Although Canadians today are richer than ever, the gap between average and median household wealth has grown also.
By this measure, the main drivers of wealth inequality between Canadian households over the 2005-16 period have been rising real estate prices and an aging population, according to the 2016 Survey of Financial Security released by Statistics Canada.
However, surveys of financial security ignore wealth accumulated in public plans such as the Canada Pension Plan or Old Age Security. These programs reduce the need for low-income households to save privately for their retirement, and thus exacerbate the perceived private-wealth inequality.
The good news is that over the 2005-16 period, Canadian families' net worth – their total assets minus total debts – rose to $10.3-trillion, a 76-per-cent growth rate when adjusted for inflation. Indeed, the median household's net wealth – the amount of net assets that a household in the middle of the distribution holds – reached $295,100 in Canada in 2016, up 66 per cent from 2005. This increase is remarkable given that the period encompasses the Great Recession of 2008-09 and the oil-price downturn of 2014-15, which contributed to sluggish annual growth of 1.1 per cent in the inflation-adjusted median income of Canadian families between 2005 and 2015.
So whereas the median Canadian family holds net assets of $295,100, the 2016 average household net worth is $669,300, a gap that has increased by 44 per cent since 2005. To what extent is that a problem and what can be driving this rise in wealth inequality?
Some inequality between households is easy to understand and economically sound, for example between older households about to enter retirement and those at earlier stages of their careers or family formation.
Predictably, the results of the recent survey show that younger people hold fewer assets and borrow more while older people own more assets and have less debt. Further, the median wealth is substantially lower among lone-parent families and persons living alone, whose numbers have risen.
In particular, since people nearing or commencing retirement tend to hold, on average, higher net assets than others, their population growth over the past 10 years has pushed the average wealth up, but its impact on the median wealth is ambiguous.
At the same time, wealth inequality also has an intergenerational component through inheritances. Wealth inequality can also be the result of barriers to wealth acquisition that negatively affect not only individuals in specific circumstances, but also overall economic growth beyond a certain level.
More than 61 per cent of the rise in total household net assets since 2005 is related to real estate, including principal residence and other properties. Soaring house prices can explain a large part of the increasing wealth inequality as households from the lower quantiles are less likely to own real estate. Only about 2 per cent of the bottom 20 per cent owned a principal residence in 2016 while of the top 20 per cent wealthiest households, 96 per cent owned their principal residence and 43 per cent held other real estate such as cottages, rental and other commercial properties. Although all families along the wealth ladder enjoyed an increase in the average home prices, those at the top gained more than the rest.
These statistics speak to the need to remove barriers to quality education and to economic opportunities. In addition, given that real estate has played such a major role in wealth accumulation, policies that make housing more affordable through expanding supply warrant special consideration. Another approach to reducing the wealth gap is increasing financial literacy, since people with greater financial knowledge are more likely to make better decisions with their money. Such a multifaceted approach can reduce inequality by removing barriers to upward mobility for those at the lower end of the wealth scale.
Parisa Mahboubi, PhD, is a Senior Policy Analyst at the C.D. Howe Institute.
Published in the Globe and Mail