Economists were caught off guard by an anomaly in Canada’s latest debt statistics. People in all regions and age groups — except one — reduced their debt loads in 2012. The exception was seniors.
Everyone knew a shift was coming. Yesterday’s prudent pensioners would eventually be outnumbered by today’s free-spending, debt-loaded baby boomers.
But no one expected it to happen yet. The first boomers had just retired. The full impact of the post-war demographic bulge was years away. Moreover, surveys showed the majority of people in their 50s and 60s planned to keep working after age 65.
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Craig Alexander, chief economist at TD Bank, admitted he and his colleagues were puzzled. “We can see what’s happening, but it’s hard to identify the motives,” he said.
He had a couple of ideas, but stressed he was merely speculating.
“I suspect a lot (of older Canadians) took advantage of the home renovations tax credit,” Alexander said. In 2009, federal Finance Minister Jim Flaherty offered homeowners a tax credit of up $1,350 for improvements to their residence. Seniors, he suggested, might have borrowed to qualify for the rebate, intending to upgrade their homes before they sold them to downsize. Or they might have taken on debt, like everybody else, because interest rates were so low.
The important thing to remember, Alexander emphasized, is that this cohort has the lowest average debt ($47,500) relative to assets ($300,000) of all age groups. “The concern isn’t that we have a problem today; it’s that Canadians are entering retirement more financially vulnerable than they have in the past.”
Susan Eng, vice-president of CARP (Canadian Association of Retired Persons), offered a slightly different interpretation. Her organization has identified four factors driving older Canadians to take on debt:
- They no longer see 65 as a clear dividing line in their lives. “They carry on travelling and buying things and borrowing. They’re leading healthy lives and they’re not ready to slow down. They don’t fit the stereotype many people have.”
- They’re borrowing to help their children and grandchildren. Because they have collateral and a good credit rating, banks will readily lend them money.
- Their investment income was decimated by the recession. They borrowed hoping markets would stabilize.
- People in their 50s were hard hit by the recession. Those who were laid off had great difficulty finding employment. “They had to take on debt.”
Like Alexander, she sees no need to push the panic button. But she hopes the spike in seniors’ borrowing will open up a conversation on the changing face of retirement and the challenges it will bring.
So far, there is little indication that political or business leaders want to talk. The federal government is pressing Canadians to save more privately and delay their retirement. The provinces, once united in their call for improvements to the Canada Pension Plan, have now splintered.
Employers insist they can’t afford to bolster workplace pensions. Nor are they open to graduated retirement, which would allow older workers to reduce their hours as they age.
And the banks, for all their statistics and analyses, are not prepared to turn away would-be borrowers.
Each insists it’s up to somebody else to act.
No one needs to guess what lies ahead. The first danger signal is already flashing.
The longer those in charge procrastinate, the more costly the day of reckoning will be.