August 2007

Are we richer than before?

It’s a strange paradox: on average, Canadians earn more than before, but they don’t necessarily put away more money.

Statistics Canada’s latest figures show that the after-tax income of the average Canadian citizen has risen substantially over the past 10 years. This is a very welcome reversal since, during the previous 10 years, Canadians’ after-tax income remained more or less stable.

However, other figures are not as favourable. Let’s have a closer look at these.

A net income that’s clearly higher

The table below shows quite nicely that, on average, since 1996, Canadians have been making up for lost time at an ever-accelerating pace. The table’s dollar amounts are in constant 2005 dollars, that is, they have been adjusted for inflation.

Average net income (after income taxes) in Canada
  1986 1991 1996 2001 2005 1996
to 2005
Family of seniors $43,200 $44,100 $41,300 $45,000 $48,200 +17%
Couple without children at home $52,600 $52,600 $53,800 $62,100 $62,700 +17%
Family with children at home $60,300 $59,500 $59,300 $70,700 $73,000 +23%
Lone-parent family $28,100 $27,000 $27,900 $35,100 $38,800 +39%
Person living alone $23,900 $23,000 $22,800 $25,700 $27,000 +18%
Source: Statistics Canada

This table makes it easy to appraise the governments’ numerous tax reductions of the past 10 years. It also allows each of us to compare our situation to that of average citizens in the same position, and see if our fate has improved relative to theirs.

An increasing net worth

It’s not just our income that’s been rising over the past few years; it’s also our equity. In 2005, the median net worth (assets less liabilities) of average Canadian households stood at $148,400, that is, 23.2% higher than in 1999.

However, there is another side to this. The fact is that this increase is not due to savings by these households, but essentially to the higher value of their investments and their main residence. The appreciation of their assets by far outpaces their saving rate: on average, savings now represent a mere 12% of the changes in their net worth.

This means that households are not saving as much of their new-found income as they should for retirement; rather, they rely on financial and real estate markets. Doing so may be a somewhat ill-considered choice since we all know that the markets’ recent performance doesn’t in any way guarantee their future performance.

Back to basics – saving!

Again according to Statistics Canada, such undersaving affects all income levels, but more particularly citizens with average and below average incomes. As such, between 1996 and 2003:

  • a couple in the lower quintile (that is, the 1/5 of the population whose income is the lowest in the country) has had their total RRSP and government pension plan contributions decrease from an average of $1,700 per year to $1,200, that is, a drop of 29%!
  • a couple in the middle quintile has experienced a 17% drop, from $5,300 to $4,000;
  • and, for a couple in the upper quintile, the drop has been 10%, from $12,600 to $11,300.

Clearly, even if their after-tax income increased by 20%, Canadian households, especially the less affluent, have substantially decreased their retirement savings. It’s a risky move, one that should be reconsidered as soon as possible!

In fact, this fall might well be the right time for Canadians to look at their financial strategy and refocus it as needed. After all, the end of the year and RRSP season are only a few months away…