Are bankrupt seniors harbingers of things to come?
Canadians over the age of 65 now have the highest insolvency and bankruptcy rates in the country, according to the latest family finances report by the Vanier Institute for the Family.
The population of those over the age of 65 has surged to nearly five million over the past five years, growing 14.1 per cent since the last official count, Statistics Canada says.
And the number of near-seniors — people aged 60 to 64 — grew faster than any other group, a pattern that will persist as boomers move up the age ladder.
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The non-profit charity's 2011/2012 report found that seniors were 17 times more likely to become insolvent in 2010 than they were just 20 years before.
In that same period, the insolvency rate for people over 65 ballooned by 1,747 per cent.
"It’s an extreme, but we can see it as the tip of the iceberg," said Nora Spinks, CEO of the Vanier Institute, who added that a larger contingent of older baby boomers might soon be in the same financial position.
As David Cork, the Director of ScotiaMcLeod, has pointed out, a very important group of seniors is now entering the 65 and over category.
"Among the many important events that will take place in 2012, there is one in particular that will recast the social and economic fabric of our country," he wrote in the forward to the family finances report. "This year, the first of Canada’s Baby Boomers celebrate turning 65."
Cork is referring to the more than 372,000 Canadian babies who were born in 1947. They are on the thin end of their generational wedge, outnumbered as they are by the roughly 479,000 Canadians born at the 1959 peak of the boom.
Although they are not the biggest cohort of boomers, Cork argues the 65 year olds "deserve our full attention as the harbingers of things to come."
Statistics Canada data, CBC graphic
Statistics Canada's 2011 census data shows Canada now has a higher proportion of seniors than ever before, a demographic reality that will have far-reaching implications for health, finance, policy and everyday family relationships. Although many of the boomers and their parents are well-positioned financially, those who are struggling will soon run an unprecedented test on the system.
"If you think there’s pressure on things today, wait 12 years," said Cork.
A far cry from freedom 55
The reality of aging and its far-reaching implications are only just starting to sink in, said Verena Menec, director of the Centre on Aging at the University of Manitoba.
"We're still not ready," said Menec. "This is interesting, because we've been talking about this for decades."
The insolvency rates of older Canadians that are starting to show up now may be indicative of the financial stress that some seniors and near-seniors are shouldering as they face the prospect of less-than-golden years.
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Yes, there is an irresponsible contingent among those who are bankrupt, but plenty find themselves in desperate financial straits due to an uncertain economic climate and myriad personal challenges — such as a divorce, the death of a spouse, or a severe illness or disability. Many seniors put aside money during their earning years, but have seen their retirement plans undermined by unexpectedly low investment returns, or eroded by outright losses in the markets over the past decade.
"There was an image of retirement, and it was everywhere," said Spinks, referencing the popular Freedom 55 campaign, which depicted retirement as a relaxed time filled with laughter and leisure, golf and sandy beaches.
"The message was if you follow the rules, that will be you," she said. "But there are people who followed the rules and that’s not them."
One of the complicating factors is the rise in life expectancy. According to Statistics Canada, life expectancy in 1942 was 63 for men and 66 for women. By 2009, it was 79 for men and 83 for women – an increase that is changing the nature of end-of-life planning.
Canada's changing age and gender demographics
Population projections by age and sex, 1971-2061. See the interactive graph.
In 2011, there were 4,870 Canadian women and 955 men aged 100 or more — the second fastest growing age group in Canada, with a 25.7 per cent rate of expansion.
By 2031, Statscan projects the number of centenarians will reach 17,000. That will rise to close to 80,000 by 2061 as the bulk of the remaining baby boomers move into the triple digits.
Given the increase, Canadians who grew up saving for a rainy day may now find themselves rationing for a rainy season as their lifespan outstrips their finances.
"Nest eggs are not worth as much, all of a sudden," said Spinks, adding that those who are already retired have more trouble recovering from economic turbulence.
"The situation is serious for those whose income is fixed or fluctuating."
Time to turn it around
Cork is less convinced that higher insolvency rates are cause for concern, especially if the increase is not a dramatic one. He notes that bankruptcy isn't always the result of tragedy. Spirited entrepreneurial ventures, for instance, could always end in bankruptcy.
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"I don’t think the statistical data tells the story," he said, adding that many older Canadians actually choose to keep working past the traditional signpost for early retirement. "55 seems very young to me."
Joe Wasylyk, who runs seniorpreneur.ca, also thinks more older Canadians are ready to take risks and launch their own projects later in life.
"We want to go away from low-energy kind of activities," he said in an interview with CBC Radio, adding that senior entrepreneurs have realistic expectations.
"They don’t want to make a million dollars when they’re 65 or 70 years old," he said. "They would like to make a few dollars and become more active, creative, productive and prosperous."
Still, Cork acknowledges that it isn't an entirely rosy picture.
Are you financially prepared to live past 100?
"I think it’s a wake-up call for a lot of people," he said. "If you want to become a ward of the state, you’re taking your chances."
Financial advisors commonly say that the planning process should begin as early as possible, and that it requires a realistic assessment of the challenges ahead.
"One of the things Canadians have to wrap their heads around is what’s not covered," said Spinks, adding that nursing homes, assisted living and senior care mostly comes out of pocket.
As boomers look ahead, she said, it may be time to forget slogans directed at their generation — like "don’t pay a dime until 1999" — and heed the advice of their elders.
"A penny saved is a penny earned."
Alternatives to bankruptcy
Debt consolidation loan
- Consolidation loans are used to pay off a variety of high interest rate consumer debts (like credit cards), resulting in a lower overall monthly payment.
- Available at banks, credit unions and finance companies. Interest rates will be higher than regular bank loans, but lower than credit card rates. Be sure to ask if there are fees and other charges.
- Consolidation loans can only include unsecured debt, so mortgages and car loans can't be included.
- Credit rating will not be hurt as long as regular payments are made and you don't go out and rack up a lot of new debt.
- People frequently use Home Equity Lines of Credit to pay off high-interest rate debt like credit cards, since HELOC interest rates are much lower and repayment terms can be interest-only.
Debt Management Plan (DMP)
- Credit counselling agencies contact creditors and negotiate a DMP to fully repay your unsecured debts over a period of up to five years. You make one monthly payment to the agency and it distributes payments to your creditors. They may be able to negotiate lower interest rates going forward.
- Agencies cannot force all creditors to accept a DMP.
- Unlike a bankruptcy, DMPs will not discharge your debts — you will usually be repaying your creditors in full, over time. But agencies can often negotiate a lower interest rate going forward. (In a few provinces, like Alberta, debt repayment agencies are able to negotiate with creditors so the debtor is able to pay back a portion of the amount owed. Fees are regulated).
- Once a DMP is in place, the creditors who agree to the plan will stop phoning you. Those who haven't agreed can continue to take action to collect.
- The presence of a DMP will be noted in the credit report.
- Credit counsellors charge fees to arrange a DMP. These depend on the debt load and the number of creditors.
- Fees for DMPs are not regulated in most provinces.
- In Alberta, Saskatchewan, P.E.I. and Nova Scotia, the Orderly Payment of Debts program (sometimes called a consolidation order) is a court-ordered process that consolidates a consumer's debts and arranges payments to creditors. All creditors are required to accept OPD orders.
- Non-profit credit counselling agencies that arrange DMPs are often funded by banks and credit card companies.
- A consumer proposal filing is done by a trustee in bankruptcy.
- The trustee makes an offer to the creditors to accept a portion of the amount of unsecured debt (i.e. excluding mortgages and car loans).
- Trustee submits a proposal to the creditors.
- If creditors who are owed a majority of the debt agree, the proposal will be binding on all unsecured creditors.
- Once the proposal is accepted, all unsecured creditors are required to stop collection efforts.
- Proposals can last up to five years, but three-year plans are generally more successful.
- Unlike a bankruptcy filing, your assets will not be liquidated but the presence of the proposal will be noted in the credit report.
- Fees are regulated by government
With files from the Canadian Press