Canada’s Instability trap: When you’re income-rich, but asset-poor

Feb. 9, 2015 – Anna Mehler Paperny, Global News

Canada supposedly got off easy after the global recession. But a months-long Global News investigation has found the reality for many Canadians isn’t nearly as rosy as the headline figures suggest. Increasingly, families across the country find themselves in an instability trap, facing labour uncertainty and an eroded safety net. The social and economic implications are real — and serious.

  • More than half of Canadians make enough to get by from one month to the next but lack the financial cushion in easily available funds to shield them from the unexpected.
  • Canadians in their working prime are dropping out of the job market altogether or have simply stopped looking: Participation rates for men reached a historic low last year; women, whose job market participation rose for decades, has stagnated since 2006.
  • People are turning to cheque-cashing services to make ends meet only to find themselves in cycles of debt. And our analysis finds these businesses clustered in low-income, high-social-assistance areas. But who’s stepping in to fill that need?
  • More Canadians are working temp and contract jobs — and more of them are doing so when they’d rather not. This means lower wages, greater uncertainty and has serious impacts not only on their health but on their families, their communities and the local economy.
  • More Canadians are prematurely cashing out their RRSPs — not for education or home-buying purposes, but because they need the money, tax penalty or no.

Read the series: 

READ: Canadians stressed about finances as debt levels rise, exclusive poll finds

What does it mean to be poor?

The most common way we measure it – the way poverty lines are calculated, subsidies disbursed – is by your paycheque: How much you take home every month.

But some argue it makes more sense to measure poverty not by income but by assets – the worth of the stuff you have and the cash you’ve saved.

McGill University professor David Rothwell is among them.

“If people were to experience a hardship, an income shock, a medical crisis or whatever, do they have enough assets to draw down for three months at the poverty line?” he said.

“Even if you’re not low income, but you have low assets, you’re thinking about the next two weeks, and your family activities. And the plumbing goes out and you have to pay for this expense – this has ripple effects through the family.

“That’s what I would be concerned about.”

By that metric, Canadians’ financial situation looks far more grim.

Rothwell’s research focuses on how many months a Canadian household could last on its savings, if it reduced its monthly expenses to poverty-line levels.

If you include all easily liquifiable financial assets (all chequing and savings accounts, but not pensions; all possessions, but not real estate), about 55 per cent of Canadians are financial asset poor: They couldn’t last three months at the poverty line if their income suddenly dried up. That percentage diminishes if you include real estate and retirement assets.

It also reflects the results of an exclusive Global News poll, which found fewer than half of Canadians figure they have enough money saved to cover three months of expenses if they didn’t get a paycheque.

It means they’re doing okay on the surface, but lack the cushion to break their fall in the case of sudden catastrophe – a lost job, a health emergency, a death in the family.

Things aren’t much rosier south of the border: A Pew Research Trust study published last month found most Americans don’t have enough readily accessible savings on hand to get them through a month without income.

“Even when pooling all of its resources—including from accounts that are potentially costly to access, such as retirement accounts and investments—the typical middle-income household can replace only about four months of lost income,” the report reads.

And even if you have enough to get by from one month to another, the inability to plan financially can take a mental toll.

“People’s psychology under asset poverty is going to be constrained. … You might have this cascade of poor decisions,” Rothwell said.

“We could … be doing more to promote a different definition of financial security: It’s not just about a better job – that’s necessary, but it’s not sufficient.”

Tamara Griffith sees plenty of those cases at West Neighbourhood House, where is Financial Advocacy and Problem Solving Program Coordinator.

“We’ve seen people who’ve been making $120,000 a year and, either because of some mental health issue or whatnot, yeah they’re in our office and whatever savings they had, it’s gone. We see people who are actually homeless – nothing,” she said.

“And some people who thought the money was just going to keep coming in and didn’t bother saving. Like, ‘The money keeps coming in every two weeks; what do I need to save for?”

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