Backgrounder
With a particular curiosity around how Canadians view their financial condition, sentiment to spending and financial prowess, the Certified General Accountants Association of Canada (CGA-Canada) commissioned a consumer survey in the spring of 2007. Building on the perspectives of Canadians on the changing level of their indebtedness, wealth, and attitudes towards spending and savings, we then examine some of our findings in the context of the publicly available facts and figures. And while we recognize that the level of debt is rightfully a personal decision, we do feel compelled to raise awareness of the potential risks of increasing individual household debt. We anticipate that this report entitled Where Does the Money Go: The Increasing Reliance on Household Debt in Canada, will be of significant value to the Canadian public.
Canadians’ Perceptions
Results of the Public Opinion Survey
- 84 per cent of Canadians reported having some type of debt.
- 14 per cent of all Canadians reported that their debt had markedly increased.
- 25 per cent of Canadians do not think that changes in interest rates, housing prices, wages or reduced access to credit would negatively affect their financial wellbeing.
- 40 per cent of Canadians holding debt think that debt negatively affects their ability to reach goals in the area of financial security for unexpected events.
- 28 per cent of Canadians holding debt feel household debt negatively affects their ability to reach personal retirement goals.
- 25 per cent of Canadians do not commit to any type of savings not even for retirement.
Facts
- Household debt is at an all-time high, reaching $1 trillion in 2006.
- Canadians’ personal saving rate has been declining since the early 1980s dropping from its highest level of 20.2 per cent in 1982 to its lowest of 1.2 per cent in 2005.
- Home equity per owner was 5 per cent lower in 2005 than in 1997.
- Household debt has been increasing annually by 4.7 per cent for the past 30 years outpacing gains in personal disposable income, assets and the GDP.
- Consumption rather than asset accumulation is the primary cause of rising debt.
- The least wealthy 20 per cent of households experienced the second fastest rate of debt growth between 1999 and 2005 when compared to all other wealth groups.
- A greater number of people – 20 per cent- are tapping into their RRSP savings prior to retirement; using funds primarily for day-to-day living purposes.
- The decline in savings is attributed to:
- Housing value appreciation that boosts households net worth;
- Low interest rate levels that make savings less attractive and borrowing costs easier to bear;
- Growing importance of government policy and transfer payments which reduce the incentive to save;
- An aging population that triggers dis-saving of retirement funds
- Slower pace of growth in personal income that leaves lesser funds after personal consumption; and
- Increased – improved access to credit that lowers the need for a “saving cushion”.
Conclusions
- The fact that savings are decreasing is worrisome, particularly taking into account that the number of Canadians entering the phase of life when they are expected to accumulate their retirement savings (aged 45-64) is increasing.
- While lending institutions afford a beneficial service to society and its constituents, the risk tolerances of those institutions should not be exercised as a substitute for the judgment of individuals who must discern between good and bad debt.
- Many Canadians do not seem to fully appreciate how increasing debt may affect their ability to handle negative economic shocks. Therefore individuals should not solely rely on the global economic outlook to determine how they manage their finances, their unique circumstances should dictate how much debt they can bear as they will assume the consequences of those financial decisions.
- Increasing indebtedness may leave Canada’s aging society sandwiched between having already committed yet unearned income to debt-servicing and the necessity to accelerate accumulation of pension funds for rapidly approaching retirement.
- Maintaining the current pace of debt encumbrance to asset growth will slowly but steadily increase household indebtedness creating higher pressure on the economy and the financial systems which support it.
Recommendations
- Accumulation of appreciable financial assets, building of a larger more diversified financial cushion, and retirement investment should remain long-term goals for Canadians.
- Developing Canadians’ financial capability and literacy skills, offering pension plans to employees, providing incentives for low income earners to save and addressing Canada’s productivity gap are measures that could assist in reaching our financial goals.
- Canadians need to develop their financial capability – that is –improve their knowledge, skills and discipline when making financial decisions. To reach this goal, governments and academia should consider integrating this subject into education and community programs.
- Improving fiscal literacy skills of Canadians who do not meet everyday reading requirements would be valuable considering they are expected to make financial decisions and assume the consequences.
- Incentives should be afforded so as to encourage employers to offer pension plans that encourage private pension savings.
- Governments should consider establishing a tax pre-paid pension savings plan and other saving incentives specifically designed for lower income earners.
- Addressing Canada’s productivity gap will translate into better wages to service Canadians’ high level of debt.
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