Friday, December 12, 2008

Packing it on and trimming it off

Since this post is about fat, I'll first update you all. After 6 weeks in Weight Watchers I'm down 12.6 lbs. I haven't been 182.8 lbs in a long time! Feels great. (By the way, if you struggle with weight, check out Dr. Arya Sharma's Six Natural Laws of Weight Gain.)

Anywho, I read a great article in Moneysense magazine (which is the greatest magazine ever published for personal finance nerds) that spoke of the current middle class squeeze. Namely, the argument goes, the Canadian middle class is finding it harder to make ends meet than the generation of 25 years ago. At first, I was skeptical, namely because I see how much people spend on garbage they don't need where I work. But turns out the data doesn't bear out my hypothesis.

Allow me to pull some tidbits from the article. From 1980-2005, adjusted for inflation, the median annual salary for a full-time Canadian worker rose a fat $53. $53. Yes, indeed, $53. I'll let you dwell on that for a moment......Okay, enough dwelling. And do we get that $53? Not really. 25 years ago, the average Canadian handed over 36% of their income in combined taxes (income, property, sales, etc.) It's now 9-percentage points higher at 45%. Home prices and education prices have surpassed inflation. Do we spend more money on stuff we don't need though? Doesn't seem so. The data show that in real terms our generation spends less on clothes and food than the last generation.

But surely the economy has improved more than a measly $53 per year for each worker since 1980. Even though our wages have gone up less than 1% in 25 years, the amount we are producing per worker has gone up 44%. So if each worker is producing 44% more, why are we not making the extra $10000 per year that added effort would deserve? Well, it seems its going to the bottom lines of the companies we work for: corporate profits increased $153% in real terms since 1980.

Another interesting point raised in the article is that consumer savings rates and government financial health seem to be negatively correlated. In the 80s even though the feds were hurtin' because of the recession, Canadians were putting away 20% of their income. Today we're putting away a miserable 3% of our savings, but the government has been awash in surplus for years. Why? They have downloaded much of the financial burden to us, the taxpayers. So as we pay more tax and load up the coffers of government, we have less to put aside for ourselves. Wouldn't be bad if it meant we had more government services and less to pay for out of pocket, but it doesn't seem to be working that way.

A couple of potential solutions mentioned in the article are worth noting. One would be to increase corporate taxes to allow a corresponding drop in income taxes. Of course, if Harper hadn't been so politically expedient and lowered GST, thus encouraging higher consumption, rather than lowering income tax, a move that stimulates the economy more, maybe we'd be on our way. Even though corporations would be spending more on taxes, the increased savings abilities of Canadians would cause greater investment in the market for retirement which goes to purchasing shares in these very companies. Another idea presented was to set up a supplementary government pension plan that would be available to those without a company pension (10 million Canadian workers). You could invest in the plan and the government would match your contributions, just like a company pension plan. All great food for thought, if nothing else.

What are your feelings on the issue? Do you think the middle class is really squeezed, or are they just spending recklessly?

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