The Decline of Saving

Most of us are aware that Canadian households have reached record levels of indebtedness over the last few years.  Household debt in Canada is now over $2 trillion and household debt to disposable income ratios in Canada are now at 170 percent.  Less discussed is what has happened to savings.  While low interest rates have been a factor in Canadians being able to carry substantially larger debt burdens, they have also been a factor in reducing the interest income from saving and as a result have led to a drop in the number of savers.

The Bank of Canada rate dropped from 6 percent in 2000 to 0.75 percent in 2015.  Over the same period, the total number of savers in Canada as reported by Statistics Canada from data compiled from Income Tax returns (Table 1110036 - Canadian savers, by savers characteristics, annually) dropped from 4,808,930 to 3,356,840 – a decline of 30 percent.  Over the same period, the median annual interest income of Canadians fell from $400 to $230, a drop of 43 percent.

What is interesting is when the same numbers are examined for the northern Ontario cities of Thunder Bay and Sudbury, the drop in the total number of savers is even more pronounced.  Figure 1 presents the percent change in the total number of savers in Sudbury and Thunder Bay as well as Canada and Ontario over the period 2000 to 2015.  The drop in Thunder Bay is 43 percent and Sudbury is 41 percent compared to 30 percent for Canada and 35 percent for Ontario. 

 

It is not just the fall in the return to saving via lower interest rates that has had an effect but also the stress of economic shocks.  Figure 2 plots the total number of savers in Sudbury and Thunder Bay and like Canada and Ontario, the drop is actually most pronounced after 2008 – that is with the onset of the Great Recession.  Of course interest rates dropped dramatically after 2008 in an effort to provide monetary stimulus to the economy but there was also an economic slowdown and a rise in unemployment that would have affected the resources available for saving.    

 

What is also interesting is that the average age of savers is quite a bit higher in Thunder Bay and Sudbury than Canada or Ontario as a whole as Figure 3 demonstrates.  While this reflects the greying of the population in general, it also means that there are likely not as many young new savers taking up the practice as in the past. 

 

Savings are important because they do provide an economic cushion for people during hard times or dealing with unforeseen circumstances– the proverbial saving for a rainy day.  Having savings makes for financial independence and gives you greater control over your life, They also provide resources for retirement and help supplement public pension income such as OAS or CPP.  When savings are aggregated, they also provide a pool of domestic capital for business investment to borrow from and finance capital investment. 

The drop in the number of savers is not only a reflection of current economic circumstances but it does not bode well for the future.  While household net worth in Canada has continued to rise, it reflects more the rise in housing prices than additions to wealth via saving.  After all, the practice of saving is a habit and over the last decade people have been saving less and acquiring more debt.  The average age of savers has gone up suggesting that potentially fewer young people are acquiring the habit.  Having the ethos of a society shift so much to the point where ever greater debt is accumulated without the counter balance of prudence is not a recipe for happy times down the road.