Hard working and hard up

Who's broke in Canada? Look in the mirror. It might be you.

By Malcom Hamilton | October 1999

Reprinted from the Moneysense URL:

http://www.moneysense.ca/magazine_items/10_99/10_99_broke.html


In Canada, the growing gap is not between rich and poor, but between perception and reality. On CBC Radio last November, I was trying to explain why middle-class Canadians shouldn't maximize their RRSP contributions. Anxious boomers clogged the lines – each with a tale of woe. Then Dimitri called.

Dimitri said he was 75. His wife was 80. They came to Canada after the Second World War. Today, they live in a small bungalow in suburban Ottawa.

Dimitri never made the big money. He never saved for retirement. For the last 10 years, he and his wife have been living on government pensions – about $24,000 per annum:

- $10,000 from the Canada Pension Plan,

- $10,000 from Old Age Security,

- $2,600 from the Guaranteed Income Supplement, and

- $1,300 from GST, sales and property tax credits.

Here, in his own words, is Dimitri's description of his life.

"The two of us, we have a very comfortable life. As a matter of fact, we travel abroad every year – last year was Russia and France; the year before was Newfoundland; the year before was Australia – I don't know what people are worrying about.

"Of course, we live modestly. We survived the war in Europe so we know how to save on food and we send more than 10% of our income to the charities of our choice. We have a very full life, a very comfortable life. I just don't understand why people worry. I never worry.

"As a matter of fact, until we retired we had only debts in our life; once we retired, suddenly, all the debts evaporated."

Most Canadians find it hard to reconcile Dimitri's story with his income. How can he afford to travel? Does he visit friends? Perhaps he inherited money.

Yet, aside from his travels, no one should be surprised that Dimitri lives well. In fact, Dimitri's income affords him a better life than many middle-class working families. And his situation is entirely typical. For three decades, the federal government has been working on a system of taxation and social benefits that guarantees senior citizens a standard of living beyond the reach of many working families. Those who pay for our social programs frequently live less well than those who are supported by them. Probe beneath the surface of middle-class communities and you will find the poor where you least expect them.

Take, for example, Dave and Julie Meldrum, a couple profiled in a recent issue of The Financial Post Magazine. Dave is a 37-year-old high-school teacher living in Cornwall, Ont. Julie, 32, stays home and raises their three children. Dave has a secure job, a good salary and a great pension plan. He and Julie live in a beautiful new home. Dave has it all – he's a middle-aged professional living in the country with the world's highest standard of living, or so we are told.

Dave's annual income is $63,400. Of this
- $16,300 goes to income and payroll taxes
- $14,500 is consumed by mortgage payments and other debts
- $6,600 is contributed to the Ontario Teachers' Pension Plan and registered education savings plans
- $1,800 covers union dues and employment expenses.

This leaves about $24,000 for food, clothing, utilities, home maintenance, vacations, education, entertainment, transportation, insurance and anything else needed to support a family of five.

Dave pulls his weight. He is self-reliant, hardworking, university educated, dedicated to his wife and children. Like Dimitri, Dave donates $2,000 a year to help the less fortunate in his community. But unlike Dimitri, Dave worries. He tells The Financial Post, "I'm not sure I'm going to be able to provide for my family the way I'd like to."

Let's compare Dave and Dimitri.

Dave Dimitri
Income

Taxes

Mortgage and debt payment

Pension and RESP contributions

Union dues/employment expenses

Available for consumption

$63,000

(16,300)

(14,500)

(6,600)

(1,800)

$24,200

$23,900

(0)

(0)

(0)

(0)

$23,900

Dave has the big income. Dimitri does not. But Dave pays over $16,000 in taxes. Dimitri doesn't pay tax. Dave has mortgage payments. Dimitri's home is mortgage free. Dave has pension contributions, RESPs, union dues and employment expenses. Dimitri has none of these things.

So at the end of the day, Dave supports five people on $24,000 while Dimitri supports two on roughly the same amount. Dave worries about his ability to provide for his family. Dimitri never worries. Each understands his financial circumstances.

To the man with only a hammer, everything looks like a nail. So when the federal government looks at Dave and Dimitri, it sees an income distribution problem. Rich Dave makes three times as much as poor Dimitri; so Dave is presumed affluent, while Dimitri is presumed indigent. It's your textbook social injustice, and our government has its textbook response. For rich Dave: high taxes with the occasional salary freeze thrown in for good measure. For Dave's children: rising university tuitions with little hope of receiving a Millennium Scholarship, 95% of which will be awarded on the basis of financial need. For Dimitri: fully indexed, tax-free government pensions, seniors' discounts and all the sympathy he can stand.

Now some will say that Dave and Julie are unusual – a one-income family in a two-income world – dreamers who spent too much on their home and now pay the price. Yet in Canada, it is Dimitri, not Dave, who is unusual. For a senior citizen, Dimitri's income is unusually low, while Dave's income is close to the average for working families. Just look at the accom-panying chart.

In 1995, the average net income for tax filers between the ages of 25 and 55 was $19,200. For senior citizens it was $18,600. In other words, after adjusting for taxes and deductions, working people have about $600 per annum more than senior citizens. With this $600, they are expected to raise their children and pay for their homes.

Age Groups: 25 to 55 Over 65
Gross income

Deductions

Taxes

Net income

 

$29,200

(2,900)

(7,100)

$19,200

 

$23,000

(1,000)

(3,400)

$18,600

 

Dave is one of Canada's nouveau poor, and he's not alone. There are lots of Daves out there. Hammered by child care, mortgage payments and a tax system that pretends that children and mortgages do not diminish one's ability to pay tax, many middle-class families have a standard of living below the poorest senior citizen. And yet, while Canada's Dimitris are depicted as frugal seniors bravely coping with a near-poverty existence, young families are characterized as spoiled, self-indulgent wastrels – boomers who need to get their spending under control if they want to avoid the financial difficulties allegedly besetting so many of today's seniors. They are told that, to avert poverty, they must save heavily for retirement. And they believe it. And they blame themselves when they can't find the money. And they worry about their children, and their future.

For most, these concerns are misplaced. Dave, like many Canadians, wants to retire early. For him, it will be easy. From the Ontario Teachers' Pension Plan and the CPP, Dave will collect about $38,000 per annum (1999 dollars) starting at age 56. Once he and Julie reach 65, Old Age Security will give them another $10,000, bringing their total to $48,000. Let's compare Retired Dave with Working Dave.

Retired Dave Working Dave
Income

Taxes

Mortgage/Dept payments

Pension, RESP contributions

Union dues/employment expenses

Available for consumption

 

$48,000

(8,700)

(0)

(0)

(0)

$39,300

 

$63,400

(16,300)

(14,500)

(6,600)

(1,800)

$24,200

 

Retired Dave will have $15,000 less income than Working Dave. But his tax bill will be cut in half. His debts will be behind him. So will his pension contributions, union dues, RESP contributions and employment expenses. So Retired Dave will have $39,000 to support two, while Working Dave has $24,000 to support five. By any measure, Retired Dave will be able to live twice as well as Working Dave, yet in The Financial Post article, Dave is told that his pension "will not meet the couple's aspirations."

To conform to the conventional wisdom, Dave must abandon his free-spending ways and hunker down to 20 years of self-deprivation. The reward? After supporting a family of five on less than $25,000 a year, what will happen when Dave has twice as much money to support half as many people?

I'm reminded of the words with which Scottish mothers sent their sons into the world: "I've raised you to be a good Presbyterian. It won't stop you from sinning, but it will stop you from enjoying it." If frugality is all you've known, you are unlikely to enjoy extravagance. Retired Dave will probably discover, as many seniors do, that the life he knows is a simple one. It doesn't cost much. Once he retires, the money will start to pile up.

So yes, Virginia, there are poor people in Canada. We don't see them on television or read about them in the newspaper. They are invisible – struggling stoically with taxes and mortgages and children. Unlike the well-publicized "victims" with whom politicians dance and celebrities pose, middle-class families are not poor because the government gives them too little. They are poor because the government takes from them too much – collateral damage in the government's war on poverty.

For the Daves of this world there will be no dramatic escape to the United States. They will stay in Canada; do their jobs, raise their children, pay their taxes, honor their debts. They will endure condescending politicians, prime-ministerial taunts, financial scare tactics, media neglect. They will embrace frugality, beat down their expectations, pay their dues, bide their time.

And then in their 50s, their children grown and their debts discharged, they will retire to a better life than any they have known. And they will discover what Dimitri already knows.

"…until we retired, we had only debts in our life; once we retired, suddenly, all the debts evaporated."

Malcolm Hamilton is an actuary with William M. Mercer Ltd. in Toronto.