Why Canada’s household debt problem could get worse

It’s easier to spend today when you know you don’t have to worry about saving for tomorrow

by Tamsin McMahon

photo illustration by sarah mackinnon

Canadians set new records for household debt last year. At 163.4 per cent of after-tax income, consumer debt is the highest since the country started tracking it in 1990.

Yet judging by the experiences of other countries, Canadians could still have a long way to go when it comes to racking up their debts — although not for the reasons you might think.

Among Western economies, the two countries with the highest household debt burdens are Denmark and the Netherlands. At 223 per cent and 310 per cent respectively, their debt-to-income ratios make Canada’s look like chump change.

Both countries experienced a massive run-up in house prices, followed by sharp corrections in the aftermath of the global financial crisis. But while both have seen their house prices fall more than 20 per cent since 2007, household debt has continued to climb in Denmark while falling only slightly in the Netherlands.

A study last year by Norway’s central bank delves into some of the reasons why Danes’ debt levels have continued to far outstrip their Scandinavian neighbours. Rising incomes couldn’t account for it, the bank said, since incomes were roughly the same across the region. Nor could house prices, which have also skyrocketed in Norway and Sweden.

According to the bank, the most plausible explanation lies in Danes’ massive stores of private pension wealth. Denmark has one of the world’s most comprehensive pension systems. Along with a public pension that’s similar to Canada’s CPP and OAS, 93 per cent of Danes are also covered by generous employer-sponsored pension plans. On top of that, nearly a quarter of Danes also pay into private pensions through financial institutions. All told, Danish pension wealth is close to twice GDP and has been rising even faster than household debt. A sizeable share of soon-to-retire Danes have pensions worth as much as eight times their annual incomes.

The study doesn’t delve into why well-funded pensions would encourage consumers to take out bigger mortgages and loans, although several scenarios seem likely: One is that with so much of their earnings going toward pensions that are locked away until they retire, younger Danish workers need to take on more debt to afford the high cost of living. Another would be the psychology of a generous pension system: It’s easier to spend today when you know you don’t have to worry about saving for tomorrow. (An analysis by the Danish central bank suggests it’s the latter.)

With pensions worth 165 per cent of GDP, The Netherlands isn’t far behind Denmark. In a 2011 interview with the Wall Street Journal, Dutch Prime Minister Mark Rutte cited the country’s “huge private savings” as a reason its massive run-up household debt was no big deal. The country’s housing correction has since pushed Dutch consumers to cut back on their spending and household debt has fallen from a high of 250 per cent. But after Standard & Poor’s downgraded the country’s debt from AAA to AA+ last fall, citing sluggish GDP growth, economists blamed it on the fact that too much austerity — not debt — was harming the economy. Meanwhile, S&P pointed to the country’s considerable pension savings as a strength. Bond investors agreed, reacting to the downgrade with a collective shrug.

It may surprise some Canadians that we rank comparatively high in pension savings, both public and private. Canadians hold roughly $1.7 trillion in private pension savings, or just shy of our $1.8-trillion GDP and roughly equal to total household debt. (These figures don’t include the more than $230 billion in Canada and Quebec Pension Plan assets or the estimated $3.7 trillion in non-pension investments that many Canadians will still use to fund their retirements.)

In 2012, consulting firm Mercer ranked Canada’s pension system the sixth-best in the world. (Denmark and the Netherlands were ranked number one and two respectively.) Even stories of Canadian firms being bankrupted by their pension obligations may be exaggerated. Mercer said this year that the average Canadian pension fund is 99.9 per cent funded.

That isn’t to say that record-high Canadian household debt is nothing to worry about — or that Canadian pensions are adequate. But the correlation between a country’s pension wealth and its ability to tolerate high levels of consumer debt is something policymakers might want to consider as they push to expand public pension programs even as they fret about high levels of household debt. More generous public pension benefits, if they ever materialize, would be a good thing for Canadian families. But that may also mean household debts will continue to break new records long into the future.




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Why Canada’s household debt problem could get worse

  1. Great, so we’re on the verge of pursuing public policies that actually encourage less private savings and more private debt. Expect the expanded CPP proponents to ignore this little problem, or, as some quoted in the article do, insist that it isn’t really a problem at all.

    • I have put less money in my RRSP than the employee+employers part of CPP.

      Yet at 57 my month dividends, forget gains is triple CPP rates. I could live to 150 and not run out of money and pay myself triple CPP.

      Better, if I die, my spouse gets 100% of the benefit and my estate when we are both gone gets huge value after taxes which CPP does not offer.

      Reality is, with self discipline, you want you pensions in youre name/account/control. Even my LIRA pays twice as better at 57 than my employers predicted their private plans would do when I am 65.

      Pooled plans are pooled scams be they public or private. And I also decided when to retire as its in my name/account/control.

      Pooled plans are sucker plays. CPP should be considered as a employment tax with a very small and negative ROI.

  2. Hello. Does this mean all these hand wringing reports about our debt to savings ratios don’t even consider our pension plans as “savings?”

    Just what is it that bank economists think we are doing when we negotiate pension plans with our employers and forgo some of our income in order to have money later? Are they confused because we do it collectively rather than individually?

    • Most debt figures are stated as a percentage if income. Savings don’t factor into that ratio. It is true that when we talk about personal savings rates, we don’t count future pension income or pension contributions, but that’s because personal savings rates aren’t just about retirement. They are about the ability to whether economic hardship. And personal savings are almost non-existent now, which is a huge concern.

      • That should read ‘weather’, not whether.

      • But we are being lectured about not saving enough and the people lecturing us aren’t including our pension savings.

        • Because the majority of Candians don’t have a pension plan.

          • Okay but a large minority do (~38% of the workforce). You can’t just pretend that significant savings of more than a third of the work force aren’t relevant to a discussion of debt and savings, particularly since a hardship such as losing one’s employment, could in many cases (not all) be buffered by retrieving the employee contributions to a plan.

            In relation to the original topic, I fail to see how investment in a lucrative pension plan constitutes a problem for the individual or for society. Whether someone takes on debt or not, they are obviously better off with a lucrative pension plan.

  3. The govt asks the impossible of people and is then amazed when they can’t comply. And betrayal at the last minute isn’t going to help things.

  4. It has to get worse. We have less value money and no tax breaks in real or hidden taxes.

    The drop in the CAD value of 9 cents in 4 months means 9.9% inflation on the next load of imports from lettuce to autos, to toilets and electrical stuff for homes.

    Our lives just got devalued, pensions and savings too.

    People with less value money, with less money spend more and get more debt for fewer goods. And fewer goods gets lay offs as fewer people needed to produce less goods and services.

    Even pensions want more money to provide less be they public or private. Its really a cash grab to fund negative value returns for so long. To cover up malfeasances.

    In 2014 Canadians are about to realize what kind of economic mess we are really in.

    Our lives being devalued:

    http://www.xe.com/currencycharts/?from=CAD&to=CNY&view=2Y

    http://www.xe.com/currencycharts/?from=CAD&to=USD&view=2Y

    The above is something politicians, statism, liberal economists, media and BoC don’t want to talk about. Carney knew when to get out.

    • Not really 9% a huge amount of goods USA exports actually comes from countries
      whose currency got devalued. Electronics ,tools , auto parts are down considerably as too is Canadian Oil, cattle wood, Snowmobiles just buy it from the USA.

  5. For ANY pooled plan, public or private to be worth any value, it MUST consistently return at least the real rate of inflation.

    Problem is almost all if not all of them fall far short.

    Making them negative return investments.

    Do a ROI analysis on a 30+ year work career and CPP, you will see lousy and negative returns. And going to be worse the younger you are.

    In your name/account/control, invest in some basic investment knowledge and you can beat any plan out there. You even have the advantage as no 2%+++/year MER. Even get to choose when you are ready to retire and have enough. No waiting to 67 if you do it right.

    • I’m sure that the people of Detroit are just beaming about their decisions to go into debt under the promise of a future lavish pension. Many of them probably borrowed tons to fix up their houses which are now worth nothing. As the old saying goes “A bird in the hand is worth two in the bush”.

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