Can financial education improve financial literacy and retirement planning?

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Résumé (français)

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Résumé (anglais)

The capacity of Canadians to plan for retirement is low, both in terms of their specific financial knowledge and their broader financial literacy and capability. Few are aware of the retirement savings options available to them, or even of the particulars of their own occupational pension plans. The need for financial capability, however, is more pressing than ever, for two major reasons. First, there is an ongoing shift away from defined-benefit pension plans, which provide predetermined benefits, toward defined-contribution plans, which must be managed by the individual. Second, the financial products available to those planning for retirement are becoming ever more complex. Many governments and much of the financial industry maintain that financial education should be the primary instrument for addressing Canadians’ lack of financial capability. In this study, Saul Schwartz reviews the evidence on the effectiveness of education in improving financial capability and outcomes relating to retirement, and finds mixed results at best. However, research suggests that incorporating some principles of behavioural economics into the design of retirement programs – for example, making increases in the contribution rates of defined-contribution pension plans automatic – would have a far greater impact on individuals’ retirement income prospects. This would counter people’s decision-making biases, such as favouring the status quo when better alternatives are available and the inability to commit to saving. What should governments’ role be in addressing Canadians’ lack of financial capability? The author says that rather than devising a national strategy to promote financial capability, governments should emphasize protecting consumers with respect to financial matters. In order to help Canadians deal more efficiently with financial issues in general, and with retirement planning in particular, he recommends that governments * create an agency to better regulate the financial industry and protect consumers against risky products and services that are difficult to understand; * ensure the provision of expert, impartial third-party advice about retirement planning; and * redesign private pension plans using mechanisms that have been shown to improve financial outcomes such as automatic contribution-rate escalation. In Schwartz’s view, financial education should be a complement of but not a substitute for these initiatives: the most effective policy approach is to decrease the need for, rather than attempt to improve, Canadians’ financial capability. He adds, citing a phrase often used by hockey commentator Pierre McGuire, that relying on financial education to help ensure Canadians have adequate retirement income is “just not good enough!”