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.