Squeezed

Steve Robinson and his wife Krista are trying to tell me where their money goes. Actually, they’re trying to figure out why they rarely have any money left at the end of the month to stash into a savings account or, say, an RESP for their two young daughters. After hearing their story, I’m stumped too.

Steve, 40, and Krista, 36, live in the Edmonton suburb of St. Albert. Steve used to be a truck driver. But after his eldest daughter was born, and he was stuck on another long-haul drive to northern British Columbia, he quit, went back to school and became a welder so he could spend more time with his family. Krista shares his kids-first philosophy. She operates two private schools in town.

Like most middle-class couples with young children, the Robinsons (whose names we’ve changed) spend their days in a blur of activity. They rise early, grab breakfast with their two daughters, Julia, 8, and Sarah, 7, then rush out the door to drop the kids off at school and get to work. A few hours later, they scurry home, make dinner, and take their daughters to skating, violin and karate classes.

Together Steve and Krista earn slightly more than the average Canadian family, and they try to be smart with their money. They pay off their credit cards every month and they own just a single vehicle — a 2001 GMC pickup truck that Krista drives to her work. Four years ago they bought a house for $230,000 and took out a 20-year mortgage. They’ve accelerated their payments and they are hoping to have their home paid off in 14 years.

If Steve keeps his welding job and students keep enrolling at Krista’s schools, things should work out just fine. But Steve and Krista don’t feel as if they have it made. Far from it. Whenever they look at their bills at the end of every month, they realize that they are skating on the brink of catastrophe. They have no savings to fall back on if something should go wrong, no RRSPs or RESPs to cash in down the road. A while back, Krista tried to set aside 10% of their earnings, but that didn’t work out. She had to put the money back into their general account to pay bills. She worries constantly about her family’s lack of a financial buffer.

So what are Steve and Krista doing wrong? If you listen to many commentators, their problem is a simple lack of self-discipline, a selfish desire to have everything at once. A recent headline in the Vancouver Sun blares: “Overspending rampant among young.” The Montreal Gazette concurs; according to its headline writers, we are “a nation of overspenders.” A study, commissioned by Mackenzie Investments, deplores the tendency of Canadians under 50 to spend without thinking about their financial future. And economists moan about the declining saving rate. While Canadians put away nearly 20 cents out of every dollar they earned back in the 1980s, today we save less than three cents out of every dollar we make.

The conventional wisdom adds up to a stinging indictment of today’s spendthrift middle class. It sounds convincing — until you talk to folks like Steve and Krista. They and their two daughters shop at a local discount supermarket and get by on less than $500 a month in groceries. They rarely eat out. While Krista says they would like to take the kids to Disney World, all their vacations so far have been visits to family in B.C. “There’s nothing fancy in our household,” Krista says. The family’s only indulgence is a single television — a 42-inch floor model they bought for half price. But Steve refuses to spring for cable access, because he would rather his daughters read books than watch TV.

The simple fact is that Steve and Krista are doing nothing wrong. They make a bit more than average, spend wisely, and just barely make ends meet. Millions of middle-class families across the country are in the same boat. Their paycheques show they’re making decent money. But their bank accounts are empty.

How is that possible? For more than a quarter century, middle-class incomes have flat-lined in terms of real purchasing power. Meanwhile, a host of unavoidable costs — for necessities such as taxes, child care and mortgages — have surged. Even with both parents working full-time, the middle class is drowning in a sea of rising costs. The result is a paralyzing sense of economic vulnerability. With a recession looming ahead of us, the middle class is facing potential disaster. Yet no one appears to be paying attention.

The natural place to begin understanding the middle-class squeeze is by looking at how much each of us earns. We all know that we make far more in dollar terms than our parents did 25 years ago. But what most people don’t realize is that nearly all of the apparent increase is inflation. 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. A quarter century of progress has resulted in the average Canadian earning a raise equivalent to the cost of a family night out once a year at Swiss Chalet.

Actually, that’s optimistic. Because while a pay raise once went straight into your pockets, it is now likely to disappear before you even see it. Who gets it? The taxman. 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. So while our wages have stayed pretty much the same, we are paying thousands of dollars more every year to various levels of government.

It’s no wonder that Steve and Krista are stressed. They’re not making any more money than their counterparts 25 years ago, yet government is always reaching into their pockets to take more of what they do earn. Meanwhile, other costs are mounting.

Education, for instance. A generation ago, most families didn’t worry about saving for their kids’ university tuition, because you could still find a decent job with just a high school diploma. Besides, if your kids really wanted to attend university, they could probably pay most of the cost themselves, by getting summer jobs.

Not so today. The ticket to a decent job is at least a college diploma, if not a bachelor’s degree, and the price of that ticket has shot up: tuition fees for most college and university programs have roughly tripled since 1990. Meanwhile, it’s become tougher for students to get a summer job to pay those fees. Only 66% of college and university kids can find paid work on their summer vacation, compared to 75% in 1989. As a result of higher tuitions and lower student earnings, middle-class parents who want to ensure that their children have middle-class jobs must count on helping out with their kids’ education. Between 1999 and 2004, average household spending on tuition and school supplies rose by nearly half to $1,078 a year, according to People Patterns Consulting of Summerstown, Ont.

Roger Sauvé, president of People Patterns Consulting, says education is just one example of the rising costs that are hitting Canadian families. “A lot of the things people are spending money on, they have no choice over,” says Sauvé, who specializes in dissecting Statistics Canada data to reveal patterns in household finance. Health-care costs, including premiums for prescription drugs, shot up 32% between 1999 and 2004. Insurance premiums and pension fund payments increased nearly as much. All told, Sauvé figures those increases added $1,503 to a family’s cost of living in only five years.

If you’re feeling pinched, no wonder. Many of the fastest rising costs — such as pension contributions — are automatically deducted from our paycheques, so most of us are left with a vague notion that we should have more money to spend than we do, but no clue as why we’re short every month. “Your paycheque,” says Sauvé, “doesn’t go as far as it used to.”

To our credit, Canadians have taken action against flat salaries and rising costs. Families have fought back the only way possible — by sending mom out to work to bring in another paycheque. A generation ago about 47% of families had two earners; today it’s 64%. Whatever else you can say about Canadians, we’re not afraid of work.

The rise of the two-income household has provided a smart solution to stagnating wages. By bringing in an extra paycheque, the average Canadian household has boosted its income despite the lack of any real increase in individual paycheques. Thanks to working moms, the median family income edged up, in real terms, by about $5,800 between 1980 and 2005, to $63,715. The social benefits of this trend have been even larger than the financial gains. Women can now pursue careers that would have been considered unusual for them just a couple of decades ago.

The only problem is that two incomes aren’t really worth twice as much as one. To earn an extra salary, a family has to take on extra costs. Day care is the most obvious expense. A family with a couple of kids under five can expect to pay from $18,000 to $24,000 a year. And that’s just the beginning. Most two-income families need two cars to get mom and dad to separate places of work. According to the Canadian Automobile Association, buying and operating that extra new car is likely to cost you in the neighborhood of $8,000 a year. Two-income families also face added expenses for work clothes, meals away from home, and so on.

By the time you add everything up, the benefit from an additional paycheque is less than most people think. Elizabeth Warren, a professor at Harvard Law School, has made a career out of tracking the dwindling fortunes of the middle class in the U.S. and many of her findings are equally applicable to Canada. To illustrate her point, she’s fond of comparing how today’s middle class spends its income compared to how its predecessor managed its budget back in the days of muscle cars, big sideburns and bell-bottom pants.

In the early 1970s most families had just one wage earner and his name was Dad. He didn’t make a lot of money, but he didn’t need to. Warren calculates that after paying the family’s fixed costs — taxes, the mortgage, car expenditures and health care — ’70s Dad was still left with nearly half (46%) of his paycheque. Some of that disposable cash went to groceries and paying the electricity bill, but there was plenty left over to save for a new car and maybe a few indulgences, such as a color TV set or a fishing rod.

Today’s family has two wage earners: Dad and Mom. On paper their combined income is a lot more than ’70s Dad, but they see a lot less of it. Once the rising costs of taxes, the mortgage, car payments, health care and child care are covered, only 25% of their paycheques is left. “After they pay their basic expenses,” says Warren, “today’s two-income family has less cash left over than their one-income parents had a generation ago.”

Warren argues that there is a great paradox hidden beneath the shiny surface of the two-income family. As apparently affluent as it may seem, the two-income household is hypersensitive to any economic downturn because it needs every penny to get by. In contrast, ’70s Dad and his family were in much better shape, because the family had an underutilized resource — namely Mom. If ’70s Dad were laid off, or suffered a serious illness, Mom could get a job and help out until times got better. But not anymore. She’s already working flat out. If today’s Mom or Dad gets hit by a job loss or an extended illness, their family has no cushion to fall back on, no extra resources they can call upon.

Steve and Krista are the first to acknowledge that a family needs two incomes in today’s economy. When Steve quit his job as a trucker, times were tough. Krista’s single paycheque had to support the family. “We did everything we could to stay afloat,” Steve recalls. “We ate Kraft Dinner for three years.” If a recession materializes in the months ahead and one of them were to lose their jobs, they would soon be eating Kraft Dinner again.

You might think that the plight of today’s middle class would have attracted a lot of attention. Strangely, it hasn’t. If anything, people have tended to blame the victims for their own misfortune. The personal finance books that top the bestseller lists make the case that most people are buying stuff they don’t need, such as designer clothes and stainless steel appliances and — oh, yes — that latte a day that we’re all supposedly drinking. According to the doomsayers, our out-of-control shopping habits are coming back to haunt us.

The only problem with this denunciation of middle-class overindulgence is that the facts don’t bear it out. Rather than going on a spending spree, today’s average income earners appear remarkably frugal. Warren, the Harvard professor, crunched U.S. Department of Commerce data to determine how middle-class families with two adults and two kids spent their cash in 1972 and in 2005. She adjusted the figures for inflation and found that, among other things, families are spending 32% less in clothing now than they did a generation ago. The reason? Most people don’t dress up as much, which means fewer suits and fewer expensive dress shoes. In addition, foreign manufacturers are churning out most of the goods we wear for lower prices, in real terms, than 30 years ago. Discount retailers have slashed the price of getting those goods to us. While your Dad probably paid full price for his North American-made suits and ties at a local men’s shop, and your Mom relied upon the local dress shop for all her formal wear, you’re likely to drop by the local factory outlet mall to load up on the Korean-made khakis and casual sweaters you wear to the office everyday.

The same surprising frugality holds true in other areas of middle-class life. Thanks to offshore manufacturing and low-cost retailers, the price of most household goods has tumbled and so has the amount we spend on them. Stripping out the effect of inflation, Warren finds that we’re spending 52% less on appliances than our parents did, even when you factor in all those fancy convection ovens and double-door refrigerators that we’ve installed. We’re also spending 18% less on food, even with our newfound taste for lattes and bottled water. While those numbers are for U.S. middle-class earners, it’s reasonable to assume that all the same trends hold true in Canada. You can accuse today’s middle class of many things, but out-of-control shopping isn’t one of them.

So where is the money going? We’ve already mentioned day care costs and the expenses associated with a second car. It turns out that we’re also spending far more than our parents on going to the gym and kids’ recreational costs — although that’s arguably a good thing if it helps to keep us healthy and happy as families.

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. The cost of owning a two-storey home, including mortgage, taxes, upkeep and utilities, took up 48% of the typical pretax household income. It was more in big cities like Vancouver and Toronto.

“I don’t think Canadians are reckless or extravagant spenders. I’ve never seen any evidence of that,” says Malcolm Hamilton, an actuary at Mercer consulting in Toronto and one of the country’s foremost authorities on personal finance. He believes that middle-class financial stress is largely the result of runaway real estate prices. For younger Canadians in big cities, the spike in real estate prices over the past decade has meant a no-win decision. “They have this ugly choice,” Hamilton says. “They can spend less for a place 60 miles outside of Toronto and be commuting three hours a day and hardly ever see their children. Or they could pay up for the house in the city and have everyone say they’re irresponsible, because they borrowed so much money to live near where they actually work so they can spend more time with their family.”

You don’t have to live in a big city to feel like you’re struggling. Just ask Karen and Ryan MacDonald, both 30, who live in Fergus, Ont., about an hour and a half northwest of Toronto, with their daughter Lauren, 4, and son Harmon, 2. They met at fire college, got married six years ago, and bought a house. Today, Karen’s a fire prevention officer at the University of Guelph while Ryan works for a company that maintains fire equipment. Like most young families, they struggle to balance the budget. With car payments, day care costs and bills, it’s tight. “It seems like we’re not saving, though we are a little bit,” Karen says. Every month she puts money into her pension plan at work and an RESP. But the MacDonalds worry they won’t be able to pay off their mortgage, credit cards and line of credit in time for retirement. They have no savings set aside for unexpected emergencies. A few months ago they took their truck in for servicing and were told it needed $1,000 in repairs. “Well, we didn’t have $1,000 to pay for that, so it goes on the line of credit,” says Karen.

The MacDonalds are not alone in relying upon credit. While the old-fashioned answer to a money crunch was to have mom supplement the family income by working part-time, that solution no longer suffices, because mom is already putting in 40 hours a week at the office. The only solution to many financial emergencies is to charge things. The average Canadian owes $9,000 on a line of credit and $2,400 on credit cards. Slightly more than half of us need credit to cover day-to-day living expenses, according to the Certified General Accountants Association of Canada.

The growing indebtedness of the middle class has happened during some of the best times that Canada has ever experienced. We haven’t suffered through a recession in 15 years and jobs have been plentiful. Yet average families haven’t made any gains during the heady days of the late 1990s or during the recent boom years. Instead, we’ve accumulated debt.

An amazing fact: after years of strong growth in the overall economy, the typical middle-class family is on shakier ground right now than it was at the end of the devastating recession of the early 1980s. In 1984, the total amount owed by an average household, including mortgage and credit card debt, added up to 71 cents on every dollar earned. Today, after a decade and a half of prosperity, we owe $1.27 for every dollar of income.

If a recession hits and house prices fall, watch out. People who’ve relied on overtime earnings to maintain their lifestyle will have to make do with less. Same goes for homeowners who’ve dipped into the equity in their homes. Many middle-class Canadians may find themselves unable to keep up.

Doug Hoyes, a bankruptcy trustee with Hoyes Michalos & Associates in Toronto, says he sees a stream of people through his office who never dreamed they would be declaring bankruptcy. His typical clients make decent wages — $2,071 a month after tax, to be precise. Their debts are high, but payments are manageable — until a divorce, a layoff or a serious illness strikes. At that point, they’re sunk, because they’re operating with no margin of error. “I’m of the opinion that the average person does not realize how close to financial disaster they are,” says Hoyes.

If the plight of the middle class isn’t the result of runaway spending, or of a refusal to go out and work, what is behind it? More than anything else, it’s the result of a shift in how society apportions rewards.

Think back to that measly $53-a-year raise that the average Canadian worker has gotten since 1980. It amounts to considerably less than a 1% hike in purchasing power over 25 years. In contrast, labor productivity over the same period has shot up 44%. So while Canadians are producing nearly half as much again as our parents did, we are enjoying practically none of the gains. The fruits of our labor have, by and large, gone to bulk up corporate profits which have shot up 153%, in real terms, since 1980.

You don’t have to be a socialist to wonder about the fairness of that arrangement. Mathieu Dufour, an economics professor at Dalhousie University in Halifax, is among those who are troubled by the disparity between measly wage gains and galloping increases in corporate profits. He calculates that if our wages had simply kept up with the gains in labor productivity, the average Canadian would be earning an extra $10,000 a year.

Dufour thinks it’s time to find ways to put more of that missing $10,000 into middle-class wallets. A good first step would be to cut individual income taxes, perhaps by raising corporate rates. Such a shift in tax policy would help to redress the massive transfer of wealth from ordinary people to the government that has taken place over the past two decades.

In the 1980s, Ottawa was awash in debt, but average citizens were not — in fact, in 1982 the average savings rate in Canada hit 20%, its highest point ever. Two and a half decades later, the government is in the black, but Canadians are saving next to nothing. The turnaround is not a coincidence. Governments have downloaded extra costs on us in the form of higher taxes and fees. We may never again be able to save 22% of our incomes, but even a modest decrease in our taxes would help us boost our anemic savings from their current level of around 3% of earnings.

Canadians also need to start seeing meaningful wage gains again, as we did between 1950 and 1980 when household income more than doubled in real terms. Dufour suggests that a rise in the minimum wage could have a ripple effect through all income levels. Additionally, he supports easier access to Employment Insurance to encourage workers to be more vocal in demanding pay increases. At the moment, says Dufour, Canadians “look behind them and see there’s no social safety net, and so they’re willing to work for less.”

If those proposals strike you as too militant, it’s difficult to argue with another notion — giving all Canadians an affordable way to save for their retirement. Keith Ambachtsheer, director of the Rotman International Centre for Pension Management at the University of Toronto, is proposing a national supplementary pension system that would act as a top-up to Old Age Security and the Canada Pension Plan. It would automatically cover the estimated 10 million workers who don’t have a company pension plan and allow them to direct their savings into a supplementary plan that would save and invest their money at minimal cost. “Canada does look after their working poor relatively well in their old age, and the rich do a good job taking care of themselves,” says Ambachtsheer. “So we’re strictly talking about income replacement for the middle class.”

These ideas are just starting points in what should be a national debate over how to increase the wealth of average citizens. Fixing the decline of the middle class won’t be easy, but it’s vital to our nation’s health and sense of social justice. For 25 years the middle class has had a raw deal. What we need now is a new deal.