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Unpacking affordibility

29 November 2019
Canadians roundly criticized Prime Minister Kim Campbell in 1993 for her ill-advised declaration that elections were no time to talk about policy. Reflecting on this year’s federal election though, you can’t help but feel there was a grain of truth in her comment. 
In elections, parties and candidates typically collapse complex policy issues into much simpler slogans that are easier to communicate and that they believe will resonate more with voters.  When the electoral dust settles, however, there is always a risk that some or all parties will continue to over-simplify these issues and, consequently, miss the boat when it comes to building consensus on, and advancing, effective solutions.
The recent federal election is an excellent case in point.  In a striking show of unanimity, politicians of all stripes declared ‘affordability’ to be the central issue confronting Canadians today – second even to climate change.  To address the problem, all parties offered a wide array of income benefits and tax credits tailored to their demographic(s) of choice.
At one level, of course, they were correct. The cost of living -- in particular large-ticket items like housing in major urban regions and the costs of post-secondary education – has risen far faster than most Canadians’ incomes over the past decade. This has reduced the income available for other needs and many families are feeling the pinch when it comes time to pay their bills each month. At the same time, household debt has continued to rise to historic levels, while household saving rates have continued to hover close to rock bottom. Delinquency and bankruptcy rates have also begun to spike upward, along with the percentage of income that Canadians must spend to service their debts.
Our rising cost of living could be responsible for all of these troubling indicators. But is it? If we were to wave our magic wand tomorrow and make housing affordable again in big cities and education debt a thing of the past for all but the most lucrative professional programs, would Canadian households, on the whole, be financially healthy again? 
The truth is, probably not. The gap between our incomes and rising costs is just one of a broader mix of forces that are making it harder for families to make ends meet, avoid unproductive debt, and save for emergencies and their future security.  These forces include, but are not limited to:
1. Growing reliance on precarious work – More Canadians across income levels are reliant on contract, part-time and casual work for their income.  While many with higher incomes may be choosing to pursue well-paid contract and consulting work, those with low and modest-income levels are more often unwilling participants in the growing “gig” economy.  Precarious work is typically accompanied by unpredictability in the amount and timing of income flows. This makes it hard for families to budget, to save, and to build and follow a financial plan. It also makes it more likely that they will have to borrow to make ends meet in months when their income dips and expenses spike. According to TD Bank research, income volatility associated with much lower financial health affects 37 per cent of adult Canadians. This aligns with the Canadian Payroll Association’s latest survey, which showed that 41 per cent of Canadians live paycheque-to-paycheque, unable to save.  
2. Declining access to workplace benefits – With more and more Canadians employed in the contingent workforce, fewer working people have access to quality workplace benefits like paid vacation and sick leave, life and health insurance, and a pension or retirement savings plan. Fewer workers are also able to work enough hours to qualify for critical Employment Insurance (EI) benefits when they are laid off, sick or have a child – even though they pay EI premiums.  Without workplace benefits, workers are left to shoulder more risks and costs themselves, creating more pressure on families and their finances and leaving many woefully unprepared for retirement.  According to research by retirement experts Common Wealth, 60 per cent of Canadians with incomes below $50,000 do not contribute to a tax-advantaged savings account or a workplace pension plan and the median retirement savings of Canadians age 55-64 without pensions is a meagre $3,000. In the absence of more affordable institutional retirement plans, savers must rely on retail investment products with high fees that erode their savings. Modest income savers in this situation end up with just 75 per cent, on average, of their savings when they retire.
3. Increasing wealth inequality – While much has been made of rising income inequality in Canada, few people talk about the much larger problem of increasing wealth inequality. While income inequality has risen slightly in recent years, Canada’s tax and transfer system has offset much of the growing disparity in market income. We cannot say the same when it comes to gains in wealth.   According to research conducted by Carleton University’s Dr. Jennifer Robson, between 1999 and 2016, the top 20 per cent of Canadians saw their net worth (total assets, less all debts) rise by more than $28 for each $1 gained by the bottom 40 per cent of Canadians after inflation. Despite this, $45 billion annually in federal tax expenditures to incentivize RRSP and pension plan contributions overwhelmingly benefits higher income Canadians, bypassing those who need them most (see p.3 of Common Wealth report, The Canada Saver’s Credit).
4. Growing complexity of the financial marketplace and our tax system – Today’s financial marketplace, with its ever expanding array of products, services, providers and advisors can be overwhelming to the average Canadian trying to make sound financial choices for themselves and their family. Those who rely on income from public benefits also have to grapple with an increasingly complex tax system and tax filing process. People with money to invest and/or to pay for professional advice can easily get the help they need, but many Canadians don’t have that option and have no place to turn for quality financial advice when they get into financial trouble, want to plan for their financial future, or need help with their tax situation. As a result, low and modest income Canadians are targeted disproportionately by high-cost, high-risk alternative financial providers and fraudsters and end up paying far more for financial services. At the same time, over $1 billion in federal income benefits alone goes unclaimed each year by vulnerable Canadians who do not know about, or cannot access, income they are entitled to on their own.
So is affordability the main financial problem Canadians are facing? 
Perhaps, but it is certainly not the only factor making it harder for Canadians to build financial stability and security today and for their future. So, when we are thinking about how we can make life more affordable for Canadians, let’s also think about other ways we can help families to get off the financial knife-edge and onto the broader, smoother path to financial stability and prosperity. 
Here are five suggestions we encourage policy makers in all orders of government to consider:
  1. Help households to build emergency savings to smooth income/expense gaps and build their financial stability and resilience. BlackRock’s Emergency Savings Initiative in the United States is a great example we can build on in Canada.
  2. Support the development of accessible, affordable and portable retirement savings and benefit plans for workers that travel with them as they change jobs and careers. The proposed Common Good Retirement Plan for Canada’s nonprofit sector workers would be a great start.
  3. Rebalance public savings incentives to ensure equitable treatment of low and modest income households when it comes to incentivizing savings and building wealth. The proposed Canada’s Saver’s Credit for low and modest income Canadians could be financed by redirecting a mere 1 per cent of the $45B we currently spend to incentivize retirement saving by higher income Canadians.
  4. Invest in quality community financial help services for those who cannot afford professional advice. See the ABLE Financial Empowerment Network’s recommendations for scaling free high quality financial help.
  5. Build proven financial help interventions into public services where evidence shows this will improve service outcomes and cost-effectiveness and help Canadians build their financial help. See our Prosperity Gateways brief for evidence on positive impacts for services and improved financial outcomes for clients
Just as no single factor is responsible for the financial challenges Canadians are experiencing, no single solution will get families back on track. We need to understand the true dimensions of their challenges and pursue multi-pronged strategies to fix them.   
The election’s over, so let’s get to work.