Last month, we examined the importance of not cutting back on employee benefits during financially volatile times. This month we’re looking at the current economy’s impact on the average Canadian and how a workplace savings program can help.
The cost of living in Canada has been on the rise in recent years, driven by numerous factors, including:
- Inflation: Calculated as the overall increase in prices of goods and services over time; high inflation can make it more difficult for Canadians to afford necessities and increases the cost of borrowing money
- Skyrocketing housing costs: The average home price in Canada has been creeping upward, accelerating in recent years due to low interest rates, strong demand for housing, and limited supply; this has left many Canadians unable to afford a home, forcing them to rent, which also tends to be more expensive; this is particularly challenging for young people and low-income families trying to enter the housing market
- High food costs: Driven by increasing demand, higher fuel costs, climate change, and higher labour costs; high food costs have become a significant burden for low-income families and individuals, as they spend an increasing proportion of their income on food
- Transportation costs: Impacted by higher global oil and gas prices, which can be a significant expense for many Canadians; public transportation costs have also been rising and have increased fares for many municipalities and transit systems, making it difficult for some to commute to work or school and more challenging for people to access essential services
- Higher healthcare costs: The Canadian healthcare system is publicly funded, but there are still out-of-pocket expenses for Canadians, such as prescription drugs, dental care, and other medical services. Additionally, the rising cost of drugs and medical technologies and an aging population are driving up healthcare costs, placing a significant burden on older Canadians and those with chronic health conditions
- Increased education costs: Tuition fees have been rising recently, and textbooks and other materials can also be high, making it more difficult for people to attend college or university to acquire the skills they need to enter the workforce
Rising inflation and its impact on the average Canadian
The December 2022 Mental Health Index by LifeWorks™ says that 36% of Canadians have expressed that inflation is their primary concern, which is quite significant.1 Rising inflation can negatively impact the average Canadian in many ways, including decreasing purchasing power, raising the cost of living, and potentially leading to economic instability.
When inflation rises, it takes more money to purchase the same goods and services, which decreases purchasing power for Canadians, as they have to spend more money to maintain their standard of living. Rising inflation can also lead to a higher cost of living as prices for goods and services increase, making necessities such as food and housing unaffordable for some Canadians, leading to financial strain and potentially even poverty. When inflation is consistently high, it can cause uncertainty and unpredictability in the economy, making it difficult for businesses and individuals to plan for their financial future. The purchasing power of savings and investments may decrease, making it difficult for individuals to plan and save for retirement or other long-term financial goals. High inflation can also make it difficult for individuals to obtain loans, as the loan’s value may decrease over time, making it challenging to repay. High inflation can contribute to increased unemployment, as businesses may struggle to maintain profitability in the face of rising costs. Additionally, high inflation can decrease economic growth. When prices are snowballing, consumers and businesses may be less likely to spend money, slowing economic activity and decreasing economic growth.
Overall, high inflation can negatively affect companies and individuals, including financial instability, difficulty in planning for the future, diminished purchasing power, erosion of standard of living, and reduced economic growth.
What can the average Canadian do?
There are a few things you can do to mitigate the impact of rising inflation on your finances:
- Review and adjust your budget: As prices for goods and services increase, it’s essential to review your budget and adjust it accordingly; this can help ensure that you can afford the things you need while saving money for the future
- Invest in assets that increase in value: Investing in assets that rise in value, such as stocks, real estate or other investments, can help protect your purchasing power against inflation
- Consider hedging against inflation: You can also consider hedging against inflation by purchasing investments that perform well in an inflationary environment
- Look for ways to increase your income: Another way to mitigate the impact of rising inflation on your finances is to look for ways to improve your revenue; this could include asking for a raise at work, starting a side hustle, or finding a higher-paying job
- Be mindful of the cost of living: Be aware of the cost of living when making financial decisions and look for ways to save money on everyday expenses; for example, you can shop for the best prices on goods and services, take public transportation instead of driving, and cook meals at home instead of eating out
It’s important to note that these are general suggestions and may not work for everyone. It’s best to consult with a financial advisor to develop a personal financial plan that suits your unique needs and goals.
What can employers do to help their employees with inflation?
Employers can help their employees deal with inflation in several ways:
- Offer competitive salaries and benefits: Regularly reviewing and adjusting salaries and benefits to match market standards can help employees keep pace with the rising cost of living
- Provide financial education and resources: Offer educational resources, such as workshops and seminars, to help employees understand and manage their finances during inflation
- Offer flexible work arrangements: Allowing employees to work remotely or adjust their schedules can help reduce the cost of commuting and childcare
- Provide a safe and healthy work environment: Investing in employee wellness programs can help reduce the cost of healthcare expenses, which tend to increase during inflation
- Offer incentives for cost-saving behaviours: Encourage employees to adopt cost-saving behaviours, such as carpooling or using public transportation, by offering incentives
By implementing these strategies, employers can help their employees better manage the effects of inflation and maintain their financial stability.
Benefits of a company-sponsored savings plan
There are several benefits to both employers and employees of a company-sponsored savings plan, such as a group RRSP or a pension plan.
Benefits for employers:
- Attract and retain top talent: A company-sponsored savings plan can be an attractive benefit for job candidates, helping the employer to attract and retain top talent
- Tax advantages: Employers may receive tax deductions for contributions made to their employees’ savings plans
- Improved employee morale and motivation: Providing a savings plan shows that the employer cares about the financial well-being of their employees, which can lead to enhanced confidence and motivation
Benefits for employees:
- Tax benefits: Contributions to a savings plan can reduce an employee’s taxable income, allowing them to keep more money and potentially lowering their tax liability
- Long-term savings: A company-sponsored savings plan provides a convenient and automatic way for employees to save for the future
- Employer contributions: Many employers match a portion of their employee’s contributions to the savings plan, effectively increasing the employee’s savings
- Investment opportunities: A savings plan provides access to various investment options, allowing employees to invest in multiple assets and potentially grow their savings over time
- Dollar cost averaging: Helps hedge against inflation as the employee makes regular contributions throughout the year and thereby is purchasing their investments at different unit values (when prices are high and when prices are low)
Overall, a company-sponsored savings plan can provide employers and employees various financial benefits and help ensure a more secure financial future.
Pension Awareness Day launched
To encourage people to start conversations about pension and retirement savings plans and the retirement system in Canada, FSRAO (Financial Services Regulatory Authority of Ontario) launched Canada’s first pension awareness day on February 16, 2023.
For more information, please reach out to your Cowan retirement consultant.
1 LifeWorks. (December 2022). The Mental Health Index by LifeWorks™. Retrieved from URL.