Statistics can be misleading, especially when they hide the real human story behind the numbers. The key results from the 2016 Census published by Statistics Canada claim that the median total income of Canadian households rose from $63,457 in 2005 to $70,336 in 2015, a 10.8% increase. What the key highlights do not highlight is the fact that the top 1% of income earners in Canada that comprised about 254,700 individuals and who reported a median income of $283,400, has accounted for almost 33% of all growth in median incomes since the late 1990s, an increase from 8% during the 1950s and 1960s.
Today, nearly half of Canadians are living pay cheque to pay cheque. According to the results of the National Payroll Week 2017 Employee Research Survey conducted by The Canadian Payroll Association (CPA), 47% of Canadians believe it would be difficult for them to meet their current financial obligations if their pay cheque was delayed for a week. A large number of Canadians (41% according to the CPA survey) is spending all of or more than their net pay while 42% of Canadians are saving 5% or less of what they earn. As a result, 22% of employees are unlikely to obtain $2,000 within a month in case of an emergency.
These and other astonishing insights from the CPA survey point to a worsening liquidity crisis leading to an unprecedented rise in consumer debt. This in turn is resulting in a rise in mental health issues and productivity loss for the economy.
A dangerous symptom of the systemic issues with the distribution of wealth in Canada is seen in form of the significant increase in the use of payday loans by Canadians. The Financial Consumer Agency of Canada (FCAC) conducted a national survey of 1,500 Canadian payday loan users to inform the Agency’s approach to educating consumers. In a report titled “Payday Loans – Market Trends” published on October 25, 2016, the FCAC highlighted that the use of these short-term, high-cost loans has more than doubled in Canada from 1.9% in 2009 to 4.3% in 2014 of Canadian households.
The Canadian Payday Loan Association reports that nearly 2 million Canadians use payday loans each year. What is more worrisome is that fewer than half of the respondents (43%) of the FCAC survey understood that a payday loan is more expensive than available alternatives. According to FCAC, the costs of payday loans are typically based on a set dollar amount per $100 borrowed—for instance, $21 per $100, which represents an annual percentage rate (APR) of 546%.
Payday loan use is not restricted to low-income Canadians. As shown by the FCAC survey, 20% live in households with annual incomes exceeding $80,000, with 7% over $120,000. Most of the payday loan users borrow small amounts for unexpected needs or for unexpected but unavoidable needs such as for paying a bill to avoid late charges and penalties. Three-quarters of the respondents reported having taken loans of $1,000 or less, while more than half (55%) reported borrowing $500 or less.
Although payday loans are meant to bridge borrowers to their next pay cheque, one-third of the respondents said that they turned to savings accounts, took out new payday loans from another lender, borrowed from friends or family or used bank account overdrafts to repay their outstanding payday loans. Furthermore, only 29% reported taking out just one payday loan in the previous three years. Nearly as many (23%) reported taking out six or more loans. Some 37% reported two to five payday loans.
On the other hand, nearly half of the respondents had no cash savings to address emergency needs. Only 24% of respondents reported household savings of at least $1,500 (the maximum value of a payday loan) that they could access right away to cover unexpected expenses. Nearly half (47%) indicated they had no cash savings at all.
What the FCAC survey also shows is that a significant number of Canadian households are still hesitant to get formal financial advice. Only 8% of respondents reported always seeking financial advice when they deemed it was required. Surprisingly, 27% never sought out advice even when they felt it was needed. Nearly three-quarters (74%) of the respondents said payday loan was the best option available to them. Only 35% of payday loan users had access to a credit card, only 12% said they had a line of credit, and 35% said they did not have access to a bank account at the time of their last payday loan. This is striking, given that 99% of Canadians in 2014 reported having access to a bank account.
The Canadian working class is worst hit by the household liquidity crisis as they are generally paid at the minimum wage rate. These workers include a large number of immigrants who have traditionally been underpaid in Canada, as well as youth employees and women.
More than long-term policy levers, there is an urgent need to employ short-term corrective measures to rectify this financial crisis that if unheeded is likely to become a national economic epidemic due to the vicious cycle many Canadian households find themselves in. While addressing the systemic challenges of income inequality and disproportionate distribution of wealth warrants a national debate with diverse stakeholders on the table, providing these households with access to formal financing facilities as well as innovative alternatives to payday loans is something that can be achieved in the short term. The resulting relief would not only serve to improve the financial wellness of Canadians but also have a positive bearing on employee retention and engagement, economic productivity and mental stress.
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