Thursday, June 07, 2007

Why Aren't You Saving -- The Death of a Bedrock Belief

The purpose of Low Interest Rates - As Destructive as Usury was to show how much less empowered people have become in their ability to get ahead by paying down debt through two mechanisms:

  1. Grossly reduced leverage of benefit of reducing total amount to be paid back from increasing payments.
  2. Low interest rates are because theoretically inflation is low, so wage increases are also low further disabling the ability to increase mortgage payments.
A third problem is revealed in Making Less Than Dad. The study points out that American men in their 30s are earning less than their father's generation, a 12% drop.

A significant point in the article states that American families had a 32% increase in income levels between 1964 and 1994. Move that forward by 10 years, from 1974 to 2004 household income growth slowed to 9%.

A "truth" I was repeatedly told when I was growing was that each generation does better than the generation before them, and article suggests the death of this bedrock belief, but I would suggest that belief has been dead a long time, through reduce earning power, as the article above shows and increased taxes that disproportionately burden younger people.

I became highly aware of the degree of the declining buying power when I was involved with the 1997 Census. I was shocked to often see 3 young adults sharing a one bed room apartment out of necessity.

That was not happening with my peer group when I was a young adult. You could afford to share a reasonable 2 bedroom or even a dumpy one bedroom on minimum wage. I worked in a bank so I saw what all occupations were paying and my wage was at the lower end of the wage spectrum. Sharing a two bedroom apartment cost me 15% of my gross income. I could fill my economical car's gas tank with one hour of wages. I had a girlfriend who supported herself in grade 12 renting a basement suite on working 20 hours per week.

I often bring up the declining buying power of minimum wage with students. "When I was a young adult minimum wage was $3.65 and my share of a two bedroom apartment was $112.50," I tell them and I get them to calculate how much minimum wage would have to be today to keep up. They will come up with about $13/hour.

I continue, "A course at Simon Fraser University cost $54 and today it is $453.30," and they calculate $31/hour.

And never mind the grossly reduced buying power, look also at the grossly increasing tax burden.

"You would have to pay $111 per year towards Canada Pension Plan, and you'd be at 57% of the maximum pensionable earning, today those at 57% of the maximum pensionable earnings pay $1066." Minimum wage would have to have gone up to $35 to have the same proportion of wages going to Canada Pension Plan. But, even on another issue, maximum pensionable earnings was 1.73x minimum wage and it is now 2.63 times minimum wage. At the very least, if minimum wage went up as much as the maximum pension amount it would be at $12/hour, but they be taking home way less because of the gross increase in pension contribution for low wage earners.

There is no question making less than dad grossly impacts on ability to work toward financial security, but I question how much the study corrected for how the tax system grossly favours the old over the young.

And they go on and on about the reduced savings rate...

1 comment:

Deborah said...

You can support raising the minimum wage from this link, http://www.bcfed.ca/issues/minimum_wage