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Don't Believe This Misleading Report About Canadian Income Inequality

09/21/2014 12:50 EDT | Updated 06/16/2017 01:02 EDT
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You'd think that we live in a caste society with an exclusive few perpetually "controlling" the vast majority of wealth given the stream of media stories on a recent report from the Broadbent Institute. Headlines in the Globe and Mail, Toronto Star, and CBC all trotted out the cliché that the rich are getting richer while the poor are getting poorer, giving the impression of a doomsday-like wealth inequality gap. Fortunately, nothing could be further from the truth.

This latest analysis, like most others on inequality, is fundamentally misleading because it relies on snapshots of the income and wealth distribution, failing to account for important changes that happen over time. The report implicitly assumes that people with low income today are the same people who will have low income in the future. In reality, the income and wealth of Canadians is anything but stationary over the course of their lives.

Just think of your own life experience. Many of us start off with low-paying jobs when we're young, in school, and have little work and life experience. After finishing college, university, or other training, a high wage isn't necessarily guaranteed. But with hard work and skills development, earnings increase over time as we get promoted or switch to higher paying jobs.

There are then periods in our lives when income is higher than previously experienced and/or expenses are lower (think of when kids finish school and move out of the house). These periods allow older Canadians to save and reduce their debt and thus accumulate assets and increase their net worth.

Consider the results from a 2012 study, Measuring Income Mobility in Canada, which uses Statistics Canada data to track a sample of a million Canadians to see how their incomes change over time. The study puts individual tax filers into five income groups from lowest to highest income, with each group containing 20 per cent of the total.

In 1990, the lowest 20 per cent of income earners had an average income of just $6,000 (in 2009 dollars). By 2009, the last year for which we have data, 87 per cent of those in the bottom income group had moved to a higher group and their average income climbed 635 per cent to $44,100. Put differently, almost nine out of 10 Canadians who started in the bottom 20 per cent moved out of low income.

Of course, people also move down the income ladder. Among those initially in the highest income group in 1990, 36 per cent moved to a lower income group by 2009. The average income of those originally in the highest 20 per cent of income earners in 1990 increased only 23 per cent from $77,200 to $94,900 by 2009.

The reality is clearly different from the cynical and incomplete narrative portrayed in the Broadbent report. It's inexcusable to assume or even imply that Canadians are permanently stuck in the same income groups year after year. The truth is Canadians are on escalators with income rising and falling depending on their life circumstances. A complete analysis should follow the income of specific people rather than compare the average of different groups of people at different points in time.

Wealth (or net worth) follows a similar lifecycle path, as research from Statistics Canada consistently demonstrates. Nobody really expects a 25-year-old to have the same net worth as a 55-year-old, but this is precisely the assumption underlying the Broadbent report.

The report's main finding is that the top 10 per cent of income earners in 2012 account for 47.9 per cent of all wealth, while the bottom 30 per cent account for less than 1 per cent. Although probably shocking on first blush, it's less so when we consider how wealth is distributed by age.

Accounting for the age of a family's primary income earner paints a dramatically different picture of Canadian society. The same Statistics Canada data used in the Broadbent report shows that median net worth increases with age.

Families with primary earners under the age of 35 have the lowest median net worth in 2012 at $25,300 (see table). This makes sense as young families are still early in their career, carrying a mortgage with little paid off, and likely raising kids which means other financial priorities leave less money for saving and investing. By contrast, older families in the 55 to 64 age group have a much greater median net worth ($533,600) since they're later in their lifecycle, have homes that are paid off, and more financial assets saved up as they near retirement.

We therefore shouldn't be surprised that families in the under 35 age group hold just 6.5 per cent of the over $8 trillion in wealth in Canada, while families in the 55 to 64 age group hold 28.5 per cent.

Unfortunately, the Broadbent report doesn't touch on either income mobility or the age distribution of wealth. The fact is Canadian society has a high degree of mobility and that's something we should celebrate. The real focus of the debate should be on how to protect and expand opportunities rather than stoking fears of a problem that doesn't exist.

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