Ian Garrick Mason

Articles and Essays

Literary Review of Canada -- January/February 2003

Rags and Riches: Wealth Inequality in Canada

Steve Kerstetter
Canadian Centre for Policy Alternatives, 68 pgs. + 60 pgs. of appendices

by Ian Garrick Mason

“Wealth” is possibly the most ancient of economic concepts. In earliest times, to have wealth meant nothing more than having enough grain and salted meat to feed one’s family for the winter. As money emerged as a store of value and medium of exchange, wealth came to mean riches and treasure: a king’s storehouse of gold or a merchant’s bag of coins under the floorboards. Today, it exists as even less tangible forms of value: bank accounts, stocks, bonds, options, pension funds, lines of credit. Despite all our progress, wealth is no less important to us. Everyone still wants to survive the winter -- and everyone still wants to be rich.

Though the notion of wealth seems to underlie everything we think about economics and money, there has been relatively little emphasis on this concept in recent times. Instead, questions of wealth and poverty have usually focused on something quite different: personal income. Tax rates are set based on income; poverty lines are defined in relation to its national average; the six-figure salary is a goal of the young and ambitious. So it was with great interest that I obtained a copy of a new report from the Canadian Centre for Policy Alternatives: Rags and Riches: Wealth Inequality in Canada. Here, I thought, might be a study that goes beyond income to the heart of the matter.

Written by Steve Kerstetter, a research associate with the CCPA’s British Columbia office and former Director of the National Council of Welfare in Ottawa, the study’s data is drawn from Statistics Canada’s 1999 Survey of Financial Security, complemented by special “data runs” and previous StatsCan surveys dating back to 1970. Its aim is to show how wealth -- defined as assets minus debts -- is distributed across Canadian society. The households in the study are grouped into fifths, or “quintiles”, which are then ordered from the poorest 20% to the wealthiest 20%. Where possible, data is also presented by age group, region, and educational level, in order to help identify the factors that might influence the distribution of wealth.

What a distribution it is. According to Kerstetter’s figures, in 1999 the wealthiest 20% of households controlled 70% of the total wealth “pie”, while the poorest 20% controlled literally 0% of the wealth. When the households are separated into deciles (groupings of 10%), the distribution looks even more extreme: the wealthiest 10% owned 53% of total wealth, while the poorest 10% had negative wealth. This distribution pattern holds with only minor variations across all regions, and -- somewhat puzzling to Kerstetter -- it holds across a thirty year period, too, which leads him to comment on how governments of different political leanings in different times and different provinces have all failed to make an impact on the distribution of wealth. Yet this remains an urgent matter for governments to attend to, for wealth inequality in Canada, he declares, “rivals anything seen in the Third World”.

As far as the actual data presented in the study goes, there is little to be criticized; Kerstetter explains his methodology clearly and uses it consistently and honestly. Yet the statement above must give us pause. For what is going on when we can look around us and see that we are patently not living in the Third World, and yet at the same time our society can be shown statistically to be labouring under such enormous extremes of wealth and poverty? What does this mean?

What it means is that “wealth”, and particularly wealth distribution, is not a statistic that links very directly to our notions of standards of living -- to what might be considered “day-to-day” wealth rather than formal wealth. To understand this difference, consider where wealth comes from. For a household, wealth is a result of a sustained surplus of income over expenses -- a result of savings, in other words. By contrast, if a household spends more than it earns, it will build up debt of one form or another. “Wealth”, whether positive or negative, is just the output of this basic formula.

The problem with studying only the output and its distribution across households is that this cannot tell us anything about the nature of wealth, and cannot explain its causes. Consider two hypothetical but perfectly possible cases. One is a single mother with two children. She lives in a tiny rent-controlled apartment and earns $15,000 per year after taxes. Although she is probably a beneficiary of a few well-intentioned government programs, her expenses are still equal to her income from all sources. Thus, she cannot save for a rainy day, and remains vulnerable to accidents and other financial shocks. Her net wealth is near $0 (or perhaps negative), and she would thus appear in the bottom quintile of Kerstetter’s study.

The other case is that of a downtown lawyer who earns $90,000 per year after taxes. He enjoys very expensive wine, has a recreational drug habit, an ex-wife who receives court-ordered monthly payments, a new wife who has a taste for designer clothes and holidays in Bermuda, and three kids attending upscale private schools. It is entirely likely that this lawyer’s expenses are equal to his income, and that he is dipping regularly into the line of credit he maintains with his bank. Thus, he cannot save for a rainy day, and remains vulnerable to accidents or other financial shocks. His net wealth is near $0 (perhaps even negative), and he too would appear in the bottom quintile of the study. Would anyone seriously contend, though, that this lawyer should be labelled “poor”?

The study’s focus on wealth alone, and its silence on the question of how that wealth was derived from the balance of income and expenses, means that throughout the study the reader (and even Kerstetter) is reduced to speculating about the dynamics behind the data. For example, the bottom quintile’s largest category of debt is student loans, which implies that many people in that quintile may be students or recently graduated students. Although their future earnings potential may be relatively high -- indeed, they may already be earning a good salary -- their student loans will keep them in a net debt position (negative wealth) for several years. Ironically, the more students there are, the more expensive graduate degrees that are taken, and the more that universities come to rely on student loans for revenue, then the greater will be the debt load of the bottom quintile, which in turn will make Canada’s wealth distribution even more extreme. Yet in having more post-secondary graduates with greater earning potential, Canada would move even further away from anything that resembles an actual Third World economy.

Likewise, the age distribution statistics in the study imply, but do not directly show, that most of the top two quintiles are made up of people in their 40s, 50s, and 60s. For many people in these age groups, a lifetime of debt reduction and careful investing have resulted in the creation of a nest egg, which will then be drawn slowly down as these people live out their retirement years, while wealth tied up in houses whose value has appreciated over decades can be accessed, if required, with a reverse mortgage or by downsizing to a cheaper house. Given the comparatively modest amounts of wealth held by families in the top quintiles (a median of $188,000 for the second wealthiest group, and $450,000 for the wealthiest), I would not be surprised to find that many of these families are headed by teachers, auto workers, and other regular people who have husbanded their savings throughout their lives, and who have finally achieved a certain measure of well-deserved financial security.

Although these two quintiles are dismissed by Kerstetter as “the rich”, it is important to understand that the ability to save even very modest amounts of money over long periods of time can lead to marked differences in accumulated wealth. If your expenses match or exceed your income year after year, you won’t be able to generate any wealth at all. By contrast, if you are able to save even $100 each month (approximately the same amount spent by many people on Tim Horton’s coffee), then after 30 years of this at 5% after-inflation returns, you’ll have accumulated $80,000, which will have promoted you from the bottom quintile into the middle quintile. This assumes, of course, that you’ve kept this money in a tax-sheltered RRSP, which Kerstetter criticizes as one of “the specialized tax breaks that favour the rich”. Nevertheless, the power of sustained savings explains why differences of wealth between the quintiles are so large yet differences in income are so modest: the data shows that the poorest quintile has an average after-tax income of $18,700, while the richest has an income of $62,500. It would indeed be hard to save money on an $18,700 income (especially with a family to feed), but as one’s income begins to move higher than this level, the opportunity arises to save $100 a month, then $200, then $500. Thus large amounts of wealth can be accumulated over time by people with perfectly middle-class incomes. After all, $62,500 after-tax implies a family pre-tax income of perhaps $100,000, which isn’t hard to achieve if both parents are unionized employees with seniority -- hardly a picture of the greedy rich.

Although he does show an awareness that stages of life may have something to do with wealth distribution, Kerstetter fails to grasp just how fundamental a role it plays in forming the data pattern he presents. Most people begin independent life in comparative penury and end in (we each hope) some measure of financial security; in statistical terms, the movement is from the bottom quintile to the top, and then gently down again as retirement savings are used up. This explains the failure of the distribution pattern to change between 1970 and 1999. Why would it? After all, what we’re looking at is just a persistent natural waveform, which each of us -- if we’re prudent or lucky -- moves through in his or her turn, like leaves move through and over a standing wave in a river. As one might expect, this waveform is not unique to Canada: similar studies have shown that the top 20% of wealth holders in both France and Sweden possess more than 60% of their respective country’s wealth, and Kerstetter’s study shows an even sharper concentration in the United States, where more than 80% of wealth is held by the top quintile.

The real problem is not the existence of the waveform itself -- unless one is truly so radical that the mere existence of any differences at all between people is cause for indignation and anger -- but the movement of people through the waveform. Why do some people move more slowly through it than others? Why do some move backwards, away from wealth and into greater debt? And why do some people get stuck in an eddy from which they seemingly can’t escape?

Helpfully, Kerstetter does provide a breakdown of median wealth by age group, as well as the percentage of households within each age group that belong in each wealth category (not broken into the usual quintiles, unfortunately, but ordered from “Negative” up to “$1 million or more”). This is probably the most interesting table in the study, because not only does it show that the bulk of people do move from age group to age group getting gradually wealthier, but it also shows the proportion of people who are out of kilter with this progression. Thus we see that while 21% of 55 to 64 year-olds have wealth between $250,000 and $499,000, 9.4% of that age group have less than $5000.

So, what can we conclude about that 9.4%? Are they people who will require government pensions in their retirement years? Unfortunately, we don’t know, because Kerstetter does not include company-sponsored pension plans in his definition of wealth. Are they people who make $100,000 a year but spend it all on wide-screen TVs and designer clothes? Are they the working poor, scraping by on $15,000 a year? Are they entrepreneurs who have bet the farm on their businesses, been prosperous for a time, and then lost it all? We don’t know: the aggregate wealth numbers cannot tell us. And as for being able to track the movement (or lack of movement) of real people from one wealth category to another over time, this study, made up of snapshots, can tell us nothing.

This is the study’s great flaw. Having discovered a statistical distribution, Kerstetter merely holds it up and points an arm of outrage at it. “People who read this report are almost certain to be shocked by the extremes between rich and poor in Canadian society,” he concludes. Yet short of implementing truly radical -- and very risky -- policies, we cannot hope to change this distribution, which is such a persistent, natural, and generally desirable fact of life. The old, who will be retiring soon, do need more wealth than the young. Indeed, the more successful every Canadian is in achieving financial security before retiring, the greater the gap between “rich” and “poor” will grow. What we should be concerned about from a policy point of view are the exceptions. There are people out there, real individuals, who are trapped in poverty and joblessness for a myriad of personal reasons -- lack of skills, physical and mental disease, violence. They need society’s help. But the study’s emphasis on “inequality” rather than on the dynamics and causes of poverty obscures our view of these people. Kerstetter has buried the truly poor in statistics.