Household savings and debt

It is a grim story for household finances according to a recent report by Roger Sauve for the Vanier Institute for the Family. Savings have all but vanished for most families, with debt rising to record highs relative to income. Interest payments have jumped up relative to income, suggesting more households are mortgage and credit card poor, with debt service payments taking up funds that previously would have gone into savings. Here’s the play-by-play:

Savings plummet

In 1990, households saved about $7,500 of their annual incomes. This dipped to under $2,000 by 2002 and is now near $1,000. The personal savings rate (savings as percent of disposable income) fell from 10% in 1990 to about 1% currently.

The savings rate varies significantly by province. In 2006, the rate was negative in four provinces (PEI, BC, SK, NS), in the range of 1.0% to 2.5% in another four provinces (MB, QC, ON, NB) and in double digits in Alberta (10.8%) and in Newfoundland (14.3%).

Debt rises seven times faster than incomes since 1990

In late 2007, the average total debt load per household moved above $80,000 for the first time. Average debt per household jumped by 54% between 1990 and 2007. The debt load is $71,000 if only mortgage and consumer debt is included. Total debt is now equal to a new record of 131% of household income after transfers and income taxes … this compares to only 91% in 1990.

… There may be more trouble ahead. A RBC reportix indicates that the “total debt service burden” (interest plus principal payments) is now approaching 24% of personal disposable incomes, up from a decade low of about 19% during the late 1990s. The ratio has been rising due to the increasing debt load rather than to interest costs.

Additional financial stress is evident in the relatively small cash cushions that families carry. A tabulation for 2005 found that almost one-third of households had a bank balance of less than $500 with another 20% with a bank balance of $500 to $2000. Some 28% of credit card holders did not pay off all of their credit cards each month. About 11% were behind in a bill or payment and 3% were two or more months behind in a rental or mortgage payment. About 7% (1 in 15) of all households had ever declared bankruptcy or made a formal or informal arrangement with a creditor.

At the back of the report is a short feature on low-income families in comparison to other income groups. Table 1 shows “Dollars left over after all expenditures including incomes taxes and pension contributions by income and age – 2005” and it breaks as follows:

Bottom 20%         -3,700

Second quintile     -2,500

Middle quintile     -800

Fourth quintile      2,500

Top 20%                   23,000

This is some additional fodder for considering who will benefit from the new Tax Free Savings Accounts. Remember, this is the net balance after expenditures; some of that left over, for those who have it, will go towards paying down debt, rather than going into savings. The main point is pretty clear: the bottom 60% will contribute on average nothing to a TFSA. The next quintile on average may have some to contribute, though if this was broken down it is probably the families near the top of that quintile grouping that are pulling up the average. Sauve adds “As such it seems that at least 5.8 million households or 48% of all households in Canada experienced a revenue shortfall in 2005.” But if you fortunate enough to be in the top quintile you will be able to max out this new tax shelter, even after your RRSP contribution is already maxed out. Sweet.