Another misleading analysis of inequality

The reality is clearly different from the cynical and incomplete narrative portrayed in the Broadbent report

By Charles Lammam
and Sean Speer
The Fraser Institute

VANCOUVER, BC, Sep 19, 2014/ Troy Media/ – Given the stream of media stories and a recent report from the Broadbent Institute, you’d think we live in a caste society with an exclusive few perpetually “controlling” the vast majority of wealth,

Fortunately, nothing could be further from the truth.

This latest analysis, like most others on inequality, 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.

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. But with education, skills development, and hard work, 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 more and reduce their debt and thus accumulate assets and increase their net worth.

Consider the results from a 2012 study that uses Statistics Canada data to track a million Canadians to see how their incomes change over time.

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. Canadians are not permanently stuck in the same income groups every year. They are on escalators with income rising and falling depending on their life circumstances.

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.

Statistics Canada data show that median net worth increases with age. In 2012, families with primary earners under the age of 35 have the lowest median net worth at $25,300. This makes sense as young families are still early in their career, carrying a mortgage with little paid off, and likely raising kids which leaves less money for saving and investing.

By contrast, older families in the 55 to 64 age group have a much higher 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.

Charles Lammam is associate director of tax and fiscal policy and Sean Speer is associate director of government budgets and fiscal policy at the Fraser Institute

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