Growing inequality threatens cohesion of Canadian society

Some solutions to closing the widening gap

January 02, 2007
John Kolkman, Freelance

Canadians' self-image as a middle class society is deeply ingrained in the national psyche.

For the first 30 years after the Second World War this self-image reflected reality. From the mid-1940s to the mid-1970s, household wealth of Canadian families steadily increased across all income categories with the most rapid increases occurring for middle-income earners. Canada was truly becoming a more egalitarian society.

Then, 30 years ago, this trend reversed. Inequality has been growing ever since.

The most recent evidence is a Statistics Canada report called Revisiting Wealth Inequality. Released last month, it puts into serious question how much longer Canada can claim to be a middle class country.

Statistics Canada has been measuring wealth distribution since 1970.

The 1970 to 1977 period was consistent with the post-Second World War trend of growing equality.

However, the survey results since 1977 show:

- The poorest 20 per cent of families now owe more than they own (they have negative net worth);

- The wealth share of the top 10 per cent of Canadian families has consistently gone up while the wealth share of the bottom 90 per cent of families has consistently gone down. By 2005, the top 10 per cent of families owned 58.2 per cent of all household wealth;

- Middle-income Canadian families have seen the sharpest drop in their relative wealth, in some cases by up to one-third.

- All of the increase in net worth for the middle 20 per cent of Canadian families has been due to increased value of the family home, while the real value of non-RRSP investments and savings of these middle-income families has actually gone down.

- Middle-income families increasingly rely on lines of credit secured against their homes to pay the bills. Home line-of-credit debt surged by a factor of 2.3 times in the past six years alone. The dream of being mortgage- or debt-free is fading for more and more families.

In a widely quoted report glibly titled Lifestyles of the Rich and Unequal, the TD Bank downplays these alarming findings. The TD report says Canada's concentration of wealth is consistent with international norms, and besides inequality in Canada isn't as bad as in the U.S. One of Canada's big five banks making light of inequality is no surprise. After all, the TD Bank's five highest paid executives made a combined $37 million last year.

Canadians should not be lulled into complacency, however. Changes in wealth distribution take place gradually over many decades. Year to year changes are almost imperceptible. Recent high levels of employment and rising home values also mask growing inequality.

Growing inequality has serious ramifications for the future cohesion of Canadian society. For the bottom 40 per cent of Canadian families -- whose net worth has dwindled to almost nothing -- the risk is the development of an underclass where many believe that financial security is no longer possible, no matter how hard they work to get ahead.

For wealthier Canadians, there can be a resulting loss of social solidarity.

This can lead to NIMBYism, and opting for two-tier health care and private schooling as the quality of public services erodes.

Inequality is widening for a reason. Canadians became more equal from 1945 to 1977 because of deliberate policy choices made by governments of that era. These policies included a progressive tax system and strong social programs like old age pensions, baby bonuses, affordable post-secondary tuition and medicare.

Canada is becoming less equal because of different policy choices made since the mid-1970s. These choices include eroding the universality of social programs by imposing user fees and income testing.

The tax balance also shifted dramatically from high-income earners onto middle-income earners as a result of changes making the income-tax system less progressive.

These policies negatively impact the ability of middle-income families to add to their net worth and achieve a measure of financial security.

For lower-middle income families, these negative impacts have been dramatic. For example, the net worth of families with annual after-tax incomes of $20,000 to $30,000 dropped by 21.2 per cent between 1999 and 2005.

It's clear that different policy choices need to be made. The good news is there are solutions. We should:

- Scrap health-care premiums, an inefficient lump-sum tax. The resulting yearly saving of $1,056 for a family making $50,000 a year makes a far bigger difference than it does for a family making $500,000.

- Make the income tax system more progressive. At the provincial level, replace the 10-per-cent flat tax with a tax of eight per cent on the first $50,000 of individual income and 12 per cent on income above $50,000. This would restore some tax balance, while being largely revenue neutral.

- Restore or enhance universality of social programs. One example is implementing a badly needed publicly paid prescription drug plan. Another example is affordable child care for families that don't qualify for subsidies.

- Make work pay. There has been a 36-per-cent decline in the real value of the minimum wage since the mid-1970s. A good job with decent pay and benefits is still the best ticket for helping Canadian families achieve a measure of financial security while reducing inequality.

- Ensure more Canadians benefit from work-related pension plans. Work-related pensions -- more so than individual RRSPs -- disproportionately benefit middle-income families and are key to their financial security.

These are common sense -- not radical -- solutions to narrowing inequality.

As citizens, we must ask our elected leaders and ourselves what kind of society we want our children to inherit.

John Kolkman is the Research and Policy Analysis Coordinator of the Edmonton Social Planning Council.