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February 5, 2011
EDMONTON, AB, February 5, 2011/ Troy Media – Household debt levels have received a lot of attention, so it might come as a surprise to know that in Alberta the official savings rate has been in excess of 10 per cent for each of the past four years, even surging to 14 per cent in 2009. This means that as Canadian economic growth is weaned off of consumer and government spending, the Alberta economy will have an easier transition.
Hold on a minute, you might say, there’s no way the ‘average’ worker in Alberta is saving 14 per cent of their income. You’re probably right. Official personal savings rates are calculated by looking at the total income earned in the province and subtracting total spending. By dividing that figure by the total employed population it can be estimated what the typical individual saves, but that would require assuming that the underlying distributions of income and spending are relatively even. And they aren’t.
So the 14 per cent is an aggregate figure, not an actual average and it likely appears high because incomes in Alberta are pretty uneven. For instance, using survey data, we find that the typical wage in Alberta is about $25/hour.
The problem is that very high earners are severely underrepresented in survey samples. This isn’t a problem when national economic accounts are tabulated, as everyone is included. To get an idea of how skewed wage income might be, if we were to divide the total amount of actual wages/salaries paid in Alberta by the number of full-time workers, the average hourly rate is closer to $40/hour. The two figures aren’t perfectly comparable, but this shows how high wage earners skew the numbers.
Wage income might be the largest source of income, but investment income can also be substantial. In 2008, $22.7 billion in interest/dividends and $13 billion in unincorporated business income flowed to Albertan households as income.
That works out to be roughly $18,000 for every employed Albertan. Many families rely on these as their primary source of income, such as the retired or the self employed, but they constitute a small proportion of the total population.
Retirement funds are the other destination, but one could presume it’s not reflective of society given the current debate on retirement preparedness. This means a highly disproportionate share likely goes to the high income earners who have had the disposable income to accumulate portfolios (so the graph likely underestimates income distribution in the province).
What’s being described is equivalent to putting Bill Gates in a room of twenty and calculating an average savings rate for the room. Not only does Bill earn a lot, he is also able to save a higher per centage as well. Alberta just happens to have a whole lot of wealth circulating relative to its population.
Consumer spending more resilient
As interest rates start to normalize, the risk has always been that Canadians, who nationally have an official personal savings rate of just 3.3 per cent, would be squeezed. The higher the initial debt load, the tighter the squeeze. Something would have to give. Without offsetting income gains, interest charges must either squeeze out other spending on goods and services or the savings rate must decline. If you’re already saving next to nothing, and maxed out, the choice is obvious.
Many Albertans fell in love with credit as much as anyone else, but total consumer spending in the province may be more resilient than elsewhere in the country when interest rates return to normal. Spending habits are hard to break and a disproportionate amount of spending in Alberta is done by individuals who are either net lenders or who could easily absorb higher debt costs.
Will Van’t Veld is an economist with ATB Financial.