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

This new annual report looks at the current state of family and household finances. It provides a shorter-term and more timely review of many of the longer-term trends examined in Trends in Canadian Family Incomes, Expenditures, Savings and Debt published in early 1999. The latter is available from the Vanier Institute of the Family. ($10 or free on the Internet at www.vifamily.ca.)

Family finances are the main focus of this report. Unfortunately, the latest family income measures relate to the year 1997 and the latest family labour force information relates to the year 1998. No family based measures are available for savings and debt. Luckily, more recent information is available for the personal sector and this is used to provide some estimates for all households. Households include both families and unattached individuals. About 68% of households are family households. In a general sense, the recent trends for households provide a good "directional" guide to what is happening in families. These household estimates are subject to revision.

All measures have been converted to a per family or per household basis. Most dollar estimates are in constant 1997 dollars and thus variations over several years represent real purchasing power changes after inflation. The term "real" indicates what would have happened if there had been no inflation.

Much of the analysis relates to the 1990s and especially to the recovery period since 1992. The charts cover each year from 1989 to the latest year available. The tables consistently provide data for the year 1989 (the previous peak for the overall economy), 1992 (the low point for the overall economy during the early 1990s recession) and the latest year available. The tables also provide the rates of change between the years shown. Shaded areas in the tables represent deterioration for the selected indicators.

While this report is national in scope, it does include some provincial information on family incomes and low-income (poverty) rates. These are shown in appendix tables A and B. The appendix tables also provide information by type of family and families by age group. These appendix tables will likely be updated each year.

Additional details on sources of data for Charts 1 to 13 are attached at the back of the report.

The opinions expressed are those of the author and may not represent the views of the Vanier Institute of the Family. Any errors and omissions are the responsibility of the author. Roger Sauve can be reached at 403-938-0071, fax (403-938-9271), Email (rsauve@telusplanet.net), or (www.telusplanet.net/public/rsauve).

The economy continued to grow in 1999 following the serious recession of the early 1990s. Private and government forecasters anticipate that positive growth will continue into the year 2000 but at a slower pace than in 1999.

The number of jobs held by Canadians advanced by 350,000 in 1999 with another 225,000 or so expected in the year 2000. The unemployment rate in 1999 dipped below 8% for the first time in the decade with little or no improvement expected in 2000. The rate in the United States currently stands at less than 5%. About 1.3 million people were still unemployed in the Fall of 1999 compared to 1.6 million in 1992 and 1993 and 1.1 million in 1989. The relatively high level of unemployment has held back average weekly wages, market based earnings growth and family incomes.

One of the more fascinating features of the current decade has been the rapidly changing makeup of workers within families. Employment levels of heads of families stood at 5,362,000 in 1998, up only 56,000 from 1989. In contrast, employment by spouses jumped by more than 900,000 or by over 25% over the same period. Youth employment declined and more relatives worked over the period.

This shift has come mainly through changes in the rate of paid employment for each group. In 1989, about 72% of heads were in paid employment compared to a much smaller 57% of spouses who were so employed. By 1998, the employment rate for spouses had jumped to 65% while the rate for heads had dipped to only 64%. Surprisingly, and for the latest two years, spouses are now more likely to be in the paid workforce than are heads of families. The youth employment rate dipped from 61% in 1989 to 53% in 1998.

The causes of these shifts are unclear. It is not likely due to retirement as the employment rate for families with heads under the age of 55 also has a larger percentage of spouses working than heads. Some of this trend may be due to the generally weakened position of males in the workforce in terms of both employment and earnings.

This shift to more dependency on spouses and away from heads of households has been accompanied by a decline in the percentage of dual-income families in the 1990s. In the previous two decades employment by heads and spouses had both increased and dual-income families had jumped.

The shift in employment from heads to spouses has had a negative impact on family earnings as spouses typically earn less than half of what heads of families earn. The decline in dual-incomes has also dampened family incomes.

The latest official estimate of family incomes relates to the year 1997. This estimate confirms that real average family incomes after taxes declined from $48,300 in 1989 to $45,600 in 1997. This is a decline of $2,700 or 5.6%. Family incomes declined during six of the last 9 years including 1997.

Another more timely measure indicates that household (families and unattached individuals) incomes dipped from $47,000 in 1989 to $42,400 during the first half of 1999. Given the directional relationship between the two, this strongly suggests that average family incomes may have also stagnated into 1999.

The major sources of income for the average family are wages and salaries earned in the market place. Income from investments, alimony and private pensions also contribute to what are called market incomes. This market income per family declined by 7.2% from the 1989 peak to the bottom of the recession in 1992. Since then to 1997, market incomes have increased by just 1.3% and still remain 6.1% below the 1989 peak. (See Table 1)

Government transfers have declined by almost 10% since 1992, which resulted in a small decline in total money income. Much of this decline was due to lower unemployment insurance transfers. Government transfers now represent 11.3% of total money incomes for all families but 69% of total money incomes for the poorest fifth and only 2% for the richest fifth of families.

Surprise. On average, real income taxes paid by families actually decreased by a few dollars over the decade. Income taxes per family actually declined during the recession but have increased by a similar amount during the recovery period. This flat real income tax payment level when combined with the fall in total money incomes resulted in an average tax rate (income taxes as a % of total money incomes) increase from 19.3% in 1989 to 20.2% in 1997. Viewed from the perspective of the decade as a whole, it seems that the tax revolt may be due more to a shrinkage of real money incomes rather than to rapidly rising real taxes per family. In 1997, the poorest fifth of families had an income tax rate of 7.4% compared to 37.5% for the richest fifth of families.

It is curious that even though the economy as a whole has recovered robustly from the recession of the early 1990s, family incomes have, on average, declined. This has also been true for most family types. (See appendix A for more complete details.)

By family type, the largest after-tax family income declines from 1992 to 1997 were experienced by male lone parents (-7.0%), one earner married couples without children (-6.4%), and households headed by persons 60-64 years of age (-9.0). On a provincial basis, families in Newfoundland (-9.6%), Saskatchewan (-9.1%) and Nova Scotia (-8.8%) suffered the biggest drops.

The only increases during the recovery period were for elderly married couples (+2.2%), other elderly families (+3.2%), families headed by persons under the age of 25 (+5.2%) and those headed by persons 65 and over. It is noteworthy that families headed by persons under the age of 25 suffered a huge decline of over 14% during the recession.

The decline in real money incomes has resulted in an increase in the low-income (poverty) rate. The low-income rate worsened sharply from 11.1% in 1989 to 13.5% in 1992. The low-income rate actually rose again to 14.6% in 1993 and was still at a rate of 14% in 1997.

According to Statistics Canada, low-income families are those that spend more than 54.7% of their total money incomes (which include transfer payments but before income taxes) on food, shelter and clothing.

Appendix B provides low-income rates by family type, age group and province with shaded areas highlighting periods of deterioration.

Low-income rates worsened for almost all groups over the 1989 to 1997 period. From 1989 to 1997, increases in low-income rates were most severe among families headed by persons under the age of 25 (from 28% to 43%), one earner married couples with children (from 20% to 26%), families headed by persons aged 25-34 (from 14% to 19%) and by families headed by persons aged 55-64 (from 10% to 14%). The trend for the 55-64 age group stands in sharp contrast to the improvements for the group 65 and over.

During the recovery period from 1992 to 1997, small improvements occurred in Alberta, Saskatchewan and Newfoundland. Small improvements were also evident for the elderly and female lone-parents.

The worse low-income rates in 1997 were for female lone-parent families (56%), families headed by persons aged under 25 (43%) and one earner married couples with children (26%).

A recent Angus Reid/Globe and Mail survey suggests that Canadian households are becoming less fearful of unemployment. ⁽¹⁾ In July 1999, only 20% of respondents knew someone in their household who felt they were in danger of being laid off or losing their job. This is the lowest in the 1990s. This confidence is encouraging spending. In mid-1999, a large percentage of Canadians still believed that now was a good time to make a major purchase.

Households, on average, are increasing their spending in spite of declining real incomes. A likely reason is the rapid rise in the value of shares held by Canadian households. These include shares held directly by households and indirectly through company pension plans. These holdings, on average, jumped from about $26,000 in the early 1990s to $41,600 in 1998. As such, many Canadians may feel a lot richer than they did just a few years ago. Those householders that actually have shares may be spending part of this new wealth and may also be borrowing against it. Families with little or no share holdings may be borrowing to sustain spending.

In addition, the personal savings rate shrank to record lows during the last three years compared to over 10% during 1989 and the early 1990s. This has supported spending.

Household spending could be disrupted by corrections in the stock market, a slowing economy, rising interest rates and debt problems.

Total accumulated debt per household in 1998 was equal to 114% of after tax incomes and compares to 92% in 1989. Consumer credit jumped to 60% of the value of consumer durables and mortgage credit rose to 35% of the value of land and buildings. Total debt rose to 19% of total assets from 18% in 1989. All are new records. The latter may not seem like a significant increase but it must be borne in mind that much of the increase in assets has been due to the surge in the value of shares and increases in the value of pensions which may be subject to short term corrections. The big positive is that much of this borrowing is at relatively low interest rates.

Many households are also having difficulties saving for retirement. In 1997, only 13.5% of the available RRSP room was used up. This compares to over 25% in 1991 and 18% in 1992. ⁽²⁾ In 1997, only 30% of those eligible contributed to RRSPs which is down from 32% in 1991.

RRSP contributions vary by income. In 1996, taxfilers with less than $10,000 of income contributed, on average, only $684 to RRSPs. This contribution increased to almost $6,000 for those with incomes above $80,000. ⁽³⁾

Annual data for 1998 indicates that, on average, households spent over $41,000 on various goods and services. The level of spending had declined by 4.6% during the recession and recovered by 6.4% during the recovery period. Despite the roughly 9% decline in after-tax household income recorded between 1989 and 1998, total spending per household was up 1.5%. This excludes expenses on various forms of savings such as pensions and RRSPs.

During the recovery period, spending per household increased in double-digit terms for recreation equipment and services (a dramatic +34%), medical care and health (+16%) and transportation and communications (12%). Expenditures on store bought food, beverages and tobacco actually declined on a per household basis. Small advances were evident for reading, entertainment, education and cultural activities (+2%), housing, fuel and power (+3%) and household furniture, furnishings and equipment (+5%).

The dramatic growth in recreation spending may be linked to the rapid rise in share values. The richest 20% of families control about two-thirds of all wealth. The stock market surge has caused the wealth of this group to increase rapidly (See chart 13) and thus their spending.

In 1996, the richest fifth of households were responsible for over 40% of all recreational expenditures. They also spent over half of all the expenditures on golf equipment and memberships, racquet sports equipment and memberships, downhill skiing equipment and fees, recreation vehicle equipment rental, paid attendance at hockey games and fees for children's camps. (4)

On average, households had about $249,000 (1997$) in total assets (financial and non-financial) in 1998. (See table 3) Total debt stood at $47,400 per household. Subtracting total debt from total assets produces a net worth of $201,600. Net worth advanced quickly to 1997 but declined marginally in 1998. Again, distribution is important. The poorest fifth of families have virtually no net worth while the richest fifth hold about two-thirds of all the net worth.

Virtually all of the increase in assets per household (See table 3) has been in financial assets, which jumped by over 17% since 1992. The value of shares and pensions (of which a large percentage are held as shares) soared by almost 50% per household over the recovery period. Shares and pensions now comprise about two-thirds of all financial assets compared to less than one-half at the low point in the recession. The value of these shares and pensions jumped from one-quarter of all assets in 1989 to one-third in 1998.

The value of other financial assets including currency, deposits and Canada Savings Bonds actually declined over the recovery period and over the entire decade. Households have moved a growing proportion of their financial assets to areas of potentially higher returns, risk, and higher volatility.

Total debt increased more quickly than assets over the entire period and over the recovery period. As noted earlier, several debt ratios are now at record levels.

Distribution is very important. The poorest 40% of households had negative changes in assets and debt in 1997. The middle income group had a small positive gain while the richest 20% had large positive net changes equal to over 17% of their high incomes.

Appendix B - Families with low-incomes (poverty) after transfers and before income taxes

⁽¹⁾ Angus Reid Group website (www.angusreid.com).
⁽²⁾ Hubert Frenken, Statistics Canada, Perspectives, 75-001-XPE, Spring 1998, page 34.
⁽³⁾ Age-Income Forecasting Model, People Patterns Consulting.
⁽⁴⁾ The Future of Canadian Household Spending to 2016, People Patterns Consulting, 1999

Additional detail on Chart Sources

Chart 1 - Statistics Canada; National Balance Sheets (13-210-XPB), National Economic and Financial Accounts (13-001-XPB), Income after tax, distributions by size (13-210-XPB), Income Historical Review 1980-1996 (13F0022XCB), Consumer Price Index (62-001-XPB) plus estimates and calculations by author.

Chart 2, 3 and 4 - Statistics Canada, Labour Force Historical Review (71FOOO4XCB) and estimates by author.

Chart 5 - Statistics Canada; National Economic and Financial Accounts (13-001-XPB), Income after tax, distributions by size (13-210-XPB), Income Historical Review 1980-1996 (13F0022XCB), Consumer Price Index (62-001-XPB) plus estimates and calculations by author.

Charts 6 and 7 - Statistics Canada, Income distributions by size in Canada, 1997 (13-207-XPB).

Chart 8 - Angus Reid Group (www.angusreid.com).

Chart 9 - Statistics Canada; National Balance Sheets (13-210-XPB) plus estimates and calculations by author.

Chart 10 - Statistics Canada; National Economic and Financial Accounts (13-001-XPB) plus estimate by author.

Chart 11 - Statistics Canada; National Economic and Financial Accounts (13-001-XPB), National Balance Sheets (13-210-XPB) and estimates and calculations by author.

Chart 12 - Statistics Canada; National Balance Sheets (13-210-XPB). Income Historical Review 1980-1996 (13F0022XCB), Consumer Price Index (62-001-XPB) plus estimates and calculations by author.

Chart 13 - Statistics Canada, Spending Patterns in Canada, 1997 (62-020-XPB).

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