Facts, Fiction and Actions: the Canadian debate on income inequality and pension inadequacy

If you watch the nightly news or flip through a newspaper in Canada today, you’ll likely see numerous stories that say the rich are getting richer, poverty levels are skyrocketing, and that as Canadians reach the end of their working lives, pensions won’t be able to support them.

But the reality isn’t nearly as dreary, according to Sprott professors Vijay Jog and Ian Lee, who dispelled the myths surrounding income inequality and pension inadequacy at the final Sprott Topics Speaker Series event of the semester last week.

Drawing data from Statistics Canada and the Organization for Economic Co-operation and Development (OECD), Jog and Lee showed that average household incomes are rising, poverty levels are at an all-time low, and that pensions and savings vehicles can take care of Canadians in retirement.

Income Inequality

As more and more Canadians say they feel they are less well-off than they were 10 years ago, Lee said he believes this is because of a few factors: stagnating wage growth, low inflation, and our own high expectations.

“Inflation is growing slowly, wages are growing slowly, but our expectations are growing more rapidly,” Lee said. “So that’s left a gap between what we have and what we think we ought to have.”

Lee used the definition of income popularized by Cornell University economist Richard Burkhauser that says income is post-tax, post-transfer, and size-adjusted household income.

Lee showed that median household income in Canada has risen from roughly $43,000 a year in 1995 to just above $50,000 in 2010, according to data from Statistics Canada.

As the median household income has risen, poverty levels in Canada have steadily fallen.

“We’re not denying that there’s poverty, but it’s much less than what people think it is,” Lee said.

Lee defined poverty as those living below the low-income cut-off (LICO) line, in which a family will likely devote much more of its income to food, shelter and clothing than the average Canadian family.

Since 1975, the overall number of Canadians living below the LICO line has fallen from a high of 15 per cent to just below nine per cent in 2010, according to Stats Can data.

“There are challenges, but they are not of a high magnitude,” said Jog. “There are certain segments of the population that must be dealt with”

The two segments of Canada’s population at the highest risk for poverty are single females with children and widowed female elders.

Lee concluded that there have been no large changes on income inequality since the 1970’s, excluding a dip during the recession of the 1990’s, but incomes have since recovered.

Pension Inadequacy

To say that Canadians aren’t saving enough for retirement is far too broad of a statement, according to Jog.

To effectively treat the problem, one must look at which segments of Canadian society will likely need assistance.

The bottom 20 per cent of income earners have access to programs like the Guaranteed Income Supplement, Old Age Security and the Canada Pension Plan, while the top 40 per cent of income earners in Canada likely have enough wealth (in savings and assets like real estate) to last through their retirement, leaving a segment of about 40 per cent of Canadians who must decide what their best options for saving are.

For middle-income younger workers and those in the private sector, the responsibility for saving for retirement has shifted from employer to employee, and of the savings vehicles that already exist, many Canadians aren’t taking advantage of them as much as they could be.

Jog cited a Statistics Canada study that estimates there will be as much as 1 trillion dollars in unused RRSP contribution room by 2018, a figure that already stands at 500 billion dollars today.

Many Canadians between 35 and 50 are making smart choices when it comes to saving and managing debt, according to Jog. He said that instead of viewing the situation as a savings problem, perhaps looking for ways to increase Canadians’ incomes is a way to a solution.

Policy Recommendations

Lee and Jog proposed a multi-pronged, multi-party approach to aiding groups living in poverty and to help future generations of Canadians earn enough to save adequately for retirement.

They cited the need to promote employable higher education, particularly in the STEM programs (science, technology, engineering, mathematics), as well as beginning financial literacy training at earlier ages.

From the business community, they would like to see more internships, training and mentor opportunities.

On the government policy side, they recommended raising the retirement age, permit contributions to RRSP’s until 75, and promote economic policy that creates broad job growth. Other policy considerations include providing benefits to encourage mobility from urban centres to smaller communities where the cost of living is lower.

To assist with elderly people living alone, they recommended raising the Guaranteed Income Supplement for elderly people living alone and raising the Canada Pension Plan survivor benefit from 60 per cent of the deceased spouse’s entitlement to 100 per cent.