In a column in MoneySense magazine titled Squeezed, Rob Gerlsbeck suggests that the blame for financial woes of the middle class — a heavy debt load, low savings rate etc. — should fall squarely on factors that are beyond the control of individual families. He disputes the widespread belief that Canadians have a spending problem and says that the middle class is feeling squeezed due to:

  • No Income Growth.

    If you strip away the impact of rising prices, the years between 1980 and 2005 turn out to be a dead zone for middle-class prosperity. During this period, in terms of inflation-adjusted dollars, the median annual salary for a full-time worker rose all of $53 — that’s right, $53 a year — to $41,401, according to Statistics Canada.

  • Higher Taxes.

    A generation ago, the average Canadian family handed over about 36% of its income to government in the form of income taxes, property taxes, sales taxes and so on. Today that figure is a staggering 45%, according to the Fraser Institute.

  • Higher Shelter and Education Costs.

    Looming larger than all those costs is the monster in the room — mortgage costs. The average price of a home in Canada’s major markets has soared since 2000, shooting from just over $160,000 to $315,000. Last year the ability of the average Canadian to own a home was at its lowest point since the last housing bubble in 1990.

One suggestion for easing the squeeze on the middle class comes from Dalhousie University economics professor Mathieu Dufour, who suggests putting the productivity gains of the past 25 years (estimated at an average of $10,000) directly in the pockets of workers by cutting income taxes and raising corporate taxes. Larry MacDonald pointed out that dividing the world into corporations and workers is far too simplistic, especially when protection from the free market may be responsible for some of the higher costs.

Still, I wonder if some financial engineering that puts money directly in the pockets of families would help very much. It would provide an initial boost to savings but, just as with salary increases, families will simply adapt to the new reality and boost their spending. Also, how true is it that family budgets are so lean that there is no fat to trim? According to the Statistics Canada report on Spending Patterns in Canada, families in the middle quintile of income levels, spend an average of $3,400 on recreation, $1,600 on tobacco and alcohol beverages and $250 on games of chance, hardly what you would call essential spending.

While it is true that home prices are much higher when compared to the median salary today than it was in the 1980s, mortgage rates are also much lower. Moreover, part of the reason for higher shelter costs could be traced to square foot inflation of the average home. Even today, families can manage their shelter costs by buying a smaller home or renting a little longer. It is a little facile to simply blame factors we have little control over for our financial woes.

This article has 33 comments

  1. I agree that it’s too easy to blame factors beyond our control, but I do think there are certain income points where a squeeze can be felt: at the low end of a higher income tax bracket, for example, or when you earn a bit too much to be eligible for home ownership incentives and assistance programs. I experienced this when I lived in the US: I earned just a little too much to be eligible for low-income homebuyer incentive programs, but I didn’t earn enough to be able to save more than a few hundred dollars a year for a downpayment. Friends of mine who earned less than me were able to buy a home with help from the federal and state programs, but home ownership was way out of my reach for many years until I switched careers.

  2. …”spend an average of $3,400 on recreation, $1,600 on tobacco and alcohol beverages and $250 on games of chance, hardly what you would call essential spending”…

    I have a problem with the philosophical implications of the quoted statement. I (and I suspect most North Americans) prefer to have a philosophy where I “work to live”, not to “live to work”. To me, if I do nothing but work, eat, sleep and pay for the essential bills… Well, I might as well not be living at all, really. I have to go out and enjoy my life, or else it’s simply not worth living. Now in terms of what leisure activities that I spend my money on, it’s not tobacco and maybe not quite as much gambling or alcohol, but the total bottom line amount of the expenditures ($5250) isn’t what I would consider to be unreasonable. After all, a 10-day trip to the Caribbean may eat up almost half of that amount when all of the expenditures are tallied up…

  3. Leading Edge Boomer

    , $1,600 on tobacco and alcohol beverages and $250 on games of chance, hardly what you would call essential spending”…

    It is if you are an addict…and there are many addicts in our midst.

    I never do see any stats on how much people spend on illegal drugs–cocaine and particularly marijuana. If one thinks that there are not many many middle class homes who use the stuff, then we have our heads in the sand.

  4. Two big areas of overspending are eating out and cars. I liked how Gerlsbeck started with a single couple who didn’t spend much on these things leaving the reader to extrapolate that these aren’t problem areas in general.

    If we put more money into everyone’s hands, won’t prices just rise to compensate? We count wealth with money, but more directly, wealth is the sum total of all the goods and services we have or produce. To benefit everyone, we need to find ways to produce more or better goods and services with less effort.

    I was surprised that the Statistics Canada report on spending patterns doesn’t seem to have a category for interest payments. Mortgage payments can be lumped in with housing, and car payments can be lumped in with transportation, but what about interest payments on lines of credit and credit cards that can’t easily be added to some other category?

    The comment from Phil S is amusing. This is the familiar rationale people use to spend themselves into debt and mess up their futures. It works fine if you have a secure job or don’t mind the occasional personal bankruptcy.

  5. It’s about to get a whole lot worse, taxes will be increasing in the form of HST, cap gain taxes and even GST in the next couple of years. As far as spending a little on yourself, I agree with Phil..nothing wrong with it..although, I do have friends who work to pay their bills and that is all they can afford..since they opted to buy a house they cant afford..in my opinion that’s not living, I call it financial slavery.

  6. Canadians do have a spending problem.
    And it goes beyond “eating out and cars” and “tobacco and alcohol”.
    My pet-peeve is the housing bubble, rather, housing-size bubble. Average square footage of a Canadian dwelling per capita has been swelling throughout the last century and into this one. And the housing costs would be highly dependent on that.

  7. There was an excellent TVO show last month called “The Mighty Middle” which discussed the Middle Class and the myths and facts that surround it.

    Though there were many excellent discussions, two that remain in my little brain are:
    (1) One of the panel members recalls that his dad, who was a middle manager with the government was able to afford two cars, 6 kids, a nice house, and a stay-at-home wife.
    (2) A university prof on the panel says that over the years he has seen his female students go from having to fight social norms to get into the workforce, to then having the choice to enter the workforce or stay at home, to today when they are EXPECTED to enter the workforce to afford the middle class lifestyle.

    The middle class of today is a very different animal than the middle class of the ’50s and ’60s

  8. My great uncle, a child of the 30’s, said his generation “stepped on the first step of the golden escalator”, financially, the world was their oyster, and they effectively could do not wrong. This I believe matches the comments in Dave in Kantata’s post.

    Yes, the middle class has changed immensely since the 50’s & 60’s.

    DAvid

  9. Frank in Markham

    Yes, some Cdns. have a spending problem.
    Yes,some people are house poor and should have purchased a smaller house.

    Illicit drug use. a cause for middle class economic issues-r u kidding?

    Wages have not kept up with housing inflation – credit is to easily accessible and people are constantly bombarded with marketing to make purchases.

    Throw cheap money at people and create lax mortage requirements and people will be lining up – and they have.
    Of course, one could argue that only a fool would do this but most people are financially illiterate. We all have to take responsibility for our action but simply saying to people to “do what I do” or that everything falls on the individual is to simplistic – external factors are always present and always affect things.

    • Canadian Capitalist

      @brad: I would definitely not claim that it is easy for everyone to save some money. The life circumstances of some may mean that it is genuinely difficult to save.

      @Phil: I definitely didn’t mean to imply that saving money should be the only goal in life. But there should be a balance. I have no quarrel with trips to the Caribbean; I’m simply pointing out that it is hard to buy the claim that there are no avenues for saving when a family takes a trip to the Caribbean every year. Maybe they can build some emergency savings by taking a trip every other year.

      @ExistingAlternatives: Creeping square footage is especially a problem when the size of an average family is decreasing. i.e. our households are getting smaller but our homes are getting larger.

      @LEB: Fair enough. Not to mention there are spending addicts in our midst too.

      @Michael: You can find data on debt patterns in the report on “Wealth of Canadians”:

      http://www.statcan.gc.ca/pub/13f0026m/13f0026m2006001-eng.pdf

      It is interesting stuff. Lines of credit are still small but they are increasing at a rapid clip. It does seem that LOC and credit cards are a significant form of debt for some families — the average is much higher than the median, suggesting a very skewed distribution. At a 4% interest rate, even the median family pays at least $500 in interest on LOC and credit cards.

      @boko: I have no problems with spending as long as there is a balance. Personally, if I were a paycheck or two from financial disaster, I wouldn’t want to go on a spending spree.

      @Dave: Does TVO rebroadcast their shows? I’d be interested in catching that discussion.

  10. “A generation ago, the average Canadian family handed over about 36% of its income to government in the form of income taxes, property taxes, sales taxes and so on. Today that figure is a staggering 45%, according to the Fraser Institute.”

    I’m not sure how they came up with 45%, if the average Canadian worker is making $41k. The average income tax rate on personal income in Quebec (where income tax is highest) is 40% for someone making $200,000/year. For someone making $40,000/year it is 19%. Even the person making $200,000 paid 15% in sales taxes on their after-tax income of $120,000, that’s $18,000. So they’ve paid $80,000+$18,000, or almost $100,000 in taxes, so 50% of their gross income. But that’s for someone making $200,000. I’m not sure how the Fraser Institute comes up with 45% in taxes for the average Canadian.

  11. The Fraser Institute’s methodology leaves something to be desired. The Institute is a bit more respectable that they used to be in terms of offering rational commentary, but their tax analysis is pretty hysterical (as in crazy).

    Their key problem is that they only look at taxes as costs, but don’t pay any regard to services people receive in return. People can object and say that a significant portion of taxes are lost in waste (as many readers on this blog have done), but you can’t deny that you’d otherwise be paying out of pocket for services that were privatized. Thus you need to look at the costs AND benefits of taxation.

  12. The modern western democratic state has primarily catered to the middle class, the largest voting block, and continued to expand since its creation (pension plans, employment insurance, university funding, subsidized day care, deductibility of interest payments on mortgages in the U.S., health care etc), we paid for it by going into debt which we financed by increased taxes (crowding out capital to private enterprise which stifled wages and then those jobs were promptly outsourced) and printing more money (creating inflation in housing, food, gas and which is why everything so much more now) and creating unintented effects (housing bubbles, urban sprawl).

    We also let our government industrial policy shift from production and exporting to consumption and, well, consumption fueled by monetary policy which encouraged more consumption through cheap capital (does anyone remember people complaining in the early 90’s that the Bank of Canada had the prime rate too high and how terrible this was when it was that high to fight inflation and as soon as prime was lowered, we spent like drunken sailors and got into debt). It was great policy to support, we got to buy stuff, throw it away and buy more stuff.

    Now that the consequences of our collective decision making is staring us in the face and our demographics simply cannot support the status quo, it seems disingeneous to do some navel gazing, scratch our heads and blame someone else for our state of being.

    A little more responsibility and a little less bread and circus may do us some good.

  13. If you want to learn about squeeze talk to any graduate student who’s not in a law or MBA program and who didn’t come from an upper-class family who were able to buy them a car and fund their education etc.. Being asked to do a heck of a lot without the pay to match it. Can’t blame any of us. Perhaps higher-higher education really isn’t what any of us should be spending any money on, the Federal Gov’t included. That’s the message I sometimes hear.

  14. What exactly are the definitions of poor, middle class, and rich? I’m not even sure where my family falls, I’m assuming I’m in the middle class somewhere since I own a house and make a descent wage.

    If you split Canadian families by thirds and just label each as the Lower, Middle and Upper class what are the cut off lines? If you split them in to quintiles and use Poor, Lower Middle, Middle, Upper Middle, and Rich, what are the cut off lines for income?

  15. Canadian Capitalist

    @Dave: IIRC, the Fraser Institute simply totals up the total government take through all forms of taxes, including such things as resource royalties and divides it by the number of families. They don’t even adjust it for Government transfers — things like GST credit, UCCB, CCTB, CSG, OAS, GIS etc. If I pay $10,000 in taxes and get $3,600 in UCCB, my federal tax bill is $6,400. I can’t count one and ignore the other.

    Nevertheless, the basic methodology employed by the Fraser Institute would fail Statistics 101. If I’m not mistaken, they do not calculate the tax bill on a median family — just the tax bill of an average family. The results are likely to be very misleading given the progressive nature of our tax system — those who earn more, pay more in taxes.

  16. I wonder what a family of 4 earning the median income, by province, pays in taxes counting all transfers. I would be willing to bet it’s far less than people think.

  17. @CC – I agree 100%, I’m not advocating spending money that I dont have, but to keep a balance in life…just from my circle of friends I see how people have become slaves to the financial institutions by over spending on housing and cars. Some of these people litereally cannot afford a 6 pack of beer..IMO that is a sad way of living, brought on by themselves of course.

    I was talking to my dad last night and he was telling me that he was at home depot several hours earlier, he was standing behind a guy who was trying to pay for a $6 item and tried 3 different cards..all of them were maxed out and declined..he had to leave the itme there.

    Great blog btw, interesting discussions.

  18. I don’t think class is determined by income. I think it is determined by consumption. Of course, if you have a low income, maintaining an middle class lifestyle of conspicuous consumption can be rather difficult.

    There are other factors that this whole discussion ignores, like the fact that many goods today are so much better than they were in past (pardon the generalisation). Our parents, who may have been middle class when they were our age, wouldn’t have dreamed of having 40+ inch flat screen TVs, iPods, or whizzy computers. Cars are generally more fuel efficient (size factor aside). This may be contentious, but food is supposedly better now (fresher, quicker to get to market, and possibly cheaper in real terms).

    Socio-economic class is, in some ways, a mindset that depends on your bases of comparison. Sure, if you compare your consumption to your contemporaries and neighbours, the glass is always half empty, and not half full. If you compare your life to your parents at the same age, you realize that you’re pretty lucky to live in the present age.

  19. The Fraser Institute is so biased that I reflexively ignore anything they have to say. They exist to push an agenda, not to do research. Even when you can spot the big lie in their findings, it’s coated in so many little manipulations and exclusions that you can’t even reliably infer a more accurate result. They are uttlerly worthless in any discussion.

  20. I’m sure the 3 factors listed play a role, but I’d like to see comparisons of $ spent on non-essentials.

    Seems to me that consumption, or ‘frivolous’ spending should play a major role in the ‘squeeze’. As Robillard points out, most of our parents spent much less than we did on non-essentials.

  21. Pingback: Weekly Review-Giveaway Continues! | Financial Highway

  22. Pingback: Weekend Reading – August 21, 2009 | Million Dollar Journey

  23. Pingback: The RR Top 5 (or 7?) | Realizing Retirement

  24. Just in case anyone was wondering, I ran through a scenario in NB. I pulled the median income for couple families with two earners. I split that income by 58% and 42% by earner (since I read recently that this is the average split. I found 2003 as the median income so I added 2% a year to get to $69699, which is 40425/29273 when split.

    They paid 5772 in federal income tax, 4878 in provincial, and receive 1521 in CCTB. So they keep 60569, which puts income tax at 13.1%. If you decide to include CPP and EI they keep 56260, or taxed at 19.28% of their income. So how much else are they being charged in property tax, sales tax, licenses and fees . . . who knows. I would think it’s less than 50% of their income with 20% being your starting point.

  25. Traciatim: You put the Fraser Institute to shame. Has anyone seen the Fraser Institute’s calculations? The reporter didn’t get any reference to any publication or aritcle.

  26. Pingback: Canadian Personal Finance Blog » Blog Archive » Indications are Good and some Random Thoughts

  27. Another contributing factor is the increased interest rates on bank loans and credit cards. With the borrow now, pay later mentality gaining in strength due to the recession, families are going to be strapped for cash for a while to come.

  28. Lender, you can’t blame the banks for that. It’s called over-spending.

  29. Probably too early to tell, but Lender, are you sure this trend is increasing during the recession. Seems to me that many people are actually saving much more, and the almighty consumer has slowed.

    Do we know that people even have access to more credit? or has the credit crisis as it relates to personal/retail individuals ended completely?

  30. Well it’s a bit of a catch 22. If they cannot spread the wealth of our grown economy, then we have to cut back…which will hurt the corps.

    My next move is to cut cable. At the middle tier, it costs almost $780 a year to have cable TV. When I factored in how much I actually watch, it comes to just under $3.00 an hour. About what I’d pay at a movie at a discount branch.

    Analysis complete, cable will be canceled.

    I can buy all 7 shows I watch from Itunes (seasons pass) for about $154 dollars in total.

    Cable sucks because it’s like those old record/cd clubs. You really only want 10 channels, but have to pay for 200 other ones you don’t watch. It’s terrible, and in one month….it’s history

    The best way is to cut extra things like high cable bundles, extra cell phones, drive less, and do what I do (if you are in a condo). Wear a sweater and cut the breaker to our furnace!

    I turn the heat on for 10 minutes in the a.m. and then off until nightfall. Then maybe another 10 minutes just before bed.

    See, even NOT giving us our share of the wealth in the growth of the economy will catch up with the “uber leaders” because we are now forced to cut back on consumption drastically….

  31. Also, to save money…yes you have to curb desire, but you also have to get out of the “oh no I’ll look cheap” worries.

    Myself, and I know many others have felt this, and it’s ingrained in society. We mock people who go to discount stores, or cheap restaurants (that often turn out to be just as good).

    We are marketed from about 3yrs old until we die, and somewhere in the middle we’re expected to be responsible as well. Yes that is partly true, but we are products of our environment. Humans are not cookie cutter replicants by any means, but if kick a dog a lot, he’ll bite anyone, and if you baby him, he’ll be a suck.

    Our society and especially advertising casts shame on those who don’t make X amount or have the bells and whistles, and that is wrong. There was a time where most people at least “sort of” respected each other, regardless of the wage or position.

    Is it responsibility, yes, but we as a society have let to much advertising mold our society, and we have all been affected to “influenza”.

    The people at the top are just as greedy as the ones at the bottom. And I know plenty of people at the top who are “all flash” “no cash” just like at the bottom! The smart ones (in both lifestyles) ride the “middle” and enjoy their treats, but also nest and don’t buy when it’s foolish.

    Trust me, there are people with several homes and cars, yet have trouble putting gas in the car.