Tuesday, June 9, 2015

“Household Savings Rate” is Highly Misleading

When I first heard that the “household savings rate” is 5%, I thought this meant the average family saved 5% of their income toward retirement. Maybe you thought the same thing. Boy was I wrong.

Malcolm Hamilton’s recent criticism of the Ontario government’s assertion that Canadians save too little got quite a bit of attention. I’m still unsure of whether Canadians have a retirement savings problem, but I’m confident that the household savings rate measure is very misleading.

Hamilton describes a number of problems with this measure, but to see that it is misleading you only have to understand one of the problems. After people retire and begin to draw retirement income from their RRSPs, this counts as a negative household saving rate. So, even if I saved 25% of my income throughout my working life, I count as a spendthrift after I retire.

This makes it clear that “household savings rate” doesn’t mean anything close to the average percentage of income that Canadians save toward retirement. If we’re going to have a sensible discussion of programs for mandatory and voluntary retirement savings, we have to at least start with meaningful information about how much people are actually saving.

In fact, we need to get beyond average figures and look at the distribution of retirement savings amounts for each income range to identify groups who may be in trouble. Such an approach could lead to sensible new retirement policies. Misleading measures and speaking only in averages won’t get us anywhere.


  1. Thanks for the link to the full paper. It reminds me of the excellent book "The Real Retirement" by Fred Vettese and Bill Morneau.

  2. Without going into details, I wonder how they consider a mortgage principal repayment. If one "save" 25k$/year through RRSP and another "save" only 10k$ and repay 15k$ principal on his mortgage. Both are puting aside 25k$ but in two different way.

    Remind me the "Canadians are 163% in debt compared to their annual income". What does it mean? If you got savings and your only debt is a 25 years mortgage or if you got no assets, consumers debts, loaded CC, car loans etc. Are they considered the 2 situations the same as long as the total debt is the same % over your annual income? IDK

    1. @Le Barbu: I assume that all payments count against the household savings rate, but you might want to read Hamilton's full paper to decide for yourself.

      I agree that 163% debt can be fine in one situation and not another. Your age and the mix of debt types matters a lot. However, averaged over all Canadians, 163% sounds like a lot to me.

    2. @Michael, 163% sound a lot to me because it's an average and include good and bad situations. If one tells me his RRSP worth 150k$, TFSA worth 10k$, RESP worth 20k$, no car loan, no CC balances, mortgage of 75k$ (against a 150k$ house) with 15 years to go and income arround 50k$, I would probably consider debt/assets to be 23% and debt/income 150%. That nothing to be worry about. Like you said, it depends of each individual situation.