Consumer Trends Report – Chapter 8: Consumer Net Worth

Chapter 8: Consumer Net Worth

This chapter brings together the information in Chapters 6 and 7 to present a picture of the net worth of particular groups of Canadian consumers. It briefly reviews trends in net worth by income quintiles, then presents the more significant trends for five broad groups: two-parent families with children; lone-parent families; young consumers; baby boomers and pre-retirees; and seniors.

Statistics Canada's National Balance Sheet Accounts show that the net worth of the personal sector (which includes persons and unincorporated businesses) was $3.6 trillion at the end of 2002. This is up from $863.6 billion in 1980, an average annual growth rate of 6.7 percent. ²²⁹

While noteworthy, the National Balance Sheet Accounts can only be disaggregated by specific types of assets and debts, and not by any demographic variables. Consequently, it provides only minimal insight into the financial situation of consumers. A much broader examination of the net worth of Canadians, defined as total assets minus total debts, requires the use of Statistics Canada's Survey of Financial Security (SFS), a comprehensive survey of the assets and debts of Canadians. ²³⁰ Prior to the 1999 SFS, the last net worth survey in Canada was conducted in 1984. Canadians have improved their net worth, although most of this improvement is due to gains by the wealthiest fifth of Canadian family units. Comparing 1984 to 1999, the median net worth of Canadian family units increased 11 percent ²³¹ (see Figure 8.1). The wealthiest 20 percent of Canadian family units (as measured by net worth) increased their net worth by 39 percent, but there was virtually no growth for the bottom 40 percent of family units.

* 1999 data are adjusted to be made comparable to 1984 data. Back to text

Source: Table 4.2 of Statistics Canada Cat. No. 13-595,p. 30.

In 1999, 70 percent of total net worth in Canada belonged to the top 20 percent of family units, with the top 10 percent accounting for slightly more than half (53 percent) (Statistics Canada 2001a, 9). This distribution, however, is less pronounced than the concentration in the United States, where as of 1998, the top 10 percent of families accounted for more than two thirds (68.7 percent) of total net worth. ²³² Despite the relatively lower concentration in Canada in comparison to the United States, trends in net worth in this country provide further evidence of polarization that was presented in the analysis of incomes(see Chapter 5).

Two-parent families with children

Considering 1984 and 1999 data, two-parent families with a main income earner younger than age 65 and with children (under age 18) at home had the worst performance in median net worth compared to any other economic family type (see Figure 8.2). ²³³ Not only did they not gain any ground over this period, two-parent families with children actually experienced a marginal decrease (-$100) in their median net worth, the only economic family type to do so during this period.

Significant variations in net worth also exist among various income quintiles within the two-parent family with children (under 18) category (see Figure 8.3). The Canadian Centre for Policy Alternatives confirms that a dramatic polarization occurred in the average ²³⁴ net worth growth rate for this important economic family unit (Kerstetter 2003, 58). This result, combined with information on consumers' incomes, suggests that the increasing polarization in Canada has not been experienced solely by groups traditionally viewed as vulnerable, such as lone-parent families or elderly widows.

Many young two-parent families, in particular, have faced severe financial pressures. Research from Statistics Canada supports this finding: a recent article divided couples with children (under age 18) into three age groups and presented time-series data on three financial indicators: the proportion of each group experiencing low income (as measured by the low income cut-off), ²³⁵ the proportion experiencing low income who also have zero (or negative) financial wealth, ²³⁶ and the proportion experiencing low income who have only modest financial wealth (Morissette 2002). ²³⁷

Figure 8.4 reveals that, when comparing 1984 to 1999, the situation of young couples (ages 25 to 34) ²³⁸ with children (under 18) has deteriorated across all three financial stress indicators considered in the study. For example, the percentage of these young families experiencing low income increased from 11.2 percent in 1983 to 14.1 percent in 1998, and the percentage experiencing low income and no financial wealth (an indication of very severe financial stress) increased from 4.9 percent to 5.8 percent during this same period. Conversely, the financial situation of slightly older couples (45 to 54 years of age) with children younger than 18 has improved, with all three financial stress indicators decreasing over the period.

Source: Table 3 of "Families on the Financial Edge," in Perspectives on Labour and Income, Statistics Canada Cat. No. 75-001, Vol. 3, No. 7, July 2002, p. 9.

Lone-parent families

The financial situation of lone parents, while still not good, has improved. This family type experienced the most rapid growth in net worth from 1984 to 1999, increasing at an annual rate of 4.5 percent. (Compare this to virtually no growth for non-elderly two-parent families with children.) This performance is likely due to the strong gains in the income of lone parents over the most recent recovery period of the late 1990s to date (see Chapter 5). While the growth rate of lone parents' net worth is impressive, it must be seen in context. In 1999, their median net worth was just $3700, approximately 20 times less than that of two-parent families with children ($77 800) (see Figure 8.2). In addition, nearly one in four lone-parent families (24 percent) had both low income and no financial wealth in 1998-99, a rate almost seven times higher than that of couples with children under 18 (3.5 percent) (Morissette 2002, 9).

So, while the situation is improving for lone-parent families, they still face very significant challenges as a result of their weak balance sheets and many lone parents continue to live on a day-to-day budget. For example, consider that the median balance held by lone parents at financial institutions was just $500 in 1999 and that even at that, almost one in five lone parents (18 percent) did not report ownership ²³⁹ of any deposit at a financial institution in 1999, an increase from only 1 in 10 (13 percent) in 1984. ²⁴⁰ Furthermore, only 56 percent of lone parents reported having a credit card in 1999, and for those who did not have one, one in four reported being turned down for this basic type of credit. ²⁴¹ Given their overall low level of financial assets and difficulty in obtaining credit, it is perhaps not surprising that female lone-parent families ²⁴² were more than twice as likely to fall behind in bill payments, compared to couples with children under 18 (31.5 percent versus 15.5 percent, respectively) (Pyper 2002, 19). Furthermore, the incidence of young female lone parents falling behind was much greater: more than half (53 percent) of those under age 25 reported falling behind at least two months for a bill, loan, rent or mortgage payment in 1998 (Pyper 2002, 19).

Not surprisingly then, evidence suggests that lone-parent families frequently do not have a secure long-term financial plan. For instance, ownership of a home represents a significant investment for any family, and potentially an important element of long-term financial security and retirement planning; this may be especially true for lone parents. SFS data indicate that while the home ownership rate of lone-parent families increased from 36 percent in 1984 to 41 percent in 1999, this rate still remained well below that of all family units (62 percent) and at roughly half the rate of two-parent families with children (77 percent) as of 1999. ²⁴³ In addition, according to Statistics Canada, 53.7 percent of lone parents had no private pension assets in 1999, ²⁴⁴ a rate significantly higher than that of two-parent families with children (19.6 percent) (Statistics Canada 2001a, Table 5.1, 22).

Young consumers

Younger consumers have experienced sharp declines in their net worth. In fact, comparing 1984 to 1999, the median net worth of the youngest adult Canadians has declined more than that of any other age group. For family units under the age of 25, median net worth declined at an annual average rate of -16.7 percent, from $3000 in 1984 to $200 in 1999. Family units between the ages of 25 and 34 did relatively better, but their median net worth still declined at an annual average rate of -2.9 percent, from $23 400 in 1984 to $15 100 in 1999.

Nevertheless, both age groups (under age 25 and 25 to 34) managed to increase their financial assets during this time, shifting away from deposits at institutions. The median deposits held by family units under age 25 fell from $1165 in 1984 to $700 in 1999, while the median held by those aged 25 to 34 dropped from $2605 to $1500 during the same period. These declines, however, were more than offset by increased contributions to Registered Retirement Savings Plans (RRSPs) (see Figure 8.5). ²⁴⁵

Despite increasing their financial assets, the debt-to-asset ratio for young family units rose over the 15-year period from 24.4 percent in 1984 to 34.7 percent in 1999 for those under age 25, and from 29.7 percent to 40.5 percent for those aged 25 to 34 during the same period (see Figure 8.6).

There has been a major shift in the kinds of financial obligations incurred by 19- to 24-year-old Canadians over the last decade. For example, Equifax data reveal that between 1992 and 2002, there has been a substantial increase in the number of active credit cards held by young consumers. These increased from about 1.7 million in 1992 to 3.3 million in 2002, an average annual growth rate of 6.5 percent. This is greater than the 4.8 percent average annual growth in active credit cards held by the adult population over this period. This trend may be linked in part to the promotion of credit cards among young consumers, which, in some cases, has even occurred on campuses. ²⁴⁶

Similarly, Equifax data also reveal that there has been explosive growth in the number of instalment loans held by young consumers between 1992 and 2002. The number of loans from traditional financial institutions grew at an average annual rate of 16.2 percent over the decade (from approximately 487 000 to 2.2 million loans), while the number of instalment loans from finance companies increased at an average annual rate of 37.6 percent (from approximately 14 300 to 348 900 loans). As the young adult population grew only very marginally over this period (at an average annual rate of 0.4 percent), this represents very significant growth in instalment loans.

An important factor in the accumulation of substantial amounts of debt by young family units is the rapid growth of outstanding student loans between 1984 and 1999. For example, a 2001 survey indicates that 70 percent of post-secondary students finance their education, in part, through debt (Dubé 2003, B10).

According to the SFS, in the group aged 25 and under (either an unattached individual or a family with major income earner age 25 and under) the percentage reporting student loan debt more than doubled from 1984 to 1999, from 15 percent to 34 percent, and tripled for those slightly older (ages 25 to 34), from 8 percent to 24 percent. In addition, the median amount of outstanding student loan debt for both these age groups more than doubled over this period, increasing from $3525 to $9000 for the group aged 25 and under and from $3218 to $8000 for those 25 to 34 years of age (see Figure 8.7).

Other sources suggest that student loan debt has become an increasing concern of Canadian graduates. Information comparing 1990-91 to 1995-96 from the Canada Student Loans administrative data system reveals an upward trend in the 12-month default rate, ²⁴⁸ from 17.6 percent to 21.8 percent (Plager and Chen 1999, Table 1, 33, and Table 4, 34). Furthermore, the proportion of students having difficulties making repayments ²⁴⁹ also rose substantially over this period, increasing from 21.7 percent for the 1990-91 cohort to 30.9 percent for the 1995-96 cohort (Plager and Chen 1999, 21).

Finally, another noteworthy trend during the decade has to do with automotive dealership finance (instalment) loans. While the average dollar value of outstanding car sale finance loans to young consumers increased only marginally between 1992 and 2002, the number of these loans grew more substantially. ²⁵⁰ One explanation for this might be changing practices of the automotive industry. A recent report notes:

Helping younger buyers afford new cars has been achieved through various marketing efforts. Most automakers offer discount programs for recent graduates of Canadian post-secondary institutions. Recent incentive campaigns such as zero percent financing have helped make cars more affordable as well (Environics Research Group/CROP 2001).

In summary, the number of financial obligations held by young consumers increased significantly over the decade. This may spell trouble in the future, given the weak financial position of young Canadians generally and the increasing costs associated with post-secondary education for some.

Baby boomers and pre-retirees

For the following analysis, baby boomers are defined as persons between the ages of 35 and 54, and pre-retirees those aged 55 to 64, in 1999. When only considering net worth, SFS data portray some important differences between these groups. In both 1984 and 1999, pre-retiree family units were the wealthiest group of Canadians. Over this period, their median net worth rose at an average annual rate of 1.2 percent, increasing from $129 100 to $154 100 (see Figure 8.8). The data for baby boomer family units, as a group, indicate a weaker performance. The SFS splits data for this group between two 10-year age groups, and both groups lost ground when comparing 1984 to 1999. This was especially true for the younger group. This latter group of family units (35 to 44 years of age) experienced an average annual decline in their net worth of -1.3 percent over this period, compared to -0.5 percent for those aged 45 to 54.

As for assets, the most noticeable trend for pre-retiree family units was the sharp increase in the value of their RRSPs (see Figure 8.5). Comparing 1984 to 1999, they saw the median value of their RRSPs grow at an average annual rate of 8 percent, more than tripling over this period (from $15 675 to $50 000). This was the fastest growth (and largest absolute change in value) compared to any other age group.

While less pronounced, baby boomer family units also witnessed strong growth in the value of their RRSPs over this period (6.1 percent average annual growth for those 45 to 54 years of age and 4.2 percent for those 35 to 44 years of age). These gains in RRSPs, however, did not offset the corresponding growth in the debts held by these two age groups. For example, the debt-to-asset ratio for those 35 to 44 years of age increased from 20.9 percent in 1984 to 25.6 percent in 1999, and from 11 percent to 16.8 percent for those 45 to 54 years of age over the same period (see Figure 8.6).

Evidence suggests that some consumers approaching retirement may have insufficient savings to maintain their current standard of living after they retire. Statistics Canada estimates that one third of family units with a major income recipient ²⁵¹ between the ages of 45 to 64 may not have saved enough for retirement. ²⁵² "Saved enough," in this context, is defined as not having enough assets ²⁵³ to replace two thirds of their pre-retirement income (or, in some cases, to generate enough income in retirement to put them above the low income cut-off). Disaggregating the data further reveals that those least likely to have saved enough for retirement include unattached individuals (46 percent, compared to 30 percent for economic families), and those who do not own a home (59 percent, compared to 34 percent for those who own a home with a mortgage and 15 percent for those who own a home free of a mortgage) (Statistics Canada 2001b, Table 6.2B, 34).

Public opinion data for non-retired Canadians 45 years of age and older (the older boomer cohort and the pre-retired age group) appear to parallel some of the findings from Statistics Canada. A November 2002 survey ²⁵⁴ revealed that a majority (56 percent) of Canadians approaching retirement have not determined the amount of money they will need to acquire in savings or investments in order to have a comfortable retirement (Ipsos-Reid 2003). Furthermore, using the same poll, the RBC Financial Group reports that two thirds (67 percent) of non-retired Canadians aged 45 or older believed they were significantly affected by the downturn in the stock market during the 2001 to 2002 period (RBC Financial Group 2002). Of this group, about one fifth (22 percent) said they were "much further behind" in their retirement plans (set back at least five years) and 38 percent reported feeling "somewhat further behind" (set back one to five years) (RBC Financial Group 2002).

Seniors

Using net worth as an indicator, the financial situation of elderly families (age 65 and over) greatly improved when comparing 1984 to 1999. By far, elderly families are the wealthiest group of Canadians, ²⁵⁵ with a median net worth of $171 600 in 1999 (see Figure 8.9). This figure increased from $121 300 in 1984, an annual increase of 2.3 percent. Unattached elderly persons also made significant gains in their median net worth over this period, increasing from $41 400 in 1984 to $70 000 in 1999 (an annual growth rate of 3.6 percent).

Seniors, on average, continue to have less debt than other age groups. The SFS demonstrates that, with respect to debts, the most noteworthy statistic is just how little of it elderly people hold. Elderly family units reported median debt of just $6500 in 1999, with a debt-to-asset ratio of only 3 percent (see Figure 8.6).

Nevertheless, Equifax data reveal that both the total outstanding consumer credit balances and credit limits of seniors grew faster than the Canadian average over the past decade. During the period from 1992 to 1997, the average senior's (65+) total credit balance increased at an average annual rate of 16.7 percent, twice the rate for the adult population (8.4 percent) (see Figure 8.10). Furthermore, seniors' average credit limits grew at more than twice the rate of the adult population during this period (18.1 percent compared to 8.9 percent, respectively). While credit balances (and limits) for the general adult population began to increase more rapidly in the recovery years between 1997 and 2002, they did not approach the growth witnessed by seniors. In addition, the period from 1992 to 2002 saw an explosive rise in the number of active credit cards used by seniors, which grew at an average annual rate of 11.5 percent, more than twice the rate (4.8 percent) for the adult Canadian population.

Given their relatively strong income performance and general financial health, it is perhaps not surprising that seniors have been given greater access to credit over the decade. There are, however, worrying trends. While older consumers are the most likely to pay off their credit balance in full each month, ²⁵⁶ they are also the most likely to use their cards to pay for day-to-day necessities. In fact, of those consumers who carry a balance on their credit card, the oldest group was the most likely (19 percent) to state that they did this to pay for things they needed regularly, such as food and rent. This compares with 12 percent for those aged 30 to 44 and 8 percent for those aged 45 to 59. Furthermore, Equifax Canada data for 1992 and 2002 reveal that, while still representing only a small proportion of overall credit card trade lines, the number of "serious delinquent" credit cards held by seniors increased substantially (at an average annual rate of 20.1 percent, nearly triple the rate of 7.7 percent for the adult population as a whole).

Comparing 1992 with 2002, the number of trade lines associated with finance companies ²⁵⁷ also grew much faster for seniors than the general population. The number of finance company products increased at an average annual rate of 42.6 percent for seniors, from about 4700 loans in 1992 to 163 400 in 2002. This compares with an average annual growth rate of 28.8 percent for the adult population as a whole, from approximately 268 500 to 3.4 million loans.

The increasing use of finance company loans by seniors is also striking when comparing these data with instalment loans obtained through traditional financial institutions, such as banks and credit unions. For example, in 1992 there were approximately 49 bank loans to seniors for each finance company loan. By 2002, this ratio decreased to about six to one. For the population as a whole, the ratio decreased from about 25:1 in 1992 to 6:1 in 2002, i.e., the same ratio as for seniors in 2002. The increasing use of finance company loans by seniors (and, to a lesser extent, by the general adult population) is a trend worth keeping an eye on. Finance companies generally charge a higher rate of interest on loans than do traditional financial institutions. In addition, the percentage of finance company loans with a good credit rating is substantially lower than that of loans from financial institutions. For example, in 2002, 97.2 percent of all financial institution instalment loans had a good credit rating, compared to 90.6 percent of finance company instalment loans. An increasing prevalence of high interest rate loans with poor credit ratings could be an indication of potential financial distress for some seniors in the future.

Research opportunities

This chapter showed the much weaker balance sheets of young consumers in the late 1990s, compared to in the mid-1980s. Many factors have contributed to this, including student loan debt, the longer period allocated to studies, and the difficulty that some young Canadians have in securing well-paid employment. These variables may be partially responsible ²⁵⁸ for an increasing number of young adults who remain within – or move back to – the parental home. ²⁵⁹ Further research could investigate whether the relatively weak financial status of many young consumers is a temporary phenomenon or whether this "bad start" will have significant repercussions down the road.

The impact of low incomes and low net worth experienced by a number of lone parents and certain families with young children would also merit further consideration. The stagnation over the past 15 years of net worth for families with children may also raise long-term issues of financial security as these consumers move to the next stage of their family life cycle.

Retirement self-sufficiency may also become a growing issue for baby boomers, who appear to be losing ground compared to previous generations in that age group.

As for seniors, while they are generally better off today than formerly, trends toward the use of expensive forms of credit suggest that some may still be underserved by the retirement income support system and their personal finances, and may be dealing with financial marketplace decisions for which they are ill-prepared. Lending practices towards seniors may also have significantly changed. Furthermore, it is possible that attitudes towards debt are different for today's seniors, compared to previous generations. These trends may be particularly important to follow, as baby boomers move into their retirement years and redefine yet again seniors' attitudes to financial issues.