Generational Crunch

On Monday, the Globe & Mail published an article comparing the costs of being a young adult in 1984 and 2012.  This isn’t really that new of a story – I’m an early Gen-Y member and graduated with well in excess of $25,000 of student debt, plus heaps more in credit card debt.  Thankfully I was able to get rid of the credit card debt fairly quickly, but my debt story was pretty average, and my income story was above average.  Today’s average students are graduating with even more debt than I and my classmates did almost 7 years ago, with lower job prospects — even people educated to work in professions like accounting or teaching are struggling to find work.  Everyone knows this, and either a) accepts it’s a problem and assumes nothing can be done, or b) says it’s a good thing because it gives graduates an incentive to work for a living to pay off the debt (and gives a disincentive towards getting “too much” education).  I recently heard that latter argument described as “debt slavery.”

But the problem is bigger than just today’s students, the poverty they’re forced into, and now the lack of those well-paying jobs they were promised they would get if only they would just kindly hand over their money to the universities for 3-6 years of their life.

For a number of years, I’ve been a volunteer at tax clinics for low-income individuals – I started in university doing returns for students, and continued in the Toronto area volunteering at clinics put on either by the Institute of Chartered Accountants or the Canada Revenue Agency itself.  I missed the chance to do this last year while I was overseas, and struggled to find similar opportunities here in Vancouver, but nevertheless I’ve seen the income situations of low-income earners.  Through these experiences, I’ve come across many, many, senior citizens.  And their situations make me fear for the destiny of my generation and the generations that follow.

Most seniors in Canada who don’t have company pensions (which, as it turns out, is a lot of them), have two main sources of income: Old Age Security, and the Canada Pension Plan (which they would have paid into over their lifetimes, as all workers still do today).  The OAS currently works out to about $6,500 a year, and CPP (on average) is just over $6,300… these amounts vary based on the individual’s situation, including things like whether they’re married or not and what other income they have, but these amounts are pretty typical.  At this income level, people over 65 would pay no taxes on this income – our tax system gives additional credits to senior citizens (whether or not this is fair is subject to much debate, most of which is ignored because seniors tend to vote far more than any other age group).  So that’s just shy of $13,000 of after-tax income, assuming they have no other savings they can tap into — many people don’t.  If they were lucky enough to have been a teacher or a worker in a unionised shop they might have additional pensions – but many, including everything from skilled labourers to business people to artists – do not.

Why does the income situation of today’s seniors matter?  As Carrick outlined in his article, previous generations had it much easier financially.  You could graduate from university with little to no debt, start a full-time job that paid relatively well, and purchase a home while still in your 20s.  This in theory led to a fully-0wned home by the time you retired.  So $13,000 a year (after-tax), while a fairly small number, can actually provide the basics that you need to live – your housing costs are minimal (property taxes, basically) and the rest is available for food, clothing, and other essentials.  Heck, this might be saying a lot, but I truly believe that even I could live on $13,000 a year (after tax) if I didn’t have to pay for housing costs.  It’s far from perfect, and you wouldn’t live an extravagant life, but the system works – for now.

But herein lies the problem.  Employers in today’s age are much, much, less willing to offer pensions to their employees – if people are even able to get full-time work in the first place.  This is only based on anecdotal evidence, but I see around me so many fellow Gen-Y members that work entirely on a contract-to-contract basis.  They have no stability in their job, and certainly no benefits.  I fully expect that people of my generation will retire without significant retirement savings – even if you ignore the debt problem.

And there is a big debt problem.  The average student (as of a couple of years ago) takes 7.4 years to pay off their student debt.  This isn’t that new – it was 7.2 years for a 1995 graduate, so Gen X is wrapped up in this too.  But assuming most people wait to purchase a home until after student loans are paid off (which the same survey suggests is the case) and they’ve accumulated enough money for a down payment (which, through the Homebuyers’ Plan, now frequently comes directly out of what little retirement savings (RRSPs) people have), this generally means we’re all buying homes much later — at least some time in our 30s.  That is, if we can afford a home.  Since the costs of those are going up so much, it will take us all longer to accumulate enough funds to make a down payment.  Add to this the fact that most banks generally wouldn’t let you amortise your mortgage over a period longer than you’ll be earning income, and many of us will simply never buy a home.  I’m slowly coming to terms with that, while at the same time running through all the possible scenarios in which I could actually afford a home – especially here in Vancouver.  At the moment I have all my hopes pinned on a market crash, which is really not a very positive way to look at the world.  This problem is further exacerbated by a government highly focused on making Canada a resource-based economy – which in theory gives prosperity in the short-term (while our generations are still low on the pay scale), and leaves relatively little economic hope for the long-term when we’re supposed to be getting those higher wages for all our years of experience.

So where will that leave my generation, as well as much of Gen X and whatever we want to call the next generation (no one seems to have decided yet on a consistent name)?  Well, it will leave us retiring, hopefully, with no debt.  Hopefully.  Some of us, of course, will be lucky enough to have inheritances or really good jobs so we can continue to pay our own way.  But many of us will still be paying housing costs all the way through our retirements — something our system is not set up for.  I live in a studio apartment and currently pay more than the aforementioned $13,000/yr in rent alone.  Even if I were to downgrade to one of the cheapest apartments available in the Vancouver area today, I would be paying housing costs of around $8,500 – leaving $4,500 a year to feed and clothe myself – and I can forget about any form of entertainment.  This all assumes, of course, that inflation in housing, food, and clothing costs grows at the same rate as CPP/OAS payments, which is in no way guaranteed.  With people of all generations living longer, it’s entirely possible this money will run out sooner than we think.  After all, there are more people in the previous generation than there are in each generation that follows – the system is permanently stuck accepting smaller cash inflows from workers and higher withdrawals from retirees.

So, there it is.  It’s bad now – students are living in poverty, and have relatively little opportunity when they graduate.  But the distant future is far more bleak, and one that we should be paying more attention to.  Between a financial system that is firmly founded in funneling money from the young and poor to the old and wealthy, and a number of environmental problems (climate change along with dwindling supplies of both water and fossil fuels), the previous generations are basically leaving us fucked.  No wonder students in Quebec have been marching in the streets.  I’m surprised the rest of the country hasn’t joined them.

EDIT: As it turns out, this problem is not limited to Canada.  The topic came up on this week’s Q&A (the Australian political / current events panel show) – you can watch this week’s episode online here, or watch the May 7, 2012 vodcast here.  The topic comes up at 49:30.  The stunning statement comes in just before 52:00 – the speaker states that the Housing Research Institute has announced that by 2050, only 2% of 65 year olds will own their own home – today that number is 78%.  I think he meant AHURI (the Australian Housing and Urban Research Institute), and that he was referring to the Australian Aging Agenda’s coverage of this report – the coverage says the report says 1 in 40 will own their homes by 2051, the report itself (page 27) actually says 55% – either way, it’s a much smaller number than currently.  Factor in the drastic increases in the number of people over 65 by then, and you have  significant increase in the gross number of people who are retired and still paying housing costs.  I was born in 1983 and by 2051 I’ll be 68 – just retired at that point, unless the government ups the retirement age again.  There is an organisation called the Research Institute for Housing America that does similar research, though, and they published a report late last year that shows roughly 80% of seniors in America currently own their homes but that these rates are expected to drop rapidly.

Canada is not Australia or the United States, but as of 2010 our senior homeownership rates were about the same – 80% ish.  And, to be fair, 2010 stats would suggest that home ownership rates are increasing for early Gen-Y’ers, though we’re just catching up to late boomers.  At the same time, Stats Can points out that peaks are being hit later in life.

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