Saturday, May 17, 2014

The wealth and finances of employed low-income families

In 2008, over 4.1 million individuals were living in low-income families.While many people in low income relied on government transfers, 37% of these people were also part of a family in which someone was employed for at least one-half of the year

Employed low-income families have been the subject of several recent studies. One study found the average income of individuals living in employed low-income families to be less than one-third of the income of individuals in other employed families (Fleury and Fortin 2004). Although fewer individuals in employed low-income families work full year, full time, their average hours worked are on par with other workers at around 2,000 hours (Fleury and Fortin 2006). 

Low-paying jobs are often associated with employed low-income families. However, while low pay was found to be a significant risk factor, it was not the most important determinant of low-income status. Instead, the presence of one earner (compared to multiple earners) and other family characteristics were found to be more important than pay (Fleury and Fortin 2006). Fortin calculated that 3.4 million of the employed in 2002 would drop under the low-income line if they experienced a separation or divorce in the family, or if other earners in the family experienced unemployment (Fortin 2007). In addition, certain groups like immigrants were found to be more likely to be part of an employed low-income family (Fortin 2007).

In addition to income, wealth is an important indicator of well-being since some assets could presumably be converted into cash for immediate consumption needs, especially during periods of economic hardship. This study examined the wealth, financial security and retirement plans of individuals living in employed low income families compared to those in not-employed low-income families and those in employed non-low income families.

On the whole, the wealth of employed low-income families was higher than that of not-employed low income families, but was significantly lower than that of the employed non-low-income group. An examination of assets and debts adds nuances to this finding. While 69% of employed low-income families carried debt compared to 44% of the other low income group, a large proportion of their debt took the form of residential mortgages. Much of their debt thus supported the long-term advantages of home ownership: greater wealth and lower housing expenses when the mortgage is paid off. However, employed low-income families were also more likely to carry consumer debt than the other low-income group. Notably, 4 in 10 employed low-income families carry outstanding credit card debt.

Indicators of financial security again highlight some differences between employed and not-employed low-income families, as well as their position relative to families not in low income. Employed low-income families were less likely to report not keeping up with payments than other low-income families, despite higher expenses. Nevertheless, when compared to the other employed group, employed low-income families were twice as likely to be behind in their payments. Another indicator of financial security is how families would deal with an unexpected expense. Compared to others in low income, a smaller proportion of employed low-income families reported that they would not be able to cover the expense, whether the amount were $500 or $5,000. Moreover, the employed lowincome group would be more likely to use savings to cover such an expense than the other low-income group. Altogether, these results indicate that employed low-income families were likely to feel more financially secure than the other low-income families but likely to feel less secure than families who weren’t in low income.

Retirement planning also differed for the two low income groups. Employed low-income families were more likely to have a plan that included more diverse sources of income than other low-income families. Families with a weaker connection to the labour market would be less likely to include workplace pensions or group RRSPs in their plans. Moreover, retirement planning may be a moot point for some since government pensions and other transfers to seniors replace a higher level of pre-retirement income for those near the bottom of the income distribution (LaRochelle-Côté et al. 2010).

Source: Stats Canada Report: The wealth and finances of employed low-income families by May Luong

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