The wealth gap is an increasingly prominent issue in Canada, capturing the attention of policymakers, economists, and the general public. The term "wealth gap" refers to the unequal distribution of assets—such as property, savings, and investments—across a population.
In Canada, this wealth gap is not only significant but has been widening over recent decades.
Current State of the Wealth Gap in Canada
Canada has a relatively high standard of living, but wealth distribution remains deeply unequal.
"Most wealth is held by relatively few households in Canada. The wealthiest (top 20% of the wealth distribution) accounted for more than two-thirds (67.6%) of Canada's total net worth in the first quarter of 2024, averaging $3.4 million per household, while the least wealthy (bottom 40% of the wealth distribution) accounted for 2.8%, averaging $70,356."
Key Causes of the Wealth Gap in Canada
1. Rising Housing Prices
Real estate plays a significant role in wealth accumulation in Canada, but it also exacerbates the wealth gap. Housing prices have risen dramatically in cities like Toronto and Vancouver, making homeownership increasingly difficult for middle- and low-income Canadians.
Homeowners build wealth through property appreciation, while renters, who often belong to lower-income groups, do not benefit from these gains. This divide has led to an asset-based inequality, where those who own property accumulate wealth at a faster rate than those who do not.
Also, homeowners have an asset to borrow off of when it comes to consolidating other unsecured debt at a lower interest rate. They can also choose to invest these funds into a second home, rental property, and other investment vehicles. Non-homeowners do not have this luxury or option.
2. Income Inequality
The disparity between high-income earners and low-income earners also contributes to the wealth gap. The growth in high-income jobs, especially in finance, tech, and real estate, has resulted in considerable wealth accumulation for certain segments of the population.
Meanwhile, many jobs in sectors like retail, service, and manufacturing have seen minimal wage growth. This income disparity affects the ability of lower-income Canadians to save, invest, and ultimately accumulate wealth.
3. Debt Levels
Canadian household debt levels are among the highest in the world, which creates additional challenges for wealth accumulation. Many Canadians rely on credit to manage everyday expenses, which erodes their ability to save. Debt burdens, especially those related to credit cards, car loans, and student loans, are particularly high among low- and middle-income Canadians, limiting their opportunities to build wealth.
4. Taxation Policies
Tax policies can influence wealth distribution, but in Canada, certain tax incentives have benefited the wealthiest individuals more than others. For instance, capital gains and dividends, which are often primary sources of income for wealthy Canadians, are taxed at a lower rate than earned income.
Furthermore, tax deductions for retirement savings plans or real estate investments disproportionately benefit high-income earners, exacerbating the wealth gap.
5. Intergenerational Wealth Transfer
Inheritance and family wealth play a critical role in perpetuating the wealth gap. Wealthy families often pass down assets to the next generation, giving them a significant financial advantage. Lower-income Canadians, who may not have similar opportunities for wealth transfer, struggle to build and maintain wealth across generations. This cycle of wealth transfer often entrenches socio-economic divides within Canadian society.
The Effects of the Wealth Gap on Canadian Society
The wealth gap affects Canadian society in numerous ways:
1. Economic Growth
A large wealth gap can hamper economic growth, as lower-income Canadians may not have sufficient disposable income to spend, reducing consumer demand. This diminished demand affects businesses and limits job creation, impacting the economy's overall health and growth potential.
2. Social Mobility
Wealth disparity can reduce social mobility, making it harder for individuals from low-income families to achieve economic success. This lack of social mobility can foster a sense of inequality and lead to a stratified society where one's economic background heavily influences future prospects.
3. Public Health and Education
Wealth inequality is closely linked to disparities in health and educational outcomes. Lower-income Canadians often have less access to quality healthcare, nutritious food, and education, all of which affect long-term prosperity. These disparities not only impact individual well-being but also place additional burdens on public healthcare and social services.
4. Political and Social Tension
As the wealth gap widens, societal tensions often rise. Wealth inequality can create frustration and disillusionment among those who feel left behind, potentially leading to social unrest and political instability. A society with large economic divides is more likely to experience polarization and eroding trust in institutions, further complicating efforts to address inequality.
Potential Solutions to Address the Wealth Gap
1. Affordable Housing Initiatives
To address the wealth gap, Canada needs to implement policies that make housing more affordable. Increasing the supply of affordable housing, offering subsidies for first-time homebuyers, and implementing rent controls in high-demand cities could provide more Canadians with the opportunity to build wealth through homeownership.
However, this is easier said than done. People often turn to their real estate to fund their retirement. They may own a home or two and plan to sell and use the funds to pay for their stay in a retirement home. With more homes being more affordable, that means that their retirement plans may be pushed back, and they can't retire on the timeline they originally planned.
Also, home value is a matter of demand and supply. If more people can buy a home, the value of the homes today, won't increase at the same rate it did in the past.
2. Progressive Tax Reforms
Reforming the tax system to ensure that wealthier Canadians pay a fair share could help address inequality. Potential measures include increasing capital gains tax rates, removing or capping deductions that disproportionately benefit the wealthy, and introducing a wealth tax on high-net-worth individuals. Such policies could generate additional revenue to fund social programs that benefit lower-income Canadians.
The other thing to think about is that a stricter tax policy could mean that employers, billionaires and millionaires won't keep their money in Canada. Why keep their money in a country with a high tax rate, vs another country with a looser tax policy? The country with the looser tax policy will win the funds. They will get the tax income, and these wealthy business owners are more likely to invest in new companies thus bringing more jobs to the countries with these looser tax brackets.
3. Improving Access to Education and Training
Access to quality education and skills training is essential for economic mobility. Expanding funding for education, particularly for low-income Canadians, could help close the wealth gap by providing more people with the skills and credentials needed for higher-paying jobs. Additionally, investment in job training programs for industries experiencing high demand can create pathways to financial stability for many Canadians.
This is one strategy that has no downsides. A smarter population is eventually a wealthier population. However, this strategy depends on the population to have the demand, and desire.
4. Strengthening Social Safety Nets
Expanding social safety nets, including unemployment benefits, health care, and retirement pensions, could provide critical support for low- and middle-income Canadians. By reducing the financial strain associated with unemployment, illness, or retirement, these programs help ensure that Canadians have a better chance to save and accumulate wealth.
The downside to this is that money is finite. These extra benefits have to come from somewhere. Either other government programs are cut, the country goes into a larger deficit, we increase taxes, or we print more money. Neither of these are good for anyone.
5. Encouraging Savings and Investments
Financial literacy programs that focus on saving and investment can empower Canadians to make informed financial decisions. Providing incentives for retirement savings and establishing programs that encourage Canadians to invest can help bridge the wealth gap by promoting wealth accumulation across income levels.
This is also another initiative that i believe has no downside. It falls under access to better education.
Conclusion
The wealth gap in Canada is a complex issue with deep-rooted causes and widespread consequences. While Canada enjoys a high standard of living and social stability, increasing wealth inequality threatens these attributes by impacting economic growth, social mobility, and public trust.
Addressing the wealth gap will require a multifaceted approach, encompassing affordable housing, tax reforms, social safety nets, and education and training initiatives.
By taking deliberate steps to bridge the wealth divide, Canada can foster a more equitable society where all Canadians have the opportunity to build wealth and contribute to the country's economic prosperity.
After reading this article, you can see the best long term and most sustainable options are better access to quality education, and financial literacy programs in schools.
