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.
The Globe and Mail
Published Sunday, Jun. 07, 2015 6:17PM EDT
Last updated Monday, Jun. 08, 2015 8:59AM EDT