New findings on asset poverty in Canada and developments on asset poverty measurement

by David W. Rothwell and Yunju Nam

Asset poverty

The most common method of economic poverty measurement requires defining of a minimal level of basic needs and economic resources. Economic poverty can be measured using income, consumption or wealth; subjective or objective criteria; multiple or single dimensions; and, from relative and absolute perspectives. In advanced economies, the predominate method for understanding economic poverty relies on annual household income as an indicator of command over resources. There are disagreements over methods to understand income poverty (e.g., see the Institute for Research on Poverty’s overview here). The U.S. poverty line is an absolute measure. Relative measures are used for international comparison.

In the 1980s and early 1990s scholars began challenging the reliance on income to understand household well-being. They argued that saving and asset accumulation function as more than stored income to be used for future consumption (seminal works by Oliver and Shapiro; Sherraden). According to Sherraden, when people accumulate assets, they think and behave differently; and the world responds to them differently. Assets function not as a flow but as a stock and are more permanent. Following these ideas, economic deprivation, i.e., poverty, can be measured using assets instead of income. Studies of asset poverty complement and contrast our understanding of the poverty condition.

Economists Robert Haveman and Edward Wolff considered a household or person asset poor if their access to wealth-type resources is insufficient to meet basic needs for some predefined period of time. Wealth-type resources usually involves financial assets or net worth; basic needs can be approximated with the income poverty threshold; and, period of time has usually been set at three months. Therefore, a person or household is considered asset poor if their asset resources fall below one-fourth of the official income poverty line. Concretely, assuming the annual income poverty threshold for a family of four is $32,000, the household would be considered asset poor if owned assets were less than $8,000.

Asset poverty in Canada

Recently, we estimated the first known asset poverty measures in Canada using the 1999 and 2005 Survey of Financial Security. We produced asset poverty rates based on (1) both financial assets and net worth, (2) the Canadian Low Income Cutoff as the threshold of basic needs and (3) three months as the period time. In the paper we reported the national asset poverty rates to be 53% based on financial assets and 34% based on net worth. Below we highlight key findings and contextualize them with US asset poverty findings.

Asset poverty is closely related to age. Figure 1 shows how the rate of financial asset poverty decreases with age. The line represents the rate of asset poverty across the life course. The shaded area reveals the uncertainty around the given asset poverty estimate. It is well known that younger people have struggled in the recovery from the Recession. This finding suggests a need for social policy targetted at younger households.

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Joint income and asset poverty

When the joint distribution of poverty based on income and assets is considered we were able to identify three sub-populations: (1) 14% of households were joint income and asset poor, (2) 3% of households were income poor but asset non-poor, and (3) 40% of households were income non-poor but asset poor. The third group reveals that a large segment of the Canadian population has sufficient income to be non-poor but lacks access to assets to survive for three months at the low income threshold. Future policy efforts will play a role in reducing or reinforcing this economic vulnerability.

Comparison with U.S. asset poverty

Differences in measurements and survey design make cross-country comparisons difficult. (For example, using 2001 data, Haveman and Wolff reported that 25% of U.S. households were poor based on net worth compared to the Canadian estimate of 34%. Using financial assets, the disparity was greater: 53% in Canada compared to 38% in the U.S.) It is better to examine systematic cross-country data. Brandolini and colleagues used data from the Luxembourg Wealth Study (years 1999-2002) to compare the asset poverty rates in several OECD countries. Using 50 percent of the median income as the income threshold, they reported that Canada had the highest financial asset poverty rates at 56.5 followed by the US (52.6).

It is perhaps more useful to examine over representation among the asset poor. The most recent CFED scorecard, showed the 2011 liquid asset poverty in the US was 43.5% and these rates were analyzed separately based on race and family structure. The rate of white households compared to households of color was 34.7 to 60.6. The rate of asset poverty among single parent households is nearly double that of 2 parent households (1.94). The analysis showed that 17% of Americans are in extreme asset poverty, i.e., they have negative or zero net worth. In the Canadian study, we decomposed asset poverty rates to understand over-representation. We created a disproportionate index where 1 is perfectly representative of the population rate.

Variable Population Asset poor Disproportionate index
Female lone parents 3.91 6.01 1.54
Age under 25 6.26 9.65 1.54
Renters 36.37 51.11 1.41

Although not perfectly comparable with the CFED and Haveman results (e.g., race and ethnicity is not measured in the Canadian survey), there are some parallels between Canada and the U.S. Asset poverty is disproportionately experienced by female single parents, younger people, and renters.

Our recent study reinforces the importance of asset poverty measurement to understand dimensions of poverty and economic vulnerability that go unnoticed when using an income based measure of poverty.

Importantly, the method of asset poverty measurement used in the U.S. and Canadian studies assumes that households need a certain amount of asset to meet consumption needs at the poverty threshold. In addition to asset poverty measures described above, new and more comprehensive asset-based economic well-being measures have been recently developed in the United States. These measures incorporate ‘asset for development’ perspective in that they recognize assets’ roles in promoting long-term economic development as well as assets’ roles in protecting families from unexpected economic emergencies (Nam, Huang, & Sherraden, 2008). For example, the Asset Security and Opportunity Index produced by the Institute on Assets and Social Policy at Brandies University includes asset opportunity as well asset security. The asset security index measures economic stability and a type of precautionary savings. While asset security is similar to asset poverty (i.e., assets needed for the period of unemployment), asset opportunity is a fundamentally different concept: it is based on the amount of economic resources needed for a family’s investment for the future (i.e. assets for college education, homeownership, and business start-up). Using this concept, over 50% of U.S. households have insufficient assets to promote social development (Shapiro, Oliver, and Meschede 2009).

In addition to precautionary savings for the time of unemployment, the US Department of Commerce (2010) highlighted the importance of two asset measures: savings for college education and retirement. College savings amounts are estimated from zero to $6,800 per year depending on family type and income while retirement savings is assessed as 1.2% to 3.3% of annual family income (U.S. Department of Commerce, 2010). The most comprehensive asset measure is included in a new framework called the Basic Economic Security Table (BEST): precautionary, retirement, homeownership and college education (McMahon, Nam, & Lee, 2011). Using the BEST, we estimated that monthly savings required to meet all four saving needs ranged from $155 to $572 depending on family size and conditions.

References

Brandolini, A., Magri, S., & Smeeding, T. M. (2010). Asset-based measurement of poverty. Journal of Policy Analysis and Management, 29(2), 267-284. doi:10.1002/pam.20491

Income inequality in Canada making headlines

The Globe and Mail has created the Wealth Paradox series to educate Canadians about the enormous impact of income inequality in our nation today.  The piece is extremely readable and filled with edifying examples of how inequality is negatively affecting Canadians’ access to education, health care, and even recreation.  Further, it looks at solutions.  While the simplicity and directness of the series may be criticized by some who expect more nuance in such discussions, I believe that its strength lies in its accessibility (to those who can afford to subscribe to the Globe and Mail, but that’s a conversation for another time).  This is something that we need to be talking about.

 

 

Household debt in Canada

In class last week we discussed household debt and it’s influence on economic well-being in Canada. There is evidence that the debt levels of Canadians is too high. Below I show two graphs that provide evidence of the rising debt in Canada.

First, is a graph from the Economist comparing household debt as a percentage of disposable income across OECD countries.

Household debt across OECD countries

The graph presents a number of points for discussion. Let’s focus on the United States compared to Canada. The graph shows that the 2012 debt level in the US is far below the level of debt experienced in 2007 just before the housing crisis and subsequent recession. In contrast, see that Canada’s debt levels have only expanded since the recession.

Below is another chart showing the debt levels over time from the Task Force on Financial Literacy. We see the debt to income ratio has risen dramatically since 1990. At what point does the rising debt become a social welfare problem in Canada, or has it already?

Household debt Canada 2010

Fewer people in poverty?

Andrew Coyne in the National Posts reviews poverty measurement and trends over time in the article Fewer people sit below the poverty line now than ever before. Why are we not talking about it?His overall point is that poverty has gone down in Canada.

But still: a much smaller proportion of the population now lives on low income, using a benchmark that was considered the acme of progressivism just a few years ago. The numbers that would be considered poor by the standards of 1965 must be a fraction of that.

The article focuses on the distinction between relative and absolute measures and defines the LICO measurement for the lay audience. Further, the story gets to the heart of the debate between income and consumption and what it means to be poor in a rich society.

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