Monday, July 30, 2012

Canada's Insolvent Seniors

In recent postings, I've been hitting on the world's pension problems fairly heavily, probably because, like all Baby Boomers, I'm getting close to "my time".  I found this study entitled "The Current State of Canadian Family Finances 2011 - 2012" on the website of the Vanier Institute of the Family, a Canadian institution whose mission it is "to create awareness of, and provide leadership on, the importance and strengths of families in Canada and the challenges they face in their structural, demographic, economic, cultural and social diversity.".

In this report, the 13th annual of its type, the author, Roger Sauve, studies the impact of Baby Boomers on Canada, the Canadian economy and how they/we are impacting the ability of the next generation to work.  As well, the study examines how household debt has risen and how family net worth has declined.  For this posting, I'm going to focus on the impact of the Boomers and the issues that they are facing.

As we have seen with recent data releases from Statistics Canada, the job picture in Canada is not really improving, particularly for young Canadians between the ages of 15 to 24.  During the post-Great Recession downturn, this age group saw 229,500 jobs disappear, more than half of all jobs lost during the downturn.  Since the worst of the recession in July 2009 (the official "end"), youth unemployment has improved very slightly with the addition of only 1300 net jobs.  Let's compare these statistics to those for Canadians 55 years of age and older.  During the period of time when younger Canadians saw 229,500 jobs disappear, employment among those 55 and older rose by 83,100!  As well, while young Canadians have only seen a net addition of 1300 jobs since the end of the Great Recession, older Canadians saw employment rise by 350,000, representing more than half of all the net jobs created since the bottom of the recession.

As well, the participation rate for Canadians aged 55+ surpassed the 36 percent mark in mid-2010 where it remains, a rate not seen since 1976.  This means that more Boomers are either remaining in the workforce for longer or are re-entering the job market.  This shouldn't surprise anyone that has been in a Home Depot, Walmart or what remains of Zellers in recent years.  A poll taken on behalf of CIBC suggests that most Canadians still expect to retire at age 63, however, only 21 percent of 55 to 64 year olds believe that they can retire based on their savings alone and that among retired Canadians, 54 percent hold some form of debt.  The poll found that, as time passed and retirement approached, older Canadians are feeling less positive about reaching their savings goals and eliminating their debt as shown on this graph:

Let's go back to the Vanier study.  What I found particularly interesting is the data on bankruptcy levels for Canadian seniors aged 65 years and older and near-seniors aged 55 to 64 years of age.  While the total number of insolvencies for all age groups fell by 11 percent in 2010, the number of insolvencies of those aged 55 to 64 fell by only 4 percent and actually rose by 6 percent for those 65 years of age and older.

Here is a graph showing the historical insolvency rate (the number of insolvencies per 100,000 people) from 1990 to the present for the entire population over 18 years of age, seniors and near-seniors:

Over the two decades, the total insolvency rate rose by 139 percent.  In sharp contrast, the insolvency rate for Canadians aged 55 to 64 rose by 597 percent and the insolvency rate for those aged 65 and older rose by an astonishing 1747 percent.  My suspicion is, that with our current near-zero interest rate environment, many seniors are finding that they are digging deeply into their saved capital to make ends meet.  With no end in sight to low interest rates, the insolvency situation is likely to get worse before it gets better.

One issue that is facing Canada's aging population is the current frothy housing market.  Most of the increase in household net worth is due to increases in the net worth of housing; real estate now comprises 50 percent of the net worth of Canadian households, up from 36 percent in 2000 and is now at the highest level since data collection began in 1990.  Housing prices as a multiple of disposable income have risen from a multiple of 3.2 in 2000 - 2001 to its current multiple of 5.1 and is well up from its 22 year average multiple of 3.8.  The combination of price instability and high household net worth based on housing valuation is particularly dangerous for senior Canadians who are looking to cash out of the housing market to fund their retirements.  As shown on this graph, should the disposable income to housing price multiple decline to the 22 year average, the price of an average home would decline from $363,300 to $269,800, a $93,500 or 25.7 percent haircut:

This would be a pretty severe cut in the value of household assets for most seniors and could make the difference between solvency and insolvency, particularly in some of the most overheated real estate markets in Toronto and Vancouver.

Baby Boomers are not likely to experience the peaceful golden retirement years of their parent's generation.  Fortunately, for the most part, Boomers are a relatively healthy lot and working into their seventies should not pose a particular problem...unless you happen to be young and looking to enter the pool of employed workers.  Unfortunately, these young Canadians will be competing with a large and growing cohort of experienced senior citizens who are more than willing to do what it takes to stave off the creditors.


  1. I too am getting close to "my time". While I've tried to do my best in preparing for my time, I look around me and see others may not have been as fiscally prudent. With headlines talking about us collectively having too much consumer debt, I do wonder what percentage of the population may be headed for some sort of financial Armageddon in their retirement.

    As always a good well researched post.

    1. The only thing I would alter is the second to last sentence of your comment to...

      I do wonder what percentage of the population will demand their share of my retirement assets accumulated by my past sacrifices.

  2. On the twenty year average chart, does that include the 10+ years of bubble in the calculation since 2000? Any chance you could redo the chart using the average multiple from the years 1980 to 2000 instead of the average from 1990 to 2012?