Many Canadians – particularly younger ones – are going to have to dramatically increase the amount of money they save in the future, CIBC says in a report, called “The Negative Personal Savings Rate: Is it just a statistical mirage?”

“Canadians of all age groups are not saving enough actively by putting money aside for a rainy day,” said Benjamin Tal, Senior Economist, CIBC World Markets. “How much savings is enough is a matter for debate, but most Canadian households would likely benefit from building a little nest egg.”

The report notes that the Canadian personal savings rate is now in negative territory – -0.5 in the second quarter of 2005 – its lowest level since the 1920s.

One of the main reasons people may no longer be saving as much is the current low level of interest rates, which encourages borrowing and
discourages savings. However, Tal says the low interest rate environment is likely to persist for many years, making it harder to accumulate adequate funds later in life.

“The practical implication of this environment is that young Canadians must start saving very early in their lives compared to previous generations in order to realize the same inflation-adjusted return on their savings,” Tal said. “Our findings suggest this is not happening.”

While the personal savings rate of Canadians has plummeted, the change in their net worth has remained relatively stable. This is because “passive savings” such as through the increase in the value of assets like houses is compensating for the dramatic decline in “active savings.” However, with house prices potentially leveling off, this will strip households of one of their most important means of saving.

“Relying solely on real estate-based savings may be dangerous because this type of saving can be illiquid and selling a home can be an inconvenient and expensive transaction,” added Tal.

The report notes that the decline in the savings rate was evident across
all age groups – even among those between the ages of 45 and 65 who have been good savers traditionally. According to special tabulations from Statistics Canada’s family household expenditure survey, in the early 1980s, the savings rate among Canadians aged 45 to 65 was about 20%, while in 2003 it was only 3.6%.

At the same time, the current value of personal liquid assets, including
funds in chequing and demand deposits, money market mutual funds and cash in brokerage accounts, measured in both nominal and real terms, is currently at a record-high.