Vanier Institute of the Family -- Contemporary Family Trends - The Current State of Canadian Family Finances

We are back again. This seventh annual report updates the current state of family and household finances up to the year 2005. The report examines incomes, spending, savings and net worth across family and household types. The positive response to previous annual reports suggests that individuals, families, governments, business, unions, the media and many other organizations want and need to know the whole picture about how families are doing financially. This report has become a source document for both the general public and researchers. Some of our findings are now being included in textbooks.

Families are the main focus of this report but the latest Statistics Canada family income indicators only go to the year 2003. More timely information is available for the total personal sector and this data is used to provide many of the estimates for all households up to the year 2005. Most of the 2005 estimates are based on the first 9 to 10 months of the year. Households include both families and unattached individuals. About two-thirds of households are family households and thus the recent trends for households provide a good “directional” guide to what is happening for families. Estimates for personal disposable incomes and family incomes are after government transfers and after income taxes.

For ease of understanding and to make the results more relevant, all measures have been converted to a per household or per family basis. In this report, all dollar estimates are in 2003 dollars and thus variations over several years represent changes in real purchasing power after inflation. The term “real” indicates what would have happened if there had been no inflation. Inflation is measured using the consumer price index. The measures incorporate updates and any recent revisions by Statistics Canada.

This year, most of the analysis relates to the period 1990 to 2005, with special emphasis on the time period that is labeled “so far this decade” and the latest year available depending on the data series. The year 1990 was chosen as the beginning year in order to highlight longer term changes over the last 15 years. All charts cover each year from 1990 to the latest year available. Chart 5 is the exception because comparable data is only available back to 1991. The text tables and the appendices provide the percentage change over the entire period, for the period from 2000 to 2003 and for 2003. Shaded areas in all the tables represent deterioration or declines for the selected indicators. Readers are urged to examine the Appendix Tables A and B at the back to get a more detailed perspective of the changes experienced by different types of families and households.

Almost all of the background data comes from Statistics Canada. The author did many additional calculations. Any errors and omissions are the responsibility of the author.

"CASH-STRAPPED" (definition)> - Being short of money, not having enough money, lacking funds, etc. This term has been applied to governments and to business firms. This term must now also be applied to Canadian families and households.

WHAT THIS MEANS? - This suggests that many families need to cut back, need to borrow less and need to pay off debt. The alarm bells are ringing louder than ever. It rang for governments and for many businesses and they did something about it… it is now time for families to do something about their own situations.

This short report defines and presents the current situation for the often mentioned but little measured “Middle-Class Family”. Is this where you fit in?

According to the Bank of Canadaⁱ, “The Canadian economy seems to be operating at full capacity”. Because of this full-capacity situation, the Bank of Canada has begun to raise interest rates in an attempt to slow the pace of growth and hold off inflation. As such, more increases are in the cards in the near-term. It is no longer “if” interest rates will rise… but by how much? This will boost the cost of supporting the already large and growing amount of debt held by many cash-strapped households and families.

More and more members of cash-strapped families are entering the paid job market in order to make ends meet. A December survey suggested that “86 percent of Canadians saw themselves as making no progress or falling behind against the cost of living ”.ⁱⁱ Luckily, the job market is the strongest it has been in many years. Total employment advanced by another 2 28 35,000 or so in 2005. Professional forecasters expect approximately 200,000 additional new jobs to be created in 2006. During eight of the last nine years, the number of jobs has increased by over 200,000 and sometimes by over 350,000. This is in sharp contrast to the actual job losses during the deep recession of the early 1990s. In 2005, employment growth was strongest in the Western-most provinces and Prince Edward Island. Full-time jobs increased the most during the year.

The unemployment rate hovered near the 6.5% level in late 2005. This is the lowest monthly rate in over three decades. The rate fell below or near the 5% level in each of the four Western Provinces. The rate remains in the 15% area in Newfoundland but this is still the lowest unemployment rate for this province in over two decades.

The labour tightness is evident in shortages in numerous occupational groups. There are Canada-wide shortages in many health care professions, in professional occupations in business and finance and in numerous construction tradesⁱⁱⁱ. This is especially so in British Columbia and Alberta, which are pulling in people from all other provinces. As in the past, families and individuals are moving to where employment conditions and wages are the strongest.

The employment rate amongst mothers with young children continues to move up. In 1990, just over half (53%) of women with a child under the age of three were working at a paid job … this has now risen to about two-thirds. The percentage of women with children aged three to six years of age with a paid job also jumped from 60% in 1990 to about 70% currently.

In addition, the percentage of dual-income couples with children is now nearing 85%, up from about 80% in 1990. The percentage of dual-income couples without children is also at a record level.

The increase in the paid employment rate has been the most rapid amongst lone-parent families, where the employment rate jumped from 63% in the mid-1990s to about 83% currently. This reflects job opportunities and the significant pullback in provincial government social support and welfare programs. This may have had the negative effect of increasing the rate of child poverty in some provinces. (See Table 2)

Most of the employed are in the job market because they want to be … but a growing number are working because they really need more money … and they need it now.

Over one quarter of all wives now earn at least half of the total family earnings on a pre-income tax basis^iv. Among couples with no children, about one-third of wives now earn more than their husbands.

The biggest increase in the contribution of wives has been among families with children at home. For couples with one child, about 20% earned as much as did their husbands in 1990 … this ratio increased to 26% according to the latest numbers. A similar upward movement occurred in families with two children and among those with three or more children.

A fascinating feature of Chart 4 is the trend in the income contribution of wives by age group. In 1990, about 19% to 24% of wives earned as much as their husbands. This ratio jumped for all age groups to the latest year available. Generally, the older the couple, the larger is the “increase” in the contribution level of the wife. Among those aged 55 to 64, about one-quarter of wives earned at least as much as their husbands in 1990 … this rose to over one-third by 2003. These are dramatic shifts in such a short period of time. These trends are due to the increasing labour force participation of older women in contrast to the flat or declining participation rate among men. In addition, women have experienced real increases in average earnings over the period while men have suffered real earning declines.

In recent years, the reality remains that this increasing contribution has generally just been enough to maintain family and household incomes rather than create major increases.

One of the reasons behind the push to dual-income families is the 15-year trend in real (adjusted for impact of inflation) average hourly earnings. Chart 5 reveals that real average hourly earnings have increased by about a dime (that is 10 cents Canadian, eh!) from 1991 to the estimate for 2005. In addition, on average, the time worked per week declined by about an hour and a half over the same period. Flat earnings and fewer hours mean less money.

A review of the reasons for these flat earnings is not within the scope of this report, but do include global competition, slow productivity gains, the restructuring of industries, the emergence of low-paying service jobs, the rapid growth of small firms, the rising Canadian dollar, and declines in unionization rates for men. And, there is also the lag in minimum wages increases.

A recent study by Statistics Canada found that about 16% of all full-time wage earners (excludes students) in Canada were “low-paid” (earned less than $375 per week) in 2000. This was a slight improvement from a decade earlier. Certain groups experienced an increasing incidence of “low-pay”, including persons under the age of 45, those with less than high school education, lone-parents and visible minorities (especially men).

Over the last five years, rising employment rates, flat earnings and declining hours have combined to merely sustain the average income per household. Average incomes are now near the $55,500 mark, or at roughly the same level as in 2001.

This average is up by about $500 (+1%) from 1990 but is significantly above the levels realized during the severe recession of the early 1990s.

This is the timeliest measure available and is compiled as part of the National Income and Expenditure Accounts, which are released every three months. Another aggregate measure produced by Statistics Canada is the Income In Canada series. This paints a more positive picture with respect to the long-term trend in average household incomes. Using the Income In Canada series, the average income per household grew by 9.5% from 1990 to 2003 compared to 1% according to the National Income and Expenditure Accounts series shown in Chart 6. The level of income using the Income in Canada series also peaked in 2001, remained there in 2002 and declined a bit in 2003. As such, the near-term pattern is very similar for both series. Table 1 and Appendix Tables A and B are based on the more detailed but less timely data from the Income In Canada series.

The estimates are different due to slightly different definitions and methodologies. In addition, the Income in Canada series had a major change in data collection procedures in 1996 and as such the historical series are not totally compatible. Both series use the consumer price index to adjust for inflation.

The amount of income taxes paid by families of two or more persons actually dipped (not a typo) during the first few years of the decade. In 2000, the average income tax burden was $14,400 and this declined to $12,800 by 2003, a decline of $1,600 or by over 11% during this short three-year period. Income taxes as a percent of total money incomes declined from 19.9% in 2000 to 17.6% in 2003. Income taxes were down by only $400 when compared with 1990.

Government transfers to families increased to $7,800 in 2003 from $7,400 in 2000. The ratio of transfers to total money incomes increased slightly from 10.2% in 2000 to 10.7% in 2003.

The above suggests that there is an ongoing redistribution of incomes. Whether this redistribution is reducing income inequality is less certain. Using a statistical measure called the “Gini index”, the degree of inequality , on an after income tax basis , deteriorated during the 1990s but has improved just a bit so far this decade. The latter is also evident in Appendix A, which indicates that the share of the after-tax income pie going to the poorest 20% of families increased just a bit from 6.9% in 2000 to 7.2% in 2003. The share going to the richest 20% of families dec reased just a bit from 39.8% in 2000 to 39.4% in 2003. Even so, the trends so far this decade have not offset the negative inequality trends evident during the 1990s.

The poverty rate (low-income after transfers and income taxes) for all persons stood at 11.5% in 2003. While this is still high, it is the fourth lowest rate over the last quarter century. The poverty rate was just a bit lower in 2001 (11.2%), in 1989 (10.2%) and in 1988 (10.8%).

In terms of numbers, there were some 3.6 million Canadians living in poverty in both 2002 and 2003 or about one million less than at the peak in 1996 and 1997.

The improvement in the poverty rate has been most pronounced among the senior population. Among seniors, the rate fell steadily from about 11% in 1990 to 6.8% in 2003. The senior population escaped the worst ravages of the early 1990s recession. Among seniors, the lowest poverty rate is now among married couples with “only” 1.7% now living in poverty. On the negative side, the poverty rate among senior unattached females (18.9%) and unattached males (14.7%) still remains significantly higher.

Adults aged 18-64 did not do as well as seniors during the recession. For these adults, the poverty rate stood at about 11% in 1990, soared to almost 16% in both 1996 and 1997 and is now down to 12.1%. This is the only one of three groups in Chart 7 where the current poverty rate is s till above the level in 1990.

The poverty rate among children under the age of 18 also increased sharply during the recession of the 1990s. For this group, the slogan “Get a Job” could not apply. The poverty rate for children jumped from 13.8% in 1990 to 18.6% (almost one-in-every-five children) in 1996 and has now improved to 12.4%. The hardest hit are children being raised by female lone-parents, with about 40% of their children living in poverty … at the peak of the recession in 1996, about 56% of these children were living in poverty. In contrast, “only” 7.7% of children in two-parent families are now living in poverty.

The reasons behind poverty are complex. For some people, poverty is temporary while for others it may last many years or nearly forever. Covering the six-year period from 1996 to 2001, about 25% of Canadians experienced at least one year of poverty. This is much higher than the number who experience poverty in any single year.

Looking specifically at children under the age of 18, about 30% experienced at least one year of poverty over the 1996 to 2001 period. About 10% experienced “only” a single year of poverty during the period, another 10% lived in poverty for two to three years, about 6% were in poverty during four or five years and 3% were in poverty during each and every year during the period. Child poverty is based on the income situation of the parents. Among parents, permanent or temporary poverty may be due to low levels of education, a change in marital status, the birth of a child, the loss of a job, discrimination or to changes in government programs.

Child poverty rates may result from government cutbacks or a restructuring of social assistance programs. Table 2 provides an overview of the number of Social Assistance recipients by province during the 2000 to 2004 period. The table also provides the poverty rate for children over the 2000 to 2003 period.

While the relationship between the two indicators is far from being conclusive, a few trends are evident.

Chart 6 revealed that average household incomes have been flat over the last five years and are up by very little since 1990. In sharp contrast, the level of household spending has continued to rise. So far this decade, spending has gone up by 5.3% in real terms and has increased by almost 17% since 1990.

As evident in Chart 9, the size of the annual addition to personal savings has declined over the last 15 years and is now negative. Coincidently, the annual additions to the total debt load have been moving up.

The annual addition to savings as a percentage of disposable incomes is called the personal savings rate. This savings rate dipped from a high of 20% in 1982, to about 13% during the early 1990s, to about 5% in 2000 and is now down to less than nothing in 2005. As such, part of the additional spending by households has been paid for by reductions in annual savings.

Based on a somewhat different measure^vi (net money flows) it seems thatthe households comprising the bottom 60% of all households (on an income basis) spent more than they took in 2003. The upper middle 20% took in a bit more than they spent while the richest 20% were able to save over 10% of their incomes.

As the personal savings rate has moved down, the ratio of additional debt incurred each year as a percent of disposable incomes has been trending upwards. In 1991, this “annual debt rate”^vii was equal to just under 4% of disposable incomes. This “annual debt rate” now stands at just over 8% ... a doubling in just 15 years. It is clear that a large part of the additional spending has come via more borrowing and bigger debt loads. Much of this borrowing was backed by the increasing value of equity holdings due to escalating house prices and the stock market.

A recent CIBC World Markets report^viii states, “Never before have we seen the housing market contributing so much to overall economic growth.” The report estimates that borrowing against home equity led to $10 billion dollars in extra spending in 2004 alone.

In 2004, total consumer debt rose by $33 billion … and it is not a coincidence that total consumer outlays increased by exactly the same amount in that year. It just makes sense, that in a period of flat income levels, (See Chart 6) that any increase in spending has to come from either more debt or from reduced savings or a combination of both of these factors. That is what happened and what is still happening.

Currently, the average debt per household stands at about $70,920. In real terms, this is up by over 16% from 2000 and up about 42% from 1990. (See Table 3) So far this decade, the outstanding value of consumer credit in real terms is up by almost 30%. Mortgage debt is up by about 13% and “other debt” is up by about 8%.

This accumulated debt is now (as of the end of the third quarter of 2005) equal to about 125% of personal disposable income compared to 91% in 1990 and 110% in 2000 … and the upward spiral is projected to continue into the foreseeable future.

A narrower measure of household debt (consumer credit plus mortgage debt only) jumped from 79% of disposable income in 1990 to 94% in 2000 and to 108% at the end of the third quarter of 2005 .

There are other debt ratios. As they should, lenders like to highlight the most positive ratios. The key positive is that in spite of all this growth in debt, the ratio of total debt to total assets is lower now (at about 17%) than it was in 1990. Another positive is the ratio of total debt to net worth, which is also lower now (at 21%) than it was in 1990. In an aggregate sense, it seems that the loans given by the lending institutions in Canada are still well covered by the borrowers ’ personal assets. More recently (from 2000 to 2005) both of these ratios have deteriorated. Even so, mortgage arrears remain at very low levels.

On the negative side, the ratio of consumer credit debt to the value of consumer durables has jumped from 47% in 1990, to 59% in 2000 and to 70% currently.

The fall in savings and the increasing debt loads have raised some concern among many analysts even though, for some, this worry has been labeled as a “false alarmism” or a myth.

It is time to ring the alarm bell even louder than in our previous reports. The cumulative danger of the increasing burden of debt is not a myth … it is a reality for a growing number of households and families. According to the Ontario Association of Credit Counselling Services^ix, the pain is increasing “We have seen an increase in clients of about 60% since the year 2000 … over one decade, the family income of clients has increased only 15%, while the average debt increased by almost 60%.”

The soaring ratio of debt to disposable income is clearly an indicator of increasing financial stress. In an aggregate sense, it portrays an inability of a growing number of households and families to keep up financially. The rising debt to income ratio means that many households are cash-strapped and are unable to pay for their everyday or special purchases… and so they borrow. They borrow more and save less. (See Chart 9) This is in spite of a growing number of dual-income families. The degree of financial stress is climbing. Rising interest rates will certainly increase this stress.

The rising financial stress is evident in terms of charitable giving. About 30% of all taxfilers made a tax-deductible donation to a charity in 1990. This ratio of giving declined to 26% by 2000 and to 25% in 2004.

From a savings perspective, the percentage of taxfilers who contributed to an RRSP (Registered Retirement Savings Plan) increased from 23% in 1990 to 29% in 2000 but has now slid back to 26% in 2004. The effect of the flat trend in disposable incomes is measurable.

Why is financial stress a problem? It can lead to personal bankruptcy. It can also lead to marital problems, depression, and even suicide and others. A recent poll^xsuggests that “fights about money are hurting Canadian couples” and that 47% of those polled consider their disagreements about money to be “serious”.

Is there really any solid proof that the increasing debt load is a significant factor in the rising rate of personal bankruptcies? Is the relationship a reality or is it a myth?

According to new research findings by the Office of the Superintendent of Bankruptcy^xi one key conclusion is clear.

The same study found that the second biggest determinant effect was the level of interest rates … these are now rising.

On the positive side, the increasing employment rate was found to be a factor in holding back the number of insolvencies. Employment rates have been improving (See Charts 2 and 3).

Technically speaking, a bankruptcy occurs when the assets of an individual are liquidated and the remaining proceeds are given to those that are owed the money. In order to avert actual bankruptcy, a person may also make an offer to his or her creditors in an effort to settle the debt. The latter is called a proposal. Together, bankruptcies and proposals are a truer measure of insolvency.

The number of personal bankruptcies continues to be near record levels with about 84,000 during each of the last three years to 2005. In contrast, the number of consumer proposals is increasing rapidly. Proposals have soared from 3,000 in 1995 to about 17,500 currently. In combination, the total number of insolvencies is now at record levels.

The continued rise in the debt to income ratio combined with the projected rise in interest rates suggests that insolvencies will rise further over the next year or so.

On average, Canadian households now have about $412,000 dollars in assets. This is up by about 50% from 1990 and up by about 10% since 2000.

So far this decade, the biggest increase has been in the value of real estate, which is up by about one-quarter in real terms. The value of shares held outside pension funds is up by about 11% since 2000, while the value of life insurance and pensions is up 3%.

Net worth (total assets minus total debt) rose to about $340,000 in 2005. This is the highest on record. Readers may want to review the previous 2004 report in this series. The Special Feature – Generational Reality Check in our 2004 report found that the changing distribution of assets and net worth tended to greatly favour older households while younger households had fallen back.

There is no generally accepted way of defining the middle-class in terms of incomes. This is so, even if this group is often cited as a target of concern by governments and business. In this Special Feature, the middle-class is defined as those families that comprise, in terms of their incomes, the middle 20% of all Canadian families of two or more persons.

In 2003, this middle-class family had an after income tax and transfer income of $52,300, with an upper limit of $60,000 and a lower limit of $44,600. The average income of this middle-class family compares to average incomes of $21,500 for the poorest 20% of families and to $118,100 for the richest 20% of families.

This middle-class family suffered through the recession of the 1990s with the average middle-class income falling from $48,800 in 1990 to $45,900 by 1993. The $2,900 drop in real terms was very significant. Average incomes remained relatively flat until 1998 when they began to improve again. The improving trend continued until 2001 when incomes hit $52,300. Average incomes stagnated near that level during the next two years and probably remain near this level currently.

The middle-class family has seen their average incomes increase by about 7% from 1990 to 2003. This compares to a 12% advance for all families of two or more persons. (See Appendix A)

In 1990, the middle-class family paid, on average, about $10,400 in income taxes. This fell during the recession as incomes fell, remained relatively flat for several years and fell sharply in 2001 as tax cuts accelerated. Taking the entire 1990 to 2003 period as a whole, income tax payments by the middle-class have fallen by over 17%.

Transfer receipts have been more volatile over the period, but in 2003 the average total transfers equaled totaled about $7,100 and were up by over 16% from 1990.

In 1990, the average middle-class family paid out $4,300 more in income taxes than it received in transfers. This can be considered as their net contribution to society through the government mechanisms. The net contribution shrank to “only” $1,500 by 2003. The net contribution declined by almost two-thirds over the period.

As of 2003, the middle-class family got 17.5% of all the incomes, after transfers and income taxes, generated by all families of two or more persons. According to our definition, the middle 20% of families received less than an equal share of the pie. This share compares to a 7.2% share for the poorest 20% of all families and a 39.4% share for the richest 20% of all families. (See Appendix A)

There is little variation by province. In 2003, the middle-class family in Newfoundland had access to 17.4% of the total family income pie in that province. The biggest piece (18%) of the pie was achieved by families in Nova Scotia and Saskatchewan.

Based on total income (before income taxes) data^xii, approximately 12% of all couple middle-class families have the oldest partner being under the age of 35, about 27% are aged 35-44, about 31% are aged 45-54, about 19% are aged 55-64 and with the remaining 11% aged 65 and over.

The same data indicates that about one-third of all couple middle-class families have no children living at home, about one-quarter have one child, about 30% have two children, with the remaining couples having three or more children at home.

Table 5 provides insights based on all households (families and unattached individuals). A few characteristics are highlighted below.

ⁱ Bank of Canada, Monetary Policy Report, October 2005.

ⁱⁱ Pollara Inc, reported at http://www.mytelus.com/money/news/article.do?pageID=ex_business/home&
articleID=2134920

ⁱⁱⁱ People Patterns Consulting, Canada Job Trends Update 2005 - National and Provincial Labour Markets, March 2005 (www.peoplepatternsconsulting.com)

^iv Statistics Canada, Small Area and Administrative Data Division. (Note: This data is derived from Income Tax data and is available for free at the National and Provincial levels and on a fee basis for local neighbourhoods. Search the Statistics Canada Daily for the latest release and how to obtain additional data.)

^v René e Morissette and Garnett Picot, Low-paid Work and Economically Vulnerable Families over the Last Two Decades, Statistics Canada 11F0019 No. 248

^vi Statistics Canada, Spending Patterns in Canada, 2003 catalogue 62-202-XIE

^vii Created by the author. The “annual debt rate” is the ratio of the increase in total debt by the personal sector divided by the personal disposable income of the personal sector in the same year. Conceptually, it is similar to the personal savings rate but it measures the annual additions of debt rather than the annual additions to personal savings.

^viii CIBC World Markets, Household Credit Analysis, November 21, 2005

^ix Henrietta Ross, The Ontario Association of Credit Counselling Services, in a presentation to the Standing Senate Committee on Banking, Trade and Commerce, Thursday Wednesday February 3 2, 2005.

^x Results of a Decima Survey commissioned by the Investors Group. Reported in the Globe and Mail July 23, 2005.

^xi Richard Archambault and Dominic Laverdiere, A Macroeconomic Model for Analysing and Forecasting Levels of Business and Consumer Insolvency in Canada, Economic Information and Analyisis, Office of the Superintendent of Bankruptcy, Industry Canada http://strategis.ic.gc.ca/epic/internet/inbsf-osb.nsf/en/br01499e.html

^xii Estimated using data from Statistics Canada, Small Area and Administrative Division. Tables 04 and 05. (Note: See endnote iii for more details on this data.)

Key Statistics Canada data sources used in the report

Income in Canada 2003, 75-202-XIE.
Income Trends in Canada 1980-2003 , 13F0022XIE.
Spending Patterns in Canada, 2003, 62-202-XIE
National Income and Expenditure Accounts and National Balance Sheet Accounts
Various electronic sources and Cansim tables

Note : Household numbers for the years 1990 to 2003 are derived from Statistics Canada, Income in Canada, 2003. Household numbers for 2004 and 2005 are assumed to grow at the same percentage rate as in 2003.

The Vanier Institute of the Family
94 Centrepointe Drive
Ottawa, Ontario, Canada, K2G 6B1
Tel: 613-228-8500 Fax: 613-228-8007
E-mail: