Personal savings rate in

The savings rate is a ratio of personal savings to disposable income, minus tax and non tax payments to the government. This measure excludes the sale of existing assets or any change in their market value. As part of this, developments in equity and real estate markets, neither are reflected as changed in personal income, are not included in the savings rate.

In other words, passive saving through asset appreciation, currently the primary means of saving among Canadians right now, is not reflected.

“Before we dismiss the savings rate altogether,” writes Tal, “One has to remember that the savings rate was similarly flawed 10 and 20 years ago when (the savings rate) stood at 10% and 20% respectively. The fact that the savings rate has been in free fall over the past two decades must have some significance.”

The decline in savings is evident across all age groups, even among those between 45 and 65 who have been good savers traditionally. “The fact that all age groups have seen a drop in their savings rate suggests that something more fundamental has impacted Canadians uniformly,” he says.

Factors contributing to the decline include lower inflation expectations, deregulation in financial markets and increased access to credit, slower personal income growth, persistent low interest rates, the recent ascent in housing market prices, and the housing “wealth effect” where people are confident and inclined to spend more because the value of their property has appreciated. The housing wealth effect alone is estimated to have generated no less than $20 billion in extra consumer spending since 2002.

“If the existing investment pie is growing nicely, one is less motivated to compromise his or her current standard of living in order to save,” says Tal. As a result, fewer Canadians are active savers today.

“While we do not foresee a major correction, the real estate boom is already in its eight inning, and a leveling off in housing prices will strip households of one of their most important means of savings,” he warns.

Although household liquid assets — chequing and demand deposits, money market mutual funds and cash brokerage accounts, have risen measurably over the past five years to record high levels, which could in turn compensate for the lack of liquidity in real estate holdings and act as buffer against the growing indebtedness of Canadians, Tal also warns that the increase in household liquidity has not been distributed uniformly. In fact since 2001, more than 80% of that increase was made by Canadians over the age of 50.

“At least 40% of Canadian households have no financial savings outside of their personal savings and checking accounts. Even among older Canadians the number, approximately 30%, is surprisingly high,” he says. “Since the excess liquidity is concentrated among a relatively narrow group with little outstanding debt, increased household liquidity, in fact, serves neither as a real buffer against growing debt, nor as a counter to illiquid savings via the housing market.”

Finally, he cautions that the current low interest rate environment that discourages saving, since borrowing is less expensive and financial assets generate lower returns, is likely here to stay, even after the Bank of Canada’s current tightening cycle is over.

“Globalization and the Wal-Martization of the North American economy suggest that the low inflation, low interest rate environment is here to stay,” he says. “The practical implication of this environment is that young Canadians must start saving very early in their life compared to previous generations. Our findings, as presented in this article, suggest that this is not happening. How much savings is good enough is a matter for debate, but most Canadian households would likely benefit from building a little nest egg.”

Filed by Kate McCaffery, Advisor.ca, kate.mccaffery@advisor.rogers.com

(09/13/05)