Low interest rates and an entrenched culture of spending are changing the face of indebtedness in Canada, driving people who already are deeply in debt – particularly those over the age of 45 – to borrow ever more, even as incomes stagnate.
A new analysis by Canadian Imperial Bank of Commerce on consumer debt shows that families that already are borrowers are driving virtually all of the increase in the country’s debt load. Much of the rise is being driven by the baby boom generation, raising concerns that a demographic group that should be focusing on saving for retirement is instead digging itself faster into a financial hole.
The findings have broader economic consequences. More people are heading into their 50s and 60s in a financially vulnerable position, and any shock – from a rise in the unemployment rate to an external shock from the global economy or, eventually, rising interest rates – could force this group to sharply reduce spending to make ends meet, creating a drag on growth.
“The two negative implications are that retirements will have to be postponed or compromised, or people will have to de-leverage [cut their debt] with a sense of urgency, so there will be major impact on consumer spending,” said CIBC World Markets deputy chief economist Benjamin Tal, who co-authored the report with Avery Shenfeld.
“Things are fine now – and nothing close to the U.S. – but what we do and how we behave over the next two years will be crucial,” he warned. Many economists expect interest rates to begin rising in that time.
Other economists, too, have discovered that it is older Canadians who are piling on debt. In October, a TD report found the 65-plus age group is racking up debt at three times the average pace.
“The traditional cycle was when you were younger, you take on debt, when you’re older, you save more and pay down your debt. And when you hit retirement, you live on your savings,” said Toronto-Dominion chief economist Craig Alexander. Now, as people stay in school longer and retire with debt, we are witnessing “fundamental changes to the life cycle that people have.”
Bank of Canada Governor Mark Carney has warned that ballooning household debt is the No. 1 domestic risk to Canada’s economy. Mr. Alexander agrees, and has asked his economic team to spend more time this year analyzing the shifting patterns.
Eva McKaeff knows just how easily debt levels can spiral. At first, she had just one credit card. Then another. And then she added a slew of them, including department-store cards with 29-per-cent interest rates. While travelling for work, it was hard to resist new shoes in Vancouver, or work clothes in Toronto. Before she knew it, her credit card debt hit $63,000.
She knows discipline was the main problem. But also, “I didn’t fully understand that more credit cards wouldn’t be better,” says Ms. McKaeff, 47. The ease of getting them “gave me false impression that I had an endless amount of credit.”
She sought credit counselling, got rid of all her credit cards and has a goal of being debt-free by age 50. To do that, she has drastically reduced her spending, still drives her 2003 Honda, and has taken an additional part-time job.
Jeffrey Schwartz sees stories like hers all the time. “Interest rates are so low, credit is available to people because the business of credit is making money, and people are sapping it up,” says the executive director of Consolidated Credit Counseling Services of Canada Inc.
The CIBC study finds virtually all of the rise in debt in the past four years comes from people with a high ratio of debt to gross income. “The indebted have piled on still more debt,” it said.