Last week, my husband, Jeff, and I visited Toronto, Ontario Canada for a wedding. We were treated to beautiful weather, visited Niagra falls, enjoyed seeing friends and meeting new people at the wedding and had a great afternoon in Kensington Market in downtown Toronto. I was struck by how similar things were in Canada. Our hotel was across the street from a Walmart (the hotel was chosen for its convenience to the wedding site), and indeed there were strip malls and Walmarts seemingly everywhere. Some of the chain names were different, but many were the same.
One other thing that Canada has in common with us is their paltry personal savings rate. The morning after our arrival, the headline story in the local newspaper was about the Canadian Parliament deliberations regarding increasing contributions to the Canadian Pension Plan, because Canadians aren’t saving enough for retirement. The Canadian Pension Plan is similar to US Social Security. Canadians, like us, must also save to insure a financially secure retirement. The Canadian three year average household savings rate has been 4.82%. The US three year average household savings rate has been 5.5%.
Our three year average household savings rate bottomed out at 2.9% at the end of 2007, and recovered following the financial crisis to the current level. Longer term it was much higher. The norm through 1985 was above 10%. The dramatic decline since is surprising given that the changes we have experienced would indicate a higher, not lower, savings rate. Most of us don’t have access to a traditional pension plan through work any longer. Pensions were far more common prior to 1985. That benefit was replaced by the defined contribution plan which offers no guaranteed income level and requires us all to contribute and manage our savings on our own. We’re generally living longer. On average we were expected to live to 75 in 1985, and by 2010, we were expected to live to 79. And living longer is more expensive, due to the rising cost of health care. All in all, we should be saving more not less, and the same goes for Canadians.
So what gives? Those in the know site stagnant wage growth, but the savings rate was in a nose dive even prior to the post financial crisis flat-line for American average hourly wages. Americans, and Canadians, have had to take more responsibility for determining what to save and how to invest since 1985 when 401(k) plans and other similar savings vehicles became popular, and traditional pension plans began to disappear. Unfortunately, by and large, we are ill equipped to manage the responsibility. Whereas corporate pension plans had the benefit of teams of actuaries and investment professionals, the average American doesn’t even get any education in creating a budget, let alone long term saving plans or the fundamentals of the investment markets.
In order to avoid a serious financial set-back at the end of our working careers, not to mention lasting stagnation in our nation’s economic growth, we are going to have to become more financially savvy. We’re not going to become actuaries or investment gurus, but we can learn some basic skills that will significantly improve our prospects. I’m dedicated to helping develop those skills here, so please stay tuned for ongoing tips and information on how you can become financially secure in retirement or sooner.