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Families on the financial edge
Over the last 15 years, several studies have examined the extent of low income among Canadian families (Picot and Myles 1995; Myles and Picot 2000; Morissette and Zhang 2001). A family's after-tax income is an important indicator of its ability to sustain a given standard of living. Also important is its wealth, which includes resources that can be converted into cash in times of need. Financial assets can allow a family to absorb the shock of economic stresses, such as job loss, sickness or divorce (Wolff 1998). However, because of the scarcity of wealth data, very few studies have examined the extent to which Canadian families rely on both income and wealth to maintain a desired level of consumption (Love and Oja 1977; Wolfson 1979). 1
Using the 1984 Assets and Debts Survey and the 1999 Survey of Financial Security, this article examines which families are financially vulnerable in the face of income interruptions or unexpected expenses. Families with both low income and little or no financial wealth have fewer resources, making them more vulnerable than other families to negative shocks. Since some families with no financial wealth or net worth may earn substantial incomes, making them not vulnerable, the article looks at two types of families that are potentially at risk: low-income families with no financial wealth, and low-income families with modest financial wealth. This examination helps identify families likely to face short-term financial difficulties as a result of unexpected events (see Data sources and definitions).
Families with no financial wealth or net worth
Between 1984 and 1999, the percentage of persons living in families with no net worth rose slightly, from 8% to 11% (Tables 1 and 2). This increase occurred despite an increase in the median and average wealth of families (Morissette, Zhang and Drolet 2002). The percentage of persons living in families with no financial wealth followed a similar pattern, increasing from 17% in 1984 to 19% in 1999.
The small increase masks substantial increases for some family types. Among individuals living in very young families of two or more persons (families in which the major income recipient was less than 25), the incidence increased from 24% to 40%. Similarly, those in female lone-parent families, immigrant families living in Canada for less than 10 years, and families in Newfoundland and Labrador saw increases of at least 7 percentage points. 4
In addition to those living in very young families and female lone-parent families, those in prime-aged families 5 with no earner were the most likely to be in a family with no financial wealth in 1999—at least 40%. Other individuals with a fairly high risk included non-elderly unattached individuals (30%), those living in Newfoundland and Labrador (33%), those in families whose major income recipient had a work limitation (31%) or was aged 25 to 34 with no university degree (33%), and couples with children whose major income recipient was aged 25 to 34 (28%).
In contrast, individuals in elderly families (major income recipient 65 or over) were the least likely to be in a family with no financial wealth. This is not surprising since older families have had more time than their younger counterparts to accumulate savings.
Some families with no financial wealth are not financially vulnerable
Some families with no financial wealth may earn substantial income and are therefore not necessarily financially vulnerable. For example, many young families with children have had little time to accumulate savings. This is especially true now that young people are staying in school longer and entering the full-time labour market later. Some families earning substantial income may choose to spend a large portion of it, thereby accumulating little or no financial assets for a significant period. Some families may have had to sell all their financial assets to substitute for income lost during a permanent layoff in the past, or to pay for unexpected expenses such as major house repairs. Or, some families may have opted to put their savings into their home. 6
In both 1984 and 1999, slightly more than 70% of individuals living in families with no financial wealth were not in low income. The remaining 30% belonged to families whose after-tax income was below Statistics Canada's low-income cutoffs (Chart A). 7
Depending on the type of family, individuals in families with no financial wealth had markedly different chances of living in low income. In 1999, the chances were greatest for non-elderly unattached individuals (56%), and for those living in female lone-parent families (63%), very young families (53%), and recent-immigrant families (49%). The chances of being in low income were fairly low for non-elderly couples, with or without children.
In 1984, having no financial wealth was a fairly sure sign that an elderly unattached individual would be in low income. Indeed, 76% of elderly unattached individuals with no financial wealth were in this position. This pattern held true to a much lesser extent in 1999 when the incidence dropped to 39%. 8
Low-income families with no financial wealth
Low-income families with no financial wealth are likely to be much more financially vulnerable to adverse events than other families since not only do they live in straitened circumstances but they also have no financial assets to draw on.
In both 1983 and 1998, about 14% of the Canadian population was living in low income (Tables 3 and 4). 9 Of all individuals in low income, 36% to 39% lived in families with no financial wealth in the following year (Chart B). 10 Consequently, 5% of the population lived in families having low income and no financial wealth during both the 1983-84 and the 1998-1999 periods (from here on referred to as 1984 and 1999 respectively).
This constant share hides important changes that occurred in some family types. The proportion of elderly unattached individuals having low income and no financial wealth fell from 8% in 1984 to 3% in 1999. This improvement was due mainly to the falling incidence of low income within this group. The percentage of individuals in vulnerable families also fell in New Brunswick. 11 In Newfoundland and Labrador, despite a sharp decrease in the incidence of low income, the percentage dropped very little. 12 This was due to a growing fraction of low-income families with no financial wealth. 13
While the data suggest that the proportion of persons in families with low income and no financial wealth rose among very young families of two or more persons, female lone-parent families, and families of recent immigrants, the evidence must be interpreted with caution. 14 In any event, in 1999, individuals in these families were at least twice as likely to belong to a family with low income and no financial wealth. For female lone-parent families, the proportion (27%) was five times higher than the national average.
The most vulnerable by far appear to be prime-aged families of two or more persons with no earner, totalling about 900,000 persons or 3% of the population in 1999. In more than 90% of cases, the major income recipient either had a long-term work limitation or disability (33%), was a female lone parent (35%), or was looking for a job for part or all of the year (24%). In 1999, almost 40% of individuals in these families belonged to families with low income and no financial wealth. The corresponding percentage was 13% for individuals living in families whose major income recipient was aged 25 to 54 and had a long-term work limitation.
Low-income families with modest amounts of financial wealth
While 5% of Canadians lived in low-income families with no financial wealth in 1999, 10% were in low-income families with modest amounts of financial wealth (families with insufficient financial wealth to cover their low-income gap). In other words, these low-income families would have remained in low income even if they had liquidated all their financial assets and added the proceeds to their after-tax income. 15 Using this measure, the percentage of individuals in financially vulnerable families remained virtually unchanged at 10% in 1984 and 1999 (Tables 3 and 4).
Once again, elderly unattached individuals became less financially exposed over the period. However, the opposite was true for families of recent immigrants. 16 In 1999, the chances of being in a family with low income and modest amounts of financial wealth were four times the national average for individuals living in female lone-parent families (42%), and almost eight times the average for those in prime-aged families with no earner (74%). In contrast, chances were half the average for those in families whose major income recipient was elderly (4%) or a university graduate aged 35 to 54 (5%).
Of all persons in low-income families, roughly 70% were in families with not enough financial wealth to cover the low-income gap (Chart B). This proportion rose to at least 80% in very young families and lone-parent families, but dropped to 44% among elderly families. These estimates are conservative since they do not account for taxes that could be withheld when registered retirement savings plans are liquidated.
Wealth distribution of low-income families
While many would agree that financial wealth is a good indicator of financial vulnerability, most studies of Canadian families who struggle financially or live in straitened circumstances have used data on low income. To what extent do low-income families have relatively low financial wealth?
As measured by median financial wealth, the 'typical' low-income family had $300 to buffer income interruptions or face unexpected expenses in 1999 (Table 5). This is at least $20,000 less than other families. 17 Some 75% had less than $6,000 in assets that could be liquidated. 18 Others were more fortunate—10% had $32,000 or more.
How did the financial vulnerability of low-income families change during the period? The ratio of the low-income gap to the low-income cutoff is often used by analysts to examine how the economic position of low-income families evolves over time. In 1984, it stood at 34%, indicating that, on average, individuals in low income were in families whose after-tax income was 34% below Statistics Canada's low-income cutoffs. It rose to 38% in 1999, suggesting some deterioration in the well-being of low-income families during this period. 19
Between 1984 and 1999, the percentage of low-income families with no financial wealth rose from 35% to 40%. The average wealth of low-income families in the bottom 75% of the financial wealth distribution dropped slightly (about $800 in 1999 dollars). Similar patterns were seen in the distribution of net worth. Thus, the average income gap ratio of low income families did not improve between 1984 and 1999. Neither did the average financial wealth nor the average net worth of families in the bottom 75% of the (financial) wealth distribution. Compared with their counterparts in the mid-1980s, many low-income families in the late 1990s were neither closer to the low-income cutoffs nor better off financially.
However, the opposite was true for the 10% richest low-income families—financial wealth and net worth rose at the 90th percentile. As a result, the proportion of low-income families with financial wealth of $50,000 or more rose from 4% in 1984 to 7% in 1999.
The above numbers include families owning a business. Although representing only 11% of low-income families in 1999, these families may have greater wealth. Excluding them did not change the trend in the average income gap ratio or in the average financial wealth and net worth of low-income families in the bottom 75% of the (financial) wealth distribution (Table 6). However, it did lower the estimates of financial wealth and net worth for all low-income families.
The average financial wealth of low-income families with no business amounted to $10,900 in 1999, much lower than the $16,800 for all low-income families. Low-income families with no business had an average net worth of $31,000, compared with $51,700 for all low-income families. Three-quarters of low-income families with no business had less than $3,800 in assets that could be liquidated or less than $10,000 of net worth, compared with $5,500 and $25,000 when families with a business were included (Table 5). 20
Financial vulnerability of the unemployed
One would expect families who have recently experienced unemployment to be more financially vulnerable than other families. This may be so for at least two reasons. First, compared with those who remain employed, workers who experience unemployment are often less educated and have a lower earnings potential, making them less able to accumulate substantial savings. Second, a family that has recently experienced a period of unemployment may have been forced to liquidate some of its financial assets, thereby reducing its future financial wealth. 21
The data confirm this view. In 1999, of all individuals living in families whose major income recipient had been unemployed for some time during the preceding year, more than 30% belonged to families with no financial wealth (Table 7). This percentage is twice as high as that of individuals living in families whose major income recipient had been working full year full time in 1998.
Furthermore, low-income rates were roughly 10 times higher among families with substantial unemployment (27 to 52 weeks) than among those with no unemployment. The implication is obvious. Of all individuals living in families of two or more persons whose major income recipient had worked full year full time in 1998, very few (2% at most) were financially vulnerable. In contrast, of all individuals living in families whose major income recipient was unemployed for at least 27 weeks in 1998, 20% belonged to low-income families with no financial wealth, and fully one-third belonged to low-income families with modest amounts of financial wealth.
Even though the percentage of individuals living in families with low income and little or no financial wealth remained virtually constant between 1984 and 1999, some groups, such as recent immigrants, became more financially vulnerable to income interruptions and unexpected expenses. Others—specifically, elderly unattached individuals—improved their economic position.
The vast majority of low-income families had very little financial wealth. The financial wealth and net worth of low-income families in the bottom 75% of the financial wealth or net worth distribution did not rise during the period. Thus, at the end of the 1990s, the vast majority of low-income families had no more savings to protect themselves against adverse events than did their counterparts in the mid-1980s.
While median net worth and financial wealth of other families rose 14% and 40% respectively between 1984 and 1999, that of low-income families did not increase. Therefore, the wealth gap between low-income families and other families rose during the period.
While very young families are relatively vulnerable, an increase in earnings as a result of labour market experience makes it likely that many of these families will have low income and little or no financial wealth for a relatively short period of time. However, this may not be true for female lone-parent families. Previous research has shown that, of all families of two or more persons, lone-parent families are by far the most likely to suffer persistent low income (Morissette and Zhang 2001). This severely limits their ability to build up savings and increase financial wealth. It also likely explains why they have by far the lowest average and median wealth compared with other families (Morissette, Zhang and Drolet 2002). The absence of a second earner poses a severe problem in these families where the parent, most often a woman, may be constrained to choose jobs with shorter hours or close to schools. Taken together, these findings suggest that the high financial vulnerability of many lone-parent families may be more than a temporary state. 22 Whether or not this may also be the case for families of recent immigrants is unclear.
In any given year, the most vulnerable families by far were prime-aged families of two or more persons with no earner. Surprisingly, only one-third of persons in these families had a major income recipient with a long-term work limitation or disability in 1999. The majority of the remaining families had a major income recipient who was either a female lone parent, or an individual experiencing long-term unemployment or who simply had withdrawn from the labour market. Among these female lone parents and other individuals, almost two-thirds had at most a high school diploma or some postsecondary education. This suggests that lack of education is likely a major factor underlying the financial vulnerability of many prime-aged families with no earner.
The absence of decline in the percentage of persons living in families with no financial wealth is somewhat surprising considering that the population was older at the end of the 1990s than during the mid-1980s and had had more time to accumulate savings. 23 Other factors must have played an offsetting role. The growing importance of lone-parent families and unattached individuals, the increased length of time young people stay in school before entering the labour market, the decline in real earnings of young men, easier access to credit, and changing preferences of consumers may have restricted savings or contributed to indebtedness, thereby reducing the net worth and financial wealth of some families.
René Morissette is with the Business and Labour Market Analysis Division. He can be reached at (613) 951-3608 or email@example.com.