Canada is aging – Some long-term implications

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Canada’s population has grown from 25.8 million in 1985 to 35.9 million by 2015. The province of Ontario constitutes the largest share of Canada’s population – 36% in the mid-eighties to 38.5% in the mid 2015 (Chart 1). The saying that “young man go west” seems to have been working over the last thirty years as each of the two western provinces – Alberta and British Columbia – has increased its relative share of population by two percentage points. On the other hand, a province that lost its relative share doesn’t mean that its population didn’t grow over time. Indeed it did, but not that substantive to raise its share.

Chart 1. Provincial shares of population of Canada, 1985 and 2015

What’s the source of this growth in population, and where are these additional ten million persons living? How have they contributed to the demographic mix of provincial populations? And, what are some of the economic implications of demographic changes?

This post, first, looks at the change in provincial demographic mix by age, and then dwells on some key economic and financial implications of such changes, including provincial and federal budgets.

Change in the source of growth of population
According to Statistics Canada’s CANSIM Table 051-004, more than two-thirds of the growth in population over the 1984/85 year was due to the net natural increase, i.e. the number of births less deaths. Thirty years later, i.e. over the 2014/2015 year, the net immigration (i.e., the number of immigrants less emigrants) rather than the natural increase accounted for a similar proportion of growth in population. Canada’s low birth rate is no longer contributing that much to its population growth. Canada is now depending heavily on immigration as its key source of population growth. Evidently, a good majority of these immigrants are in the 15-64 age group – potential labour force participants, and spenders, contributing to governments’ revenues in terms of income, consumption, and sales taxes. In other words, these are the potential consumers whose spending is vital to the growth of the both the provincial and national economies.

Where these additional ten million persons settled?
According to CANSIM Table 051-0001, 96% of these persons settled in four provinces namely, Ontario (44.9%), Alberta (17.9%), British Columbia (17.1%), and Quebec (16.0%). The remaining four percent were in other six provinces and Northwest territories. Newfoundland and Labrador is the only province that actually lost population between 1985 and 2015 – just by 0.5%. All other provinces gained.

In terms of the rate of growth in population over the 1985-2015 period, Alberta topped at 74.5%, followed by British Columbia at 57.4% and Ontario at 48.4% (Chart 2). With Newfoundland showing a drop of 8.9%, the province of New Brunswick experienced the smallest growth at 4.2%.

Chart 2. Population growth by province, Canada, 1985-2015

Canada continues to age
Canada is aging. The elderly (i.e., persons aged 65 and over) constituted 11.6% of the total population in 1985 compared to 16.1% in 2015 (Chart 3). Consequently, the median age of Canadians has risen from 31 years to 41 years (Chart 4). Put simply, one-half of Canada’s population was under 31 years of age in 1985, rising to 41 years by 2015.

Chart 3. Persons 65 years old and over as % of total population by province, Canada, 1985-2015

Chart 4. Median age of population by province, Canada, 1985-2015

The national picture portrays the situation across provinces. Although the proportion of the elderly population varies among provinces – anywhere between 7.5% and 12.0% in 1985 compared with 11.6% and 19.0% in 2015. The increasing spread in the provincial proportions of the elderly shows that some provinces are aging more rapidly than others. Alberta remains the province with relatively younger population as its proportion of the elderly is still the lowest. The median age of Albertans has risen from 29 years to 36 years compared with 30 years to 45 years for New Brunswickers – their proportion (19%) of the elderly was the highest of all provinces in 2015.

The aging process is also tilting the sex ratio as the proportion of women rises as one moves from 65-74 to 75-84 to 85+ years groups. For example, women accounted for around 55% of all persons in the 65-74 group, compared with around 70% of those aged 85 years and over (Chart 5). This isn’t surprising as women live longer than men – statistically speaking.

Chart 5. Women as % of total population in older age groups, Canada, 1985-2015

Population shrinking at the lower end
The proportion of population under 15 years of age has dropped considerably over the last thirty years. At the national level, it fell from 22.8% in 1985 to 17.1% in 2015 – a drop of 5.7, or roughly, six percentage points (Chart 6). The chart shows that the central and western provinces with relatively bigger in-takes of immigrants experienced smaller losses in their proportions of persons under 15 than the four eastern provinces that experienced losses anywhere between eight and thirteen percentage points. This is again due to the low rate of birth in Canada. Canadians seem to prefer having smaller families or voluntarily restrain to have more children because of the rising costs of raising children in an uncertain economic environment.

Chart 6. Persons <15 years of age as % of total population by province, Canada, 1985-2015

Largely because of immigration, the core of the age distribution, i.e., the 15-64 group’s proportion, has remained in tact. Nationally, this group comprised two-thirds of the total population at both points of time, whereas across provinces, the proportion ranged between 62% and 69%. In fact, the two larger central provinces have experienced a drop in their respective proportions of the 15-64 population – Quebec losing 2.7 percentage points while Ontario about one percentage point. This could be largely be due to the shift in immigrants’ desire to settle in Alberta and British Columbia rather than in Quebec and Ontario, for better job prospects and associated economic gains.

There is a cost to bear for losing population. Under the Canadian federal system, federal government gives social and/or equalization transfers to a province and the amount of this transfer is based on the number of persons in a province – or, on a per head basis. So any province losing population would get a reduced transfer as well. For those not familiar with the Canadian federal system, this federal transfer is meant to ensure that Canadians across the land receive similar services. The delivery of most of these services is administered by  provinces.

Some economic implications of changes in the age structure of Canada’s population
Let’s first look at the consequences of the shrinking proportion of those under fifteen years of age. The first and foremost is its potential long-term effect on the primary and secondary schools, the number and types of employment these offer. If we didn’t have a stable and rising flow of home-grown students, we would not have enough of schooling population, and hence, educated and skilled workers needed for a healthy, productive, and competitive economy. Granted, we could fill the void at post-secondary institutions by having more students from abroad, but we can’t do the same to fill the primary and secondary schools.

The shrinking number of children also means lesser expenditure on schooling, child care services, as well as lesser child/family benefits to families, which in turn, implies lesser spending by families as well. Such consumer spending is essential for a growing economy.

On the other hand, the rising segment of the elderly would call for private and government measures to provide adequate incomes for the elderly, their living arrangements in retirement, nursing, or community care homes, medical and hospital facilities to care for the chronic and long-term ill with debilitating or terminal disease, home care, mobility, etc. What it all means is that both federal and provincial governments would have to spend more on the care of older persons.

Since the expenditure on education and health primarily falls under provincial jurisdiction,the changing demographic mix would enforce provinces to spend more on health than on education. Since these two expenditures account for the lion’s share of the total expenditure of each provincial government, the share spent on health is likely to grow considerably for years to come.

Another consequence of the rising number of older persons is the way they could impact lives of their family members including children. Those married with children, already in the throes of balancing home and job life, would have additional responsibility to care for their older parents or relatives. This is the so-called ‘sandwich generation’, who is not only responsible to attend to the needs, including financial, of their children, but also to those of their older parents/relatives. This added responsibility is likely to stress out many young and middle-age families, some culminating in separations or divorces – adding more social problems.

Again, from an economic point of view, the rising proportion of the elderly means lesser consumer spending – as older people no longer need any heavy duty items. They may have more wealth, but they remain frugal spenders.

Conclusion
Canada’s population is not only aging, but also due to its low birth rate, losing population under 15 years of age. That means, more spending on health to look after the needs of older persons, and less on education – especially on elementary and high school. This changing demographic mix would likely keep federal and provincial governments to keep adjusting their budgets on education, health, and other social services – designed strictly for children and the elderly. For any province losing population would also mean lesser transfers from the federal government.

In economic terms, both the shrinkage in the number of children and the rising number of older persons are detrimental to the overall consumer spending, and that, in turn, means dampened future growth of the nation’s economy. Considering the constrained spending of the majority of the 15-64 group, who is already carrying financial obligations on mortgages and other debts, and with little or no change to spare or save, the future of consumer spending in Canada, vital to is economy, doesn’t look that rosy.

Tags: Canada’s population, Canadian provinces, Population by age, Consumer spending, Economic/social implications of aging, Statistics Canada

Does the relationship of ‘opposites’ or ‘likes’ last?

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Some say “the opposites attract”, while others say “the likes attract.” Who’s right? The more I think about it, the more complex it gets. Because couplings are not that simple to
divide into two distinct groups. Moreover, traits of persons forming such couplings change over time, i.e., starting with the eventful day that persons initially met or dated. These changes could be caused by several factors including personality traits, social and economic conditions, presence and nurturing of children, demands of jobs or professional occupations held, financial situation, family work-life balances…the list is endless.

In this post, I first define why men and women fall for “the opposites” or “the likes” and then how over time, their once so cherished relationship turns sour to the extent that they can hardly stand each other. The result: the likely dissolution of their relationship. Statistically, more than half of such couplings end up in a divorce, and those not divorced, are likely to live as strangers under the same roof.

The key factor bringing together the opposites
The key factor attracting the opposites is the desire to fulfill one’s void in personality, or desire to have, or compensate for something, one doesn’t have or possess. For example, an introvert may be attracted to an extrovert, a less educated to a higher educated, a poor to a rich, an obese to a slender, someone lacking love finding one full of love, and so on. You get the gist. One is looking into the other something that he/she doesn’t have. The seeker is happy to have met and married the one bestowed with the desired trait(s)a desired. That gives the seeker a feeling of satisfaction or fulfillment – a strong motivation to hookup.

But can they live happily together over the long run? In my opinion, they can’t. Sooner or later, their individual personality traits are likely to re-appear, especially when either’s expectations of the other are not met. For example, a person seeking love may not get the kind of love and affection he/she expected, or poor may not find the rich sharing the affluence with the same enthusiasm, or the extrovert may no longer able accept introvert’s life style. Over time, their relationship may turn tense and sour, resulting in a total loss of communication and domestic harmony. The relationship guru, like Dr. Phil McGraw, would be glad to recommend a professional counselling for such couples.

The key factor bringing together the likes
The key factor here is the commonality of their interests and personality traits. As the saying goes, the like minded meet and interact more as they like one another, want to share time together. They are happy sharing common interest and values. The commonality brings them together, including matrimony. However, as psychologists points out, too much familiarity or commonality breeds contempt too. There may come a point where these people had had enough of each other. As a result, boredom, solence, or mutual nit-picking may evaporate all the once harmony.

Viagra for women – a brief perspective

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In August 2015, the Food and Drug Administration (FDA) of the United States approved the sale of flibanserin, a pink pill, under the generic name Addyi, to enhance libido of pre-menopausal women. The media hyped it as ‘Viagra for women’. Those concerned about gender inequities were satisfied to see that women now have Viagra to boost their sexual desire like men have been doing since 1998 – when Pfizer began to sell sildenafil, a blue pill, under the trade name ‘Viagra’. Is this gender-specific Viagra going to be effective as it is designed to be?

Let us look at it briefly in this post.

Viagra for men
The drug was introduced as a potential cure for erectile dysfunction (ED) – i.e., a man’s inability to have erection to perform sexually. A good proportion of men in the forties and over lose their ability to have desired erection, as with age, they are more vulnerable to diseases like diabetes, cardiovascular, prostate, kidney/liver ailments, etc. All of such diseases, in turn, constrain the blood flow in their body organs, including penis. What this pill is supposed to do is to improve the blood flow in the nerve chamber of a mans’ penis, fill it up with blood, harden it enough to complete his so-called ‘manly act’. In a way, this magic pill has given males a ‘chemically induced’ power to boost their ‘manhood’, uplifted their egos, and sexual participation and domination. Alas! This euphoria doesn’t last long because the lasting effect of this pill has been limited. Now other pharmaceutical companies are selling similar drugs like Cialis and Levitra with longer lasting effects. Still, this is all ‘chemically induced’ short-term euphoria.

Depending on a man’s age and other physical conditions including how serious the ED issue is, a doctor can prescribe a dose of Viagra anywhere from 25 mg to a maximum of 100 mg. The pill is supposed to be taken four hours before the couple plans to indulge in a sexual interlude.

Like any other drug with side effects, this magic blue pill for men also has its share, including headache, flushing, upset stomach, stuffy or runny nose, dizziness, abnormal vision (such as having a blue colour tinge) – to name a few. Doctors won’t recommend Viagra to those taking any drug containing nitrates, or to those allergic to sildenafil. In the same manner, they recommend to their patient to go to a hospital for emergency treatment if the erection wouldn’t go away after four hours or more.

One of the reasons Viagra for men has been working is because men, by nature, can easily compartmentalize their feelings, emotions, or any distractions prior to sexual indulgence. Once they are determined, excited, or stimulated (chemically or non-chemically) to have sex, and their organ is all up and ready, they are all set to go and complete the act. Worries and distractions may again engulf them right after the act, that’s a different story.

Viagra for women
Women, on the other hand, are unable to compartmentalize their emotions – personal, physiological, and psychological – before sex. They may appear fit physically and be willing to give-in to their partner, but their brain may be on a totally different wave-length. They may be thinking about anything but sex. It could be their inter-personal relationship with their partner, job, children, personal physical looks, ailments, or any other stressful or depressive thought, causing invisible distraction. They don’t need this sort of distraction before sex.

For women, the thoughts of arousal, or desire to make love, always arise first in their brain, which in turn, transmits signals to other organs of their bodies, creating arousal, sensation, or tenseness. It’s well-known that a man mostly gets aroused by visual means whereas a woman by signals of desire transmitted by her brain. Unless a woman is totally relaxed, in full control of her emotions, free of any stress or depression, she can’t fully enjoy sex, climaxing to achieve orgasm. And, there is no pill as yet that can enable a woman to reach that kind of happy, calm, and relaxed position to fully participate and enjoy sex.

Even the current pink pill, or ‘Viagra for women’, is simply meant to increase a woman’s sexual desire and likely to wet her key genital areas. That really doesn’t mean that she is all ready to enjoy sex. She could still be distracted for any reason, which in turn, may leave her dissatisfied and/or unfulfilled.

For those not yet familiar with this new pill, it’s worth mentioning that the FDA approved it after initially rejecting it twice – in 2010 and 2014. Finally, the pharmaceutical company, seeking FDA’s approval to sell this drug, conducted a clinical trial (its technical details are omitted here, but can be found on the FDA’s site) on a sample of 2,400 women, with an average age of 36, and who were suffering from hypoactive sexual desire disorder (HSDD) – or put simply, a low sexual desire. The results showed that the group taking the drug had experienced slightly more sexual arousal as well as sexual participation than the one on placebo. That was enough to convince the FDA to approve the drug for commercial sale.

A woman is supposed to take a dose of 100 mg of flibanserin (or female Viagra) once daily just before bedtime. She can discontinue it after eight weeks if she finds no improvement in her sexual desire.

While she is on this pill, she shouldn’t consume alcohol.

Some of the most common side effects of this drug include nausea, dizziness, dry mouth, and insomnia.

Last word
Based on what I have read on this drug so far, I believe we are still a long way from creating a magic pill that would make a woman not only just want more sex, but also enjoy it to the best of her ability – to feel its ultimate orgasmic pleasure.

In my opinion, the current pill is a step in the right direction. I am sure the researchers of pharmaceutical companies will eventually find a pill, ideally suited to treat sexual dysfunction of both pre-and-post menopausal women.

Tags: Erectile dysfunction (ED), Sexual desire, Sexual interlude, Slidenafil (Vigra for men), Flibanserin (Viagra for women), Orgasm

Does alcohol enhance sexual performance?

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    A few months ago, I was at a social gathering enjoying drinks with my friends. All of a sudden, someone raised a question if alcohol consumption enhanced sexual performance? I looked at my friend, paused, then mentioned that alcohol stimulated sexual desire but it didn’t improve one’s performance. A general discussion ensued, followed by sexual anecdotes.

    One thing was sure. The question raised was not something new. Four hundred years ago, when William Shakespeare wrote Macbeth, he attributed this statement on alcohol consumption to one of his characters – a sly porter – “… it provokes, and unprovokes; it provokes the desire, but takes away the performance.”

    Let’s look at both sides of the coin here.

      Alcohol provokes the desire

    Alcohol, consumed in moderation may relax a person, loosening his/her inhibition(s) in a social get-together, initiating new contacts, or conversing on a topic he/she felt uncomfortable about, overcome shyness, or even in bed with a spouse, partner, or with a one-night stand friend, able to discuss the way he/she wants to have a good time or fulfill any sexual fantasy. Here, a moderate alcohol consumption may even act as an aphrodisiac. As one survey in Psychology Today revealed that alcohol consumption “greatly or somewhat improved” sexual enjoyment for 45% of men and 68% of women respondents.

    What do we mean by moderate consumption? A blood alcohol consumption level (BAC) of less than 0.05 for men and 0.04 for women. A 150-lbs man with three drinks within two hours can reach, or even exceed BAC level of 0.05 – depending on his body metabolism, and the type of food he is eating.

      Alcohol takes away the performance

    An excessive consumption of alcohol, on the other hand, not only causes dehydration in the body but also depresses the central nervous system. A person may fall asleep, not a restful sleep but with frequent awakenings, headaches, nightmares, etc. The dehydration, in turn, may cause a drop in blood levels of testosterone – a hormone that ignites male libido. Since major biological activities and functions of a body utilize water molecules (especially its oxygen component), any drop and/or restricted flow of blood caused by dehydration is bad. And, when the circulation of blood is poor in vital genitals of a man and a woman, they are going to be deprived of all the sexual fun. What fun can a man have with his limply or flaccid penis? Or a woman with her dry vagina?

    Also dehydration increases the hormone – angiotensin – that’s associated with erectile dysfunction (ED).

    Some studies have shown that excessive consumption of alcohol (or higher BACs) may delay or prevent men’s ejaculation and women’s ability to reach orgasm; for example, men with BAC of 0.09 may have problem with ejaculation.

    Studies have also shown that men with chronic drinking problem may not only lose testosterone but also gain more estrogen – a female’s hormone. Women, on the other hand, may lose interest in sex, may find it hard to reach orgasm.

      Alcohol affects women more than men

    Because of their lower weight and lesser water content in their body; the latter implies that it takes women longer to dilute or ingest the alcohol’s effect.

      In conclusion:

First, avoid alcohol consumption four to six hours before bedtime.
Second, after two stiff drinks, take the third as a glass of cold/chilled water to dilute the consumed alcohol.
Third, if any sexual interlude is on the agenda for the evening, stick with moderate drinking, or completely abstain; you will be glad you did it.

The contents of this note rely heavily on the following two sources:

1. Petra Zebroff’s article in The Huffington Post, 01/07/2013;
2. Bechtel, Stefan, The Practical Encyclopedia of Sex and Health, Rodale Press, Emmaus, Pennsylvania, 1993.

Tags Sex, Alcohol consumption, Erectile dysfunction, Testosterone, Estrogen, Angiotensin

Proliferation of credit cards in Canada, 1984-2014

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The six major Canadian chartered banks and other financial institutions are well aware of Canadians’ extensive use of VISA and MasterCard (MC) credit cards. According to the latest statistics published by the Canadian Bankers Association, not only the number of these cards in circulation has mushroomed from 13 million in 1984 to 72 million by 2014, the number of issuers of these cards has also jumped from 10 to 28. In 2014, there were 15 principal issuers of MCs and 13 of VISA cards.

Subsequently, the number of merchant outlets, accepting VISA and/or MC has increased 3.4 times – from 442,928 in 1984 to 1,485,147 in 2014. And, the gross sales slips issued by these merchants have sky-rocketed from 325.2 million to 3,675.6 million – an increase of 11.3 times compared to an increase of 1.5 times in the potential number of credit card users, i.e., the population 18+ (18.9 million to 28.6 million). This translates into 128 gross sales slips processed per person in 2014 compared to 17 in 1984 (Chart 1).

Chart 1_credit card_blog

The net dollar value of transactions on these cards (including cash advances) has risen from $17.10 billion in 1984 to $399.23 billion by 2014 – a 23-fold increase. Since money owed on credit cards is a part of consumer debt, no wonder, Canadians are increasing their overall consumer debt, as reported periodically, by both Statistics Canada and the Bank of Canada. Canadians seem to be in love with their credit cards. They likely use these not only to purchase goods and services, but also for convenient travel, bill payments, shopping on phone, and above all, for shopping online. The continuing growth of e-commerce is one of the key factors pushing the use of credit cards.

Sensible use of credit cards
It’s not bad to use credit cards (as a convenient and handy source of payment for any purchase in-person, or online) as long as users can repay their full balances each month. If that were the case, users won’t pay any interest to issuers, who will still make money on commissions charged to merchants selling goods on credit cards. But the reality is different. A good proportion of these card users carry-over monthly balances, likely because they don’t have sufficient funds to fully pay off their accounts, on interest rates as high as 20+%. These balances accumulate over time, putting these users deeper and deeper in the hole. These users constitute the most financially vulnerable group. Of any payment they make, a good portion of it will likely cover the interest charges. And, if they are making just the minimum payment, then almost the entire amount is simply covering the interest charges. Interest paid by these users is all that institutions need to solidify their revenue base. Those who pay off in full each month hardly contribute to this base (other than paying their annual card fee – which, again, varies with the type of card they carry). Since the interest on loans and credit cards is one of the key sources of revenue of issuers, they want to keep this financially vulnerable group as well as their peers around by further offering them various incentives, including the reduced monthly payment, periodic increases in their credit limits, allowing them to skip a payment with full interest charged – to name a few. Because it’s the interest income from this group that’s supporting other customers’ free air travel, variety of insurances, car rentals, ad-hoc rebates, cash-back programs, etc. In other words, this group is helping issuers not only to keep their other customers happy, but also in expanding their businesses.

Card issuers are not to be blamed
To be fair to card issuers, the truth be told. We live in a democratic and free-market system. Issuers are not forcing anyone to use their credit cards. It’s the user and his/her vulnerability, financial needs, impulsive shopping habits, inability to postpone a purchase, or some personal urgency, that may make him/her to use a credit card – that, too, of his/her own choice. Issuers of cards are there in the market, selling ‘money as a good at a cost’ to customers in need of their product. Issuers have to protect their money against any risk as well as earn a decent return by charging interest. On the other hand, users have the responsibility to weigh the pros and cons of using credit cards to finance their spending habits. They need to ensure about their ability to handle credit well, and within their affordability. The onus is strictly on a user to pay in full or carry-over the monthly balance. He/she doesn’t want to be labelled as ‘delinquent’, or ultimately ‘bankrupt’ (I will be writing a separate note on personal bankruptcies).

90-Day delinquency rate
The financial institutions define the fiscal year-end ’90-day delinquency rate’ as the ratio of the number of overdue accounts for 90 days expressed as a percentage of all accounts. So a user who is making just the minimum payment monthly is not a delinquent even though he/she isn’t paying any principal. No wonder, the 90-day delinquency rate has been around 1% or less with the exception of fiscal year 1990, when the rate jumped to its highest value of 1.8% (Chart 2). Keep in mind that the Canadian economy experienced a mild recession over the 1990-91 period. During the recession, those people who lose jobs and have no savings to rely on, usually depend on borrowed money – as a bridging measure. Another spike in delinquency rate of 1.3% can be noted for 2009, year when the economy just began to turn around after the recession – from late 2007 to early 2009. Technically, users who can’t pay a portion of balance outstanding should be treated as delinquent. But since the institutions care only for their interest income, they are not bothered about the time such users will take to repay their balances outstanding. Institutions simply remind users each month the time (in years and months) it will take to repay the balance if they kept paying only the minimum payment.

Chart 2_credit card_blog

What’s this minimum monthly payment?
This payment is the interest charged on the outstanding balance from the previous month plus ten dollars. Even though there are lots of calculators available on the Google site for users to calculate their monthly payment for a given amount outstanding, at a given interest rate, I am simply illustrating a case for the benefit of my readers.

Say, one owes $5,000 at 13.99% interest rate. The interest is charged daily. So the first thing to do is divide 13.99% by 365. This gives us a daily rate of 0.0383%. Now if one’s statement period covers 30 days (as usually shown on the monthly statement), then the monthly interest charged is: (5000×0.0383×30)/100 = $57.45. Add $10 to this, and you have a minimum payment of $67.45. So if one pays this amount only, then it is evident that one is simply paying the interest charge on $5,000, and just about $9 or so to pay off the balance outstanding. At this rate, a user will take closer to 500 months (or 41 years and 7 months) to pay off $5,000. That’s what the card company writes as a reminder on its monthly statement. For $10,000 balance, it will be close to 1,000 months (or 83 years and 3 months). The inclusion of this reminder, along with the rate of interest being charged on the balance outstanding, in a monthly credit card statement is mandatory in Canada. Its objective is to remind and persuade users to pay more than the monthly minimum to pay off the balance quicker.

Simply making the minimum monthly payment will leave the card user in debt forever.

Tags: VISA/MASTERCARD Credit cards Consumer debt

Minimum payment Interest on credit cards

Household debt is rising in Canada

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Statistics Canada regularly publishes the ratio of total household debt to disposable income. Since this ratio has been steadily rising, its publication alarms and reminds Canadians the extent to which they are in debt relative to their incomes available for spending and saving. More debt means committing more income to pay-off debt, reducing the potential to save for any contingency including saving for children’s higher education, and eventually, retirement. Not only that, highly indebted Canadians would have limited money left over for paying monthly bills, and other committed expenses, and for day-to-day spending on essentials. This personal spending is one of the key ingredients of economic growth. The bottom line here is that if indebtedness of Canadians continues to grow and they have less and less money left to spend and/or save, it’s eventually going to affect the health of the economy. We may witness a home-grown economic recession resulting in from this steadily growing household debt.

In this note, I comment on the rising indebtedness of Canadians over the last three decades: 1984-94, 1994-2004, and 2004-2014. Besides talking about the two main components of household debt, i.e., mortgage and consumer debt, I show in the accompanying charts the increasing role of consumer debt in household consumption expenditure or spending, which in turn, plays a role in boosting the economy’s health. In other words, consumer debt is not only becoming more and more instrumental in maintaining household spending but also increasing its proportion of nation’s gross domestic product (GDP). This debt induced growth can’t last for ever. Eventually, Canadians are going to be squeezed in their own financial web.

Debt-to-income ratio has been rising
The ratio of total debt outstanding to household disposable income has risen from 57.4% in 1984, to 92.8% in 1994, 115.5% in 2004, and 158.2% in 2014 (Chart 1). This shows that in 1984, we Canadians owed 57 cents of each dollar of disposable income; thirty years later, we are owing one dollar and fifty eight cents – meaning we owe more than our disposable income (since we are using macro data, we are referring to a national picture rather than of specific groups of households owing debt or no debt). Nationally, we have substantially increased our debt liability. Since both the size of the economy and population have increased over time, we measure changes on a per capita or per person basis. For instance, our total debt per person has risen from $6,370 in 1984 to $49,740 by 2014 – an increase of 7.8 times, compared to the 3.1 times increase in our per capita income – from $17,900 to $55,560. This shows that we have been raising our indebtedness at a rate faster than the growth of our national economy (Chart 2).

Chart 1
Chart 2

Mortgage debt is the bigger component of total debt outstanding
Mortgage debt is the bigger component, constituting 68.4% of the total debt in 1984, rising to its maximum share of 74.6% in 1993, then dropping to 68.3% by 2004, and then climbing again since 2010 to 70.5% by 2014 (Chart 3). The highest mortgage share during the early nineties can be attributed to the hectic pace of purchasing and upgrading of houses by the so called ‘baby-boomers born between 1946 and 1965’ who were then aged between the late twenties (likely buying their first homes) and mid forties (likely purchasing up-graded homes). On the other hand, their corresponding cohorts, born between 1965 and 1984, were purchasing homes in 2010 and after with relatively higher mortgages – including the short period when buyers could purchase a house with no down payment at all, or move into a fully mortgaged house. Again, during the early 2000’s, the federal government of the day tinkered with the amortization period, relaxing to 40 years from the conventional 25-year term, which in turn, may have encouraged potential buyers to take higher mortgages. Right now, we are back to the conventional 25-year term.

Chart 3

Also keep in mind the way the concept of mortgage debt is defined here. This includes not only the amounts taken to buy the first house, but also any subsequent upgraded house(s), house purchased for investment purpose to generate rental income, loans taken as reverse mortgages to pay off consolidated debts, or to finance children’s higher education, or have funds for a new or on-going business. Here, the home equity (i.e., the market value of home less its mortgage debt outstanding) plays a crucial role of a secured collateral that can be used to borrow funds to meet any contingency.

Use of consumer debt is growing
Consumer debt, on the other hand, represents all debt outstanding on different credit cards issued by banks, department stores, other retailers and institutions, student loans, car loans, secured and unsecured lines of credit, and all other outstanding loans and unpaid bills. This debt is open to use to purchase all kinds of goods and services ranging from travel, entertainment, household goods and appliances, to paying bills, and for some really financially straitened, for putting food on the table. Its share of total debt had remained around 30% with the exception of 1993 when its share dropped to its lowest at 25.4%. However, looking at this debt outside its share of total debt, it is worth noting that consumer debt per person has risen from $2,012 in 1984 to 14,662 by 2014 – an increase of 7.3 times compared to the eight-fold increase in the mortgage debt (Chart 4). This increase in consumer debt between 1984 and 2014 can be attributed two factors: first, the growth (3.2 fold) in households’ consumption expenditure exceeding the growth (2.8 times) in its disposable income, and second, the heavier overall indebtedness pushed by factors like different incentives offered by credit cards, pitches of car loans with no down payment, and accessibility of lines of credit at low interest rates. For a household with expenditure exceeding income, and no liquid saving available, there is hardly a choice other than to use credit to purchase the desired goods and services.

Chart 4

Consumer debt represented 21.4% of total household consumption expenditure in 1984, rising to 26.1% by 1994, 37.4% by 2004, and 48.6% by 2014 (Chart 5). Put another way, consumer debt was one-fifth of total consumption expenditure of households in 1984; thirty years later, it’s nearly one-half. If this debt is cushioning up household spending, and this spending being a key component of our national economy, then evidently this debt is equally helping the economy float and grow. Consumer debt, which represented 11.2% of our nation’s gross domestic product (GDP) in 1984 jumped to 26.4% by 2014 (Chart 6). Even though the household spending as a proportion of GDP hasn’t changed much over the last thirty years (just hovered between 53% and 56%), the importance of consumer debt to the growth of the economy has been growing.

Chart 5
Chart 6

Most of the changes occurred between 2004 and 2014
Most of the changes in the key financial components of households occurred over the 2004-2014 decade.For example, of the total increase of $1.5 trillion in GDP (in current market prices) between 1984 and 2014, 21.6% was over the 1984-94 decade, 35.5% over 1994-2004, and 42.9% between 2004 and 2014 (Chart 7). On the other hand, of the total increase of $1.6 trillion in total debt, 58.2% alone occurred over the 2004-2014 period. This is the period when the real estate market went through dramatic changes including a sudden surge in prices of homes across the land, pushing demand for larger sums of mortgages, tinkering with rules on down payment, mortgage amortization term, uncertain economy, low interest rates, role of foreign buyers and speculators, and stagnant incomes. As a result, the likelihood of owning a home, a cherished dream of each and every Canadian family, seems to be slipping away for certain demographic groups.

Chart 7

Parting words
The growth in debt isn’t going to stop. Keep in mind that not all debt is bad. Any debt taken to improve income potential or to acquire an asset is considered as a good debt. Canadians, including potential immigrants, aspiring to own a home, are going to take hefty mortgages to purchase a home. Similarly with tuition and other costs of obtaining higher education rising, persons aspiring to acquire higher education or upgrade skills are going to take more student loans. With incomes stagnant, rising expenditures are equally going to make households borrow more to finance their needs. Middle income families are no longer the exclusive users of consumer credit. Affluent families use it too for convenience, or to reap benefits and rewards (like air travel including insurance) offered by credit cards. Canadians have to use some degree of self-discipline to use credit wisely and within their financially comfortable boundaries. That’s one way to slow down the growth of household debt.

(See my next blog on the concept of minimum payment and the small-print statement, though legally required, on the number of years it will take to pay off the balance – something we see in our monthly credit card statement).

Charts

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charts: misery-index-canada-1980-2014 (1)

Misery Index, Canada, 1980-2014

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Misery Index is a simple indicator of the health of the economy. This index, introduced by Arthur Okun, the economic adviser to the late U.S. President Lyndon Johnson, is the sum of unemployment rate and inflation rate (i.e., year-over-year percent change in Consumer Price Index). It’s well known that the worsening of both unemployment and inflation rates can be costly to not only the economy but also to its population. This cost is not entirely in dollars; this could be social, psychological, and personally painful. Ask an  unemployed how he/she feels when managing to feed his/her family? Or, ask an elderly on a fixed income how he/she is coping with the rising cost of living? Research has also shown a strong association between misery index and the crime rate.

In this note, I take the opportunity to look at the misery index during Harper’s administration, 2006-14 (as the calendar year 2015 is not over yet, and I didn’t want to use fluctuating monthly data) compared to previous Liberal and Conservative administrations since 1980. Between 1980 and 2014, Canada had five Prime Ministers (excluding Kim Campbell and John Turner, who held office for a very short tenure): P. Trudeau (1980-84), B. Mulroney (1984-93), J. Chrétien (1993-2003), P. Martin (2003-06), and S. Harper (2006-14). Their respective misery indexes are shown for periods 1980-84, 1985-92, 1993-2002, 2003-05, and 2006-14 – since I am using the annual rates.

During P. Trudeau’s administration, Canada experienced a worsening recession during 1981-82, with the rate of inflation reaching its highest at 12.5% in 1981, the only year when the rate of inflation exceeded the unemployment rate of 7.6%. In 1982, these two rates were almost equal at 11%. By 1984, the rate of inflation dropped to 4.3% but the unemployment rate jumped to 11.3%. Since one or both rates were quite high between 1980 and 1984, the misery index for 1980-84 period averaged to 17.4%.

Under B. Mulroney’s administration, the misery index fell to 13.4% as both the inflation and unemployment rates fell – the former ranged between 1.4% and 5.6% compared to the latter between 7.5% and 11.2%. Indeed, Canada experienced another recession in the beginning of the nineties but that was much milder compared to that of the early eighties; e.g., the rate of inflation peaked at 5.6%. The gap in the rates of unemployment at the peak of these recessions didn’t vary that much compared to the significant gap in rates of inflation. So the misery index fell largely due to the drop in the rate of inflation.

Ever since J. Chrétien’s administration took over in 1993, the annual rate of inflation in Canada has been between 0.1% and 2.9% – in line with the Bank of Canada’s goal to keep inflation rate low to 2% or around. It’s the unemployment rate that has fluctuated between 6.0% and 11.4% between 1993 and 2014. The unemployment rate has been the dominant component of the misery index, averaging to 10.5% for J. Chrétien, 9.5% for P. Martin, and 7.9% for S. Harper. Again, during S. Harper’s administration, Canada experienced its share of the global economic slump between 2007 and 2009. During this slump, Canada’s rate of inflation remained steadied around 2% but the unemployment rate increased from 6.0% in 2007 to 8.3% in 2009. In other words, the latest economic slump was hard on the Canadian labour market.

The good thing is that the misery index has been steadily falling over time, and hopefully, will continue its downward slide for the incoming administration.

A cautionary note for those familiar with this index. I recognize that this index has been defined in many different ways. For example, some economists have used it as a sum of inflation, unemployment, and interest rate minus the year-over-year percent change in per-capita GDP growth. Since the dynamics of the latter two components is highly volatile in nature, especially the multi-faceted interest rate, it could have distorted the historical comparability.

 

See also “https://en.wikipedia.org/w/index.php?title=Misery_index_(economics)&oldid=681602752&#8221;