Measuring the Canadian Wealth Distribution Issues and Challenges vis-

1
Measuring the Canadian Wealth DistributionIssues
and Challenges vis-à-vis the LWSLuxembourg
Wealth Study Technical Conference December
14-15, 2006
2
Overview

• Background on the Survey of Financial Security
• The Canadian Pension System
• Net worth definition in Canada
• Recent wealth trends 1999-2005
• Impact of excluding pensions
• Conclusions

3
Background

• Canadian wealth surveys conducted with some
  regularity since the 1950s
• Long hiatus from 1984 survey to 1999 SFS
• Wealth value of employer-sponsored pension plans
  introduced subsequently
• Extensive consultation
• Now part of featured net worth

4
Survey of Financial Security

• Funding secured for 2005 repeat of SFS via Policy
  Research Initiative
• Reduced sample of 9000 dwellings
• Dual frame 1500 high income
• National wealth picture in wake of stock market
  crash
• Results released December 7, 2006

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Challenges 2005 SFS

• Smaller sample, lower response rates in 2005
  restrict analysis overall 67.7
• Area sample 71.2
• High income sample 49.0
• Regional analysis, certain age groups and family
  types constrained
• Next steps targeted research studies and
  production of public use micro file
• Slated for March 2007

6
Policy environment

• Examples of policy use
• Evaluate income security programs for seniors
• Preparedness for retirement
• Financial situation of students
• Analyze housing info in relation to net worth
• Central bank re sustainability of consumer debt,
  sensitivity to interest rate changes
• Response of asset allocation to taxes, use of
  tax-sheltered savings programs

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Policy environment

• Health of the defined-benefit pension system
• Coverage ratios declining
• Sponsors concerned about growing difficulty
  maintaining funds
• Pension regulators flag crisis
• Central Bank concerned re risks to financial
  system
• Heightened demands for pension information
• New data on actuarial liabilities and assumptions
• Pension satellite account in Canadian SNA

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Canadian Pension System

• Three Pillars
• Government administered plans
• Old age security/Guaranteed income supplement
• Canada and Quebec Pension Plans
• Employer-sponsored plans
• Registered pension plans (DB, DC, etc)
• Group RRSPs
• Other (DPSP, RCA)
• Individual savings plans
• Registered retirement savings plans (RRSPs,
  LIRAs, RRIFs)

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Canadian Net Worth Definition

• Includes pension assets
• Employer-sponsored plans
• Individual plans
• Does not include government-administered plans
• CPP/QPP considered
• Includes business equity
• Includes non-financial assets other than real
  estate
• Vehicles
• Contents of home

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Recent wealth trends 1999-2005

• Increase of 23.2 in median net worth
  (inflation-adjusted)
• Assets
• Big gains in housing values
• Next most important contributor was pensions
• Modest shift from financial assets to real estate
• Debts
• Increased mortgage debt
• Increased use of home-secured lines of credit
• Debt to asset ratio increased marginally

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Recent wealth trends 1999-2005

• Rising wealth inequality
• 69.2 of net worth held by highest quintile
• Net worth of bottom quintile stagnant
• Housing a big factor
• Follows increasing income inequality evidenced
  earlier
• Not due to population aging

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Trends in pension coverage

• Statistics Canada s Pension Plans in Canada
  Program
• 15,336 Registered Pension Plans covering 5.7
  million members as of 2005
• 39 of paid workers covered
• Membership rising, but coverage rates declining,
  faster for men than for women
• About 1/3 of family units had no pension assets
  of any kind according to SFS 2005
• Majority had lower income from employment

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Excluding pension assets in Canada considerations

• Country rankings and portfolio composition
• Employer pensions second largest asset after
  principal residence
• Other savings tax-sheltered in RRSPs
• Investments outside of pension assets relatively
  smaller
• Wealth concentration
• Pensions clearly have equalizing affect
• Proportion held by highest decile lower (50.9 vs
  58.2)
• Gini Coefficients lower (0.746 vs 0.688) and show
  different trends

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Excluding pension assets in Canada considerations

• Wealth distribution and wealth trends for
  specific groups affected
• E.g., couples with children
• 30.4 growth in median net worth including
  pension assets
• 45.2 growth when pension assets excluded

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Conclusions

• Omission of a key component of net worth from
  distributional wealth data risks to provide
  misleading view of the relative financial
  security of Canadians.