Building Personal Financial Resilience
Canada has a suite of federal programs to enable Canadians to save for key life events, which benefit from government grants and/or tax incentives. These include RRSPs that enable tax efficient saving for retirement and RESPs that provide grants and tax efficient saving for post-secondary education. However, even with these attractive programs Canadians have been saving less.
Canadian households saved about 14% of income in the 1980’s a ratio that decreased to about 3% in the 2000s. While it is true that bank interest rates decreased over this time, it is also true that the level of non-mortgage debt supported spending has increased over the same period. For 2018 the average Canadian household saved just 1.5% of disposable income according to the OECD.
So why is it beneficial to individuals, families, and government for Canadians to have savings?
Self-Reliance — The more savings one has the more self-reliant they are. People with savings have less need for debt, government benefits, or support from friends and family. This financial freedom enables individuals and families to make the best choices for themselves without coercion from banks, lenders, or government.
Financial Resilience — People with more savings are more financially resilient to shocks such as unemployment, natural disaster, and unplanned expenses (such as new roofs). This financial resilience enables people to weather storms with less need for debt and government supports.
Financial Benefits — When you have savings you can benefit financially such as lower interest rates with higher deposits (using savings) on houses, being able to afford a higher insurance deductible that reduces premiums, or buying something with cash, avoiding the need for debt and associated interest.
Wealth Accumulation — Savings generally grow once invested in interest bearing accounts or via other asset classes such as property or the stock market. Greater individual savings enables families to grow their wealth, which makes them more self-reliant, financially resilient, and saves them money… creating a virtuous cycle.
I have focused on the personal and family benefits of higher personal savings, but there are also societal and governmental benefits from more savings.
Less Government Involvement — There would be less need for government involvement in people’s lives due to less need for programs like unemployment insurance, welfare, and bailouts in response to natural disasters.
More Efficient & Effective Government Support — With a stronger savings ‘buffer’ within society governments would have more time to craft more efficient and effective responses to crises. If everyone had one month of savings it would give governments more time to create programs to respond effectively to shocks in society (think Covid and how many times the Canadian government has tweaked its response). With more time governments can better assess the challenge, craft a response, and create supports that are less costly but more effective.
Lower Taxes — With less reliance on the state for support more of peoples’ pay packets would stay in their pockets. This would result in lower taxes, which could be used to support savings by individuals and families.
Business Access to Capital — Over nearly the past two decades Canada has suffered from historically low levels of business investment, ranking near the bottom of OECD nations when ranked for business investment. This matters, because the less businesses invest, the fewer jobs there are and the slower wages grow. With a larger domestic savings pool driven by increased personal savings, Canada businesses would gain access to lower cost capital to invest to increase productivity, creating more better paid jobs.
So, if saving is beneficial, how do we encourage people to create a savings buffer that benefits them, their families, and society? This article does not delve into why, if the benefits are so great, that people do not save. However, many have argued that causes relate to lower bank interest rates, cheap credit, increased pressure to ‘keep up with the Jones’ driven by social media, and increased living costs. I argue that regardless of these factors, that society needs to find a way to encourage savings in order for individuals and families to be self-reliant, independent, and free.
I propose a relatively simple savings solution for Canadians, which could be applied to most developed economies, to address the ‘gap’ in savings. It builds on Canada’s existing government supported savings schemes, albeit with a bit more flexibility and downside for not saving.
Canada’s median per person income in 2018 was $36,400. It is a well worn financial rule of thumb that people should have 3 months expenses saved in a rainy-day fund, suggesting that Canadians should have at least $9,100 saved in a rainy-day account. If we
So how does one encourage Canadians to create savings to at least that amount?
Grants — Getting people to save is tough. It took the UK to compel businesses and individuals to put money aside in defined contribution pension schemes to get most of the population covered by retirement schemes. I argue that Canada’s federal government should match all personal savings to what I deem Canada Savings Plans (“CSP”)meaning that if someone puts $100 into the plan the government matches it dollar for dollar, leaving the CSP with a balance of $200. This grant should be in place until a person’s CSP balance hits 3 months of Canada’s median per person income. With such a strong incentive to save one could expect that the vast majority of Canadians would take advantage of the programme.
Tax Relief — Make all contributions to a CSP tax deductible, much like RRPSs are today. If we assume a 50% marginal tax rate that means that a $100 contribution generates a $50 tax refund, again, strongly encouraging personal savings. This tax relief combined with the government grant would result in every $100 of personal savings equating to an additional $150 provided by the government ($100 in savings grant and $50 in a tax rebate). It would be hard for anyone to argue against the financial benefits of such a savings scheme.
Wait Times — The government should institute a two month wait time for all unemployment insurance and/or welfare claims. People should be expected to draw down their CSPs to weather such storms. This would still leave money in CSPs after a claim on government benefits. For those who didn’t save in a CSP the government would not make payments for the first two months. This would encourage people to save to avoid suffering a reduction in government benefits.
Disaster Deductible — Before any payment to individuals to recover from floods or wildfires, for instance, the government should expect that two-thirds of a CSP is spent on recovery. For those who didn’t save in a CSP the government would deduct two months of the individual’s pre-tax income from any payment. This would strongly encourage people to save in a CSP as they get grants and tax benefits, while being more resilient to disasters.
So now that Canadians have generated savings via a CSP, other than for funding themselves for periods of unemployment or to respond to natural disasters, for instance, how else could these funds be used? Well, here are a few ways that these funds could be used:
Housing — Individuals could use the funds to purchase a home for use as a down payment. Funds could also be used for down payments for rental accommodation. This will enable people to more quickly gain equity in the housing market, leading to access to stable housing, which can only benefit society.
Retirement — At retirement age the CSP could be rolled into an RRSP or another pension solution. This will enable people to retire with more security and reduce demand on government assistance in old age.
Education — Funds could be withdrawn to pay for accredited education programs to enable people to up-skill. This will encourage people to re-train or up-skill if they become unemployed or to capitalise on changing economic forces.
Insurance Deductibles — Funds could be used to pay an insurance deductible following a claim. Insurance policies with higher deductibles are materially cheaper, so enabling people to use savings to pay deductibles will help families reduce expenses.
To ensure that the CSP programme is not abused and is affordable, once an individual has benefited from government matching of contributions up to 3 months of the median per person income, no further grants would be available. However, to encourage people to replenish used savings in their CSPs the tax relief would still apply. This would ensure that the wealthy don’t disproportionally benefit from the scheme, but still encourage future savings if a CSP gets drawn down to respond to a lay-off for example.
It could be argued that this savings would decrease GDP as debt driven consumer consumption would reduce. However, once savings reached their government supported peak (e.g. 3 months of income) the impact would go away. That said, with increased savings comes decreased costs of debt and equity for business and government, potentially offsetting a short-term negative economic impact. By deepening Canada’s household savings pool business and government would gain increased access to capital to invest. Studies conducted by the Federal Reserve Bank of St. Louis in the US demonstrated that increased consumer savings has a strong positive correlation to future economic growth. Regardless, individuals, business, and government value stability so a short-term reduction in GDP is likely a price worth paying for more stability in future GDP and economic wellbeing.
Will we ever see a time which CSPs become common in Canada? Perhaps Canada’s response to Covid, increasing demands on governments to respond to floods and wildfires, and the ‘gigifaction’ of work will make this solution attractive. This solution does not compel savings, but strongly incentivises it, while leaving individuals, families, and society more resilient — none of which are bad things.