Manitoba (+179%) and Ontario (+195%). In 2004, bankruptcies rose in seven out of the ten provinces.

SPECIAL FEATURE - Generational Reality CheckTWO LOST DECADES!

Do young and middle-aged families have reason to complain that they are having a more difficult time making ends meet than was the case for earlier generations? Yes they do. Over the last two decades younger and somewhat older households have not done as well, or have even fallen back, compared to older households.

Over a longer-term, the impacts are measurable and they are real.

• Employment earnings for the youngest families have been more sluggish in spite of more hours worked per couple.
• Home ownership levels have declined for all household age groups except those 55 and over.
• Net worth has declined for all households under the age of 55.
• Poverty rates have soared for the youngest and plummeted for the oldest group of households.

Generational Reality Check #1 - Two lost decades for those under 45s

Chart 12 tracks the average employment earnings for three family age groups.

• Family employment incomes were flat from 1980 to the mid 1990s for both the 25-34 and 35-44 age groups. These were two lost decades for both these two groups.
• The incomes of those aged 45-54 improved during the 1980s but then flattened to the mid 1990s. One lost decade for this group.
• Luckily, all three groups have reached new peaks in recent years.

A rather fascinating studyxiii prepared by Statistics Canada, quantified earnings trends for couples by age group and by level of education. The study looked at three age groups of couples and 10 educational levels within each age group. Tables 5 and 6 contain some of the results for four of the 10 educational groupings of Canadian-born couples, in which both partners were mostly working full-time. The study did not look specifically at couples aged 55 and over (and that was not the intent).

This is what the table tells us about the 25-34 age group.

• Over the 1980 to 2000 period, the average weekly earnings of men aged 25-34 plummeted by 21% within couples where neither partner had graduated from high school.
• The average incomes of men, within the same 25-34 age group, where both men and women had a high school certificate, fell by 13% over the 20-year period.
• Again, within the same age group, the average earnings of men fell by 7% for those where both partners had a non-university diploma or certificate.
• Within this 25-34 age group, the only men to experience rising incomes were in couples where both had a university degree.

Similar realities are evident for the other two age groups. Earnings of men have generally declined except for the most educated couples. Earnings for women have increased with the biggest increases among the most educated.

As is apparent by the shaded areas (indicating declines) in Table 5, most men in all three age groups saw their average weekly earnings shrink over two decades, with the only exception being for those with university degrees. For men, the shaded areas fully represent three-quarters of the cells.

For women in these couples, the only declines in average weekly earnings was among those aged 25-34 within couples where both partners had a high school certificate or had less than high school. The largest improvement for women was the 30% advance for women aged 45-54 where both partners had a university degree. Of the 12 cells in the table relating to women, "only" two (or 16%) are shaded indicating earnings declines while 10 cells show increases.

On an aggregate basis, some couples were able to increase their incomes by achieving higher levels of education. Education plays a big role in economic well-being.

Generational Reality Check #3 - Fewer hours for men, more for women … up for couples

Table 6 gives the average number of hours worked by these same Canadian-born couples.

• Over the 1980 to 2000 period, the average hours worked per week among men in each of the three age groups declined or were flat for all four educational levels. The decline (-8%) in hours worked was biggest for all ages among those with less than high school graduation.
• In sharp contrast, hours worked by women shot up sharply from 1980 to 2000 (by as little as 20% for those aged 25-34 with a university degree to as much as 57% for those aged 45-54 with a high school certificate).
• And now for the total combined hours for the couple. The total number of hours worked by these couples jumped in all age groups and all educational levels. The number of hours worked by those where both partners did not finish high school rose within the range of 6% to 9% from 1980 to 2000. Generally, the increase in total hours was largest for those with the highest levels of education.

Families are working hard to provide for themselves and make ends meet. More working hours means fewer family hours and more stress.

Generational Reality Check #4 - Younger households now less likely to own their homes

Home ownership rates are at an all time high … this may be true but not for everyone. This is important since home ownership is the primary source of wealth accumulation. Some groups are falling behind.

In 2001, a record 66% of all households owned their homes, up from 62% in 1981. This is good. But, there is much more to the story.

• The home ownership rate for those households aged 34 and under fell from 44% in 1981 to 41% in 2001. Among households aged 35-44, home ownership rates plummeted from 72% in 1981 to 67% in 2001. Both of these groups had flat earnings for almost two decades, as shown in Chart 12.
• Home ownership rates fell more slowly, but they also fell, for those households in the 45-54 age bracket … from 76% in 1981 to 74% in 2001.
• The only increase has been for those aged 55 and over where the ownership rate increased from 68% in 1981 to 74% in 2001.

On the surface, the increasing proportion of Canadians who own their homes (either with or without a mortgage) looks like good news indicating that home ownership is a realistic goal for all. That goal has proven to be attainable for older Canadians but it remains to be seen whether or not, over time, the same proportion of younger Canadians will be able to make the dream of home ownership a reality.

Generational Reality Check #5 - Older households the only ones gaining wealth over time

In addition to housing, households can also accumulate net worth (wealth) through financial assets such as pensions, stocks, bonds, bank deposits, actual cash, equity in business, etc.

Chart 14 provides a very disturbing story when examined on a generational basis.

• The typical household under the age of 25 basically lost most of their net worth over the 1984 to 1999 period.
• Those aged 25-34 saw their net worth (total assets minus total debt) sink by 36% from 1984 to 1999.
• Over the same period, the net worth of those aged 35-44 dipped by 18%. The 45-54 year olds suffered a 7% drop in net worth.
• Are there some winners here? Yes, both the 55-64 age group (+19%) and the 65 and over crowd (+56%) experienced healthy advances in their net worth^xiv.

Distribution is always important. It is typically unequal. In previous reports, we have examined how different types of families and different groups of income earners acquire greater or lesser shares of the nations wealth. It is now also apparent that the different generations have faced and will likely continue to face different levels of financial security both in the short term and into the future.

Generational Reality Check #6 - More poverty among youngest, less among seniors

The final age-related indicator that we look at in this section is low-income (poverty).

• In 1980, about 31% of all households aged under the age of 25 were living with low-incomes (poverty) but by 2002, about 43% were living in poverty … this is a huge 12 percentage point (pp) increase over the period.
• There was basically no change in poverty rates for each of the 25-34, 35-44, 45-54 and 55-64 age groups of households. No worse and no better.
• The big winner were households aged 65 and over, where the poverty rate improved sharply from 29% in 1980 to 10% in 2002, or by 18 percentage points.
• The latter does not mean that poverty is no longer an issue among the elderly. The message should be that youth are in trouble and that the middle-aged households are just maintaining the status quo.

Poverty must also be examined on a inter-generational basis.

The Generational Realities

This short review makes it clear that the different age groups have not all benefited equally relative to growth in incomes and well-being. The older generation has clearly done the best, the middle-aged groups have had to struggle just to keep up (and many haven't), and the youngest groups have done poorly.

This reality check in not intended to encourage conflict between age groups. Rather, it should increase understanding. And it needs to guide the formulation of family policies based on realities and not simply on wishful thinking that the futures of our children and grandchildren will simply look after themselves.

Thanks for reading this report. Pass it on to others.
For previous year's reports, please visit www.vifamily.ca
We will be back next year.

ENDNOTES

Key Statistics Canada data sources used in this report.

• Income in Canada 2002, 75-202-XIE.
• Income Trends in Canada 1980-2002, 13F0022XIE.
• National Income and Expenditure Accounts and National Balance Sheet Accounts (various electronic sources and Cansim tables)

Note: Household numbers for the years 1980 to 2002 are derived from Statistics Canada, Income in Canada, 2002. Household numbers for 2003 and 2004 are assumed to grow at the same percentage rate as in 2002.

About the author...

Roger Sauvé is President of People Patterns Consulting. He is the author of Canadian People Patterns (1990) and Borderlines (1994). He has written numerous client reports on social, economic and demographic trends. He produces an annual Canada Job Trends Update report and other trends related publications. Roger Sauvé can be reached at peoplepatternsconsulting@sympatico.ca or (613) 931-2476 or visit his website www.peoplepatternsconsulting.com.



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