Wednesday, September 19, 2012
Why are Middle-Income Canadian Families a Paycheque Away from Poverty?
By Marilyn Brennan
There is growing concern that financial stress burdens many Canadians who have a job and a regular paycheque. For instance, Statistics Canada recently reported young families with $500 or less in their bank account who experience financial difficulties in meeting bill or loan payments were significantly more likely to have used payday loans than other households. And a national survey of 3,500 employees conducted by the Canadian Payroll Association last year found that 47 percent of workers are living paycheque to paycheque, saying they would suffer financial difficulty if their paycheque was delayed by a week.
The idea that middle-income families in Canada might be a paycheque away from poverty challenges common assumptions about a comfortable, middle-class lifestyle. Yet there is mounting evidence to suggest that the fear is real as strained household budgets reflect record debt, low savings, and a corresponding demand for short-term credit to help solve cash flow problems. These trends lead some to conclude that consumers themselves are responsible for their adverse financial position.
But, is the rising debt load the fault of consumers with bad financial habits? A Canadian study revealed that personal care, public transportation, out of pocket health care and education were the fastest growing categories of spending for middle-class households from 1999 to 2008. Astoundingly, personal care expenses increased by more than 125 percent! As these categories are considered to be short or long-term necessities, the problem is a case of need, not greed.
Still, some might argue that it is the fault of consumers if they decide to take on more credit. However, research on why consumer demand for credit is increasing tells us that it is largely driven by holes in public and private safety net programs and also by employment and family instability. Stagnating incomes together with high debt-to-income ratios and a decline in savings and earnings stability combine to make Canadian families vulnerable to adverse shocks such as recession, job loss, illness, and divorce or emergency expenditures forcing them to take on debt with usurious interest rates.
One emerging view suggests that policymakers cannot influence cultural tendencies without also addressing structural causes. Deregulation of the credit industry and gradual erosion of the social safety net are key structural forces that have lead to a culture that fosters and accepts overindebtedness. Since structure sets the conditions for culture, policy-makers should first aim to address structural factors underlying the supply and demand for credit.
In discussing the escalating demand for emergency credit these societal-level factors account for the upsurge of families of all types seeking relief from temporary or chronic cash-flow problems. Although more empathy is given to low-income or lone parent families struggling to make ends meet, there is less patience (and even less research) for dual-earner, middle-income families who find themselves in the same situation. What the discussion here suggests is that the underlying problem has been building for decades, and the financial strain such middle-class families are experiencing may not be entirely of their own making.