Why it's time to save more, not less

As RRSP season comes to an end, Canadians appear to be cutting back on their saving, and even dipping into those savings, at what may be exactly the wrong time.

Canadians cut back on building their nest egg

If prices head higher, Canadians will be caught between paying more to service debt and setting side more to compensate for lower real investment returns. (LM Otero/Associated Press)

As the season for RRSP contributions comes to an end Tuesday, Canadians appear to be cutting back on their saving, and even dipping into those savings, at what may be precisely the wrong time.

At the same time as gasoline prices rise and commodity prices soar — suggesting higher food prices are coming in Canada — there's concern over mounting evidence that Canadians are dipping into their piggy banks.

The Ottawa-based Vanier Institute of the Family, in a study released earlier this month, noted the Canadian savings rate has dropped significantly.

And a survey commissioned by the BMO Financial Group and released Saturday suggested 40 per cent of Canadians are dipping into their registered retirement savings plans (RRSPs).

Household budgets could be hit by inflation from two directions. If inflation rises enough to change a saver's assumptions about investment returns and how much to put aside, then the saver should increase the savings rate.


     How inflation erodes savings

Someone setting out to save $100 a month and hoping for a five per cent compounded rate of return over 40 years would have to increase that savings contribution by 28 per cent — to $128 — to compensate for just one percentage point of inflation persisting over the entire period.

But doing that may not be so easy, if the Bank of Canada raises interest rates and pushes up how much Canadians must spend on servicing already high household debt.

In fact, said Katherine Scott, the Vanier Institute's director of programs and research, for those families with the highest debt loads, saving isn't an option anyway.

"This group of households in particular have no resources to put aside for emergencies, retirement, post secondary education, those sorts of things," Scott told CBC News.

The Vanier Institute found that since 1990, the savings rate has dropped by two thirds.

Back then, Canadian families managed to put away $8,000, a savings rate of 13.0 per cent. By 2010, that had dropped to 4.2 per cent, an average of $2,500 per household.

The drop in savings has happened just as the average debt-to-income ratio, which measures household debt (including mortgages) against income, has risen to a record 150 per cent.

In other words, for every thousand dollars in after-tax income, Canadian families owe $1,500.

The BMO study suggested the largest proportion of those polled — 36 per cent — took money out of RRSPs for an emergency, such as the loss of a job.

A study by the Vanier Institute for the Family found household debt has soared at the same time as savings rates have fallen. (Phil Coale/Associated)

The online survey of 1,510 Canadians was conducted by Leger Marketing between January 31 and February 2, and has a margin of error of 2.5 per cent.

"What that's telling us," BMO retirement planning strategist Caroline Dabu told CBC news, "is that people don't have that rainy day savings fund."

Dabu suggested a more disciplined approach than pouring funds into an RRSP every February. Instead, set aside on a monthly basis in good times enough to cover living expenses for three months in the event of an emergency.

If inflation is about to take off, Dabu said, Canadians must prepare.

"If you assume an inflation rate of two per cent, and you decide that you need $50,000 of income for retirement, if you're going to retire in 30 years, that $50,000 is going to need have to look more like $90,000," she said.

"You should be setting aside those investments such as real return bonds," she said, that protect a portfolio from inflation.

Banks should take more responsibility

From Scott's point of view, the public discussion about savings and debt ought to move beyond financial advice. It should broaden to reflect the fact that the emphasis is much more now on individual families.

"Twenty years ago, there was much more emphasis on access to education, lower tuition fees, but now the emphasis is on putting away money through (registered education savings plans) to send your individual child to college or university," she said.

"The expectation now is that individual households will carry the risk of accumulating enough money and investing it wisely."

If that's the case, said Scott, banks and the government must do more to educate individuals about how to evaluate and deal with those risks.

The banks, she said, have not stepped up to do more to meet their obligations not to pressure Canadians into taking on more risk than they can handle.

As examples, she said, banks, credit card companies and other financial institutions could raise minimum credit card payments so that some part of the principal owed is always paid down.

Bank and governments could also do more to constrain the offering of credit cards to students or others with low incomes and high debt.

"There are a significant number of households on financially shaky ground, who are labouring under high debt loads," she said. "This group will be particularly vulnerable when interest rates start to rise."