Like an antibiotics-resistant germ, household debt is holding up alarmingly well as the economy improves.

A new survey shows the economic growth of the past year has helped ease some of the financial challenges faced by Canadian households. Fewer people are spending their entire paycheques, and fewer think they would financially implode if they faced an unexpected emergency expense.

But with interest rates rising in the past year, debt-related stress has worsened. It’s a scary finding if you look ahead to what happens when the current economic growth phase ends and the next recession arrives. Suggestion for your next raise or bonus: Sink the money into debt reduction, not consumption.

The Canadian Payroll Association’s 10th annual survey of employees is part of the group’s continuing efforts to annually document how well people are managing their finances. The 2018 edition, released on Wednesday, comes just after the release of data showing the economy growing at a very respectable annualized rate of 2.9 per cent in the second quarter of the year. While uncertainties such as the fate of the North American free-trade agreement persist, there’s serious talk these days about economic growth being sufficient to make inflation an issue.

Stronger growth has already made an impression on people, the payroll association survey suggests. Thirty-nine per cent of the 5,074 employees polled believe their local economy will improve, compared with a three-year average of 36 per cent.

The growing economy has modestly eased some household financial stress. The percentage of people who believe they would face difficulties if their paycheque was delayed by even a single week fell to 44 per cent from a three-year average of 48 per cent. Also, the percentage of people who could not come up with $2,000 within a month to cover an emergency expense dropped to 20 per cent from almost 25 per cent. And 35 per cent of people said they spend all or more than their net pay, down from the three-year average of 40 per cent.

The hopeful tone of the payroll survey ends when the questions turn to debt. This is discouraging because a stronger economy has helped increase average hourly earnings by 3.2 per cent, according to the latest Statistics Canada numbers. With inflation recently in the 2- to 3-per-cent range, this should be enough to help families address their debts.

And yet, probably because of the impact of higher rates, people seem to be feeling worse about their debt situation. The payroll survey found that 40 per cent of people feel overwhelmed by their debt, up from 35 per cent last year. More than one-third said their debt load got bigger over the previous year, up from 31 per cent in the last survey.

When asked how long it would take them to pay down that debt, 43 per cent said a decade. That’s up from 42 per cent last year and 36 per cent in 2016. Twelve per cent this year see themselves as never being debt-free.

The survey results suggest we’re going to have to closely watch how high debt levels affect the level of retirement saving. On one hand, the target retirement age of survey participants was 61 on average, the same as in 2017. On the other, 47 per cent of participants who are 50 and older admit they have saved just one-quarter or less of what they feel they will need to retire (72 per cent over all said this).

Want to find money to save for retirement? Eliminate your debts and re-route your monthly payments into your tax-free savings account or registered retirement savings plan. The payroll association suggests a “pay-yourself-first” approach, where you put away part of every paycheque for debt reduction and long-term savings.

The weakness in advice like this is that it’s so commonly ignored. In a coming column with behavioural economist Dan Ariely, I’ll discuss the reasons. Meantime, consider the mental-health benefits of paying down your debt.

Plenty of polls and surveys in the past year or so have documented high levels of stress about money. That’s now, a time of economic growth. When the economy inevitably heads into the next down cycle at some future date, today’s money stresses will look mild by comparison.

Reduce stress, fix your retirement savings deficit. That’s your motivation for paying down debt today, while the economy has your back.

The Globe and Mail, September 5, 2018