The Wealthy Hand-to-Mouth – a new financial study

The results of a recent study released at the Brookings Institution’s BPEA conference claim that most Canadians are living paycheque to paycheque are not, in fact, “poor”.  The study started with data form America and then compared it to data from Canada, Australia, the UK, Germany, France, Italy, and Spain.

More than 30% of Canadian Households are living paycheque to paycheque.   When most people hear that phrase they imagine low income families struggling to make ends meet. However, according to the research conducted by academics at Princeton and NYU, this assumption is true for only a third of people who fall into this category.

The paper dubs the other two thirds “The Wealthy Hand-to-Mouth”.  These wealthy hand-to-mouth have family earnings well above the poverty line, but almost no liquid assets.  All of their wealth is tied up in cars, homes and other non liquid assets, and much of their paycheque goes towards making payments on these items rather than savings or investments.

Wealthy hand-to-mouth households tend to be older than poor hand-to-mouth households, and they hold portfolios very similar to the non-hand-to-mouth in terms of non liquid wealth held in housing and retirement accounts. The status of the wealthy hand-to-mouth also seems to be transitory according to the study.  Though there are millions of households that live this way, eventually they pay down their debts and transition into the non-hand-to-mouth category. The average length of time for a family to remain in the wealthy hand-to-mouth category is only 2.5 years.

The truly poor hand-to-mouth tend to be younger, less educated and unfortunately stay in that category much longer.

The study started with data form America and then compared it to data from Canada, Australia, the UK, Germany, France, Italy, and Spain.  In all countries studied the wealthy hand-to-mouth were a far larger fraction of the population than the poor hand-to-mouth.

This study is interesting because it could have a large effect on economic stimulus packages and fiscal policy.  It is currently generally assumed that fiscal stimulus works by spurring spending among the poorest households who need the extra cash the most; but this study could contradict that finding.  The research found that while wealthy hand-to-mouth and poor hand-to-mouth households increase their spending by similar amounts in response to small stimulus payments, the wealthy hand-to-mouth continue to ramp up their consumption much less than the poor-hand-to-mouth as the size of the stimulus payments are increased.

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