Retirement planning for my family

Once-in-a-generation chance to build household savings

While the story for the past decade or more has been one of undersaving and overborrowing, Canadians saved a huge amount last year. The national household savings rate, which normally hovers between 2 per cent and 3 per cent, jumped to 27.5 per cent from April to June of 2020.

It remained high in the third quarter, at 14.6 per cent. BMO Economics recently reported that Canadians saved $150-billion more than normal in 2020, the equivalent of 7 per cent of GDP.

Not all households have been able to save. Some people have seen their incomes devastated, then falling between the cracks of government supports and depleting whatever meagre savings they had to begin with. The COVID-19 pandemic may have amplified the already yawning inequality of wealth between modest-income and high-earning Canadians.

Governments have been talking about household savings in the same way they often talk about cash held by businesses: money that is “sitting on the sidelines” just waiting to be spent. Finance Minister Chrystia Freeland calls it “preloaded stimulus,” going so far as to solicit ideas from Canadians about how the federal government could encourage Canadians to spend these “excess” savings to drive the economic recovery.

This thinking misses an opportunity to learn a counterintuitive lesson from the pandemic. Instead of seeing the 2020 savings bump as an aberration, governments should use it as an opportunity to build a plan to further strengthen household balance sheets.

Coming out of a year of forced savings for many, Canadians may be primed to save more. Saving is habit-forming, and governments risk breaking this habit if they focus exclusively on encouraging people to spend.

At the same time, people who have been hardest-hit financially by the pandemic, many of whom face other systemic disadvantages, need help now more than ever in rebuilding (or starting to build) a nest egg to protect them from future shocks and build financial security for the long term.

Increased savings also appear to have contributed to a surprising feeling of economic optimism. A recent poll by Pollara Strategic Insights found that, compared to 2019, Canadians have a stronger belief in social mobility and feel more financially secure personally. The survey also recorded the highest level of optimism about the future of the middle class since 2014.

To see this level of economic hope in 2020 is remarkable, and we would argue it is linked to household savings. Any government promising to strengthen the middle class ought to be paying close attention to the savings side of the balance sheet.

What might a plan to encourage further, longer-term savings look like? First, it should provide help to those modest-income households who, unlike upper-income households, have not accumulated unplanned savings during the pandemic. Together with colleagues from Maytree, we recently proposed a Canada Savers’ Credit that would provide matching contributions for modest-income Canadians who save through tax-free savings accounts.

Second, it should encourage employers to support the financial health of their employees through workplace retirement plans and other programs. Here, the government could take a page from recent U.S. retirement reforms and offer help to small businesses, which are much less likely than large employers to offer savings programs and need a boost coming out of the pandemic. Washington is providing tax credits for retirement plans. Employees with access to payroll-based savings are 15 times more likely to save.

Third, it should strengthen our savings “infrastructure” by encouraging portable benefits programs that aren’t linked to a single employer. With the rise of contingent work and the decline of traditional pensions, we need ways to help workers save that match the reality of the 21st-century labour force.

It is understandable that governments want to get money into the economy, particularly when so much of the savings households built up in 2020 came from government transfers. But for governments to lean heavily toward encouraging spending misses perhaps a once-in-a-generation chance to build stronger household balance sheets among Canadians of all incomes, and with them, the enduring sense of economic optimism that is necessary for sustainable, inclusive growth.

Jonathan Weisstub and Alex Mazer are co-founders of Common Wealth Retirement, a financial technology company.

This op-ed was first printed in The Globe & Mail on January 17

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Common Wealth

Common Wealth is on a mission to make it possible for every Canadian to have a financially secure retirement. We provide a quick and easy retirement planning and saving experience, powered by a turnkey digital platform.

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