NBER WORKING PAPER SERIES

FINANCIAL LITERACY AND RETIREMENT PLANNING IN CANADA

David BoisclairAnnamaria LusardiPierre-Carl Michaud

Working Paper 20297http://www.nber.org/papers/w20297

NATIONAL BUREAU OF ECONOMIC RESEARCH1050 Massachusetts Avenue

Cambridge, MA 02138July 2014

We thank the Canadian Securities Administrators and the Quebec Autorité des marchés financiers forgranting access to the data, and Innovative Research for providing us with the data files and documentation.Michaud thanks the Fonds de recherche du Québec - Société et culture (NC 145848) for funding thisresearch. We also thank Thomas Lalime for excellent research assistance and Audrey Brown for editorialassistance. Findings and conclusions do not necessarily represent the views of the organizations involved.The views expressed herein are those of the authors and do not necessarily reflect the views of theNational Bureau of Economic Research.

NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies officialNBER publications.

© 2014 by David Boisclair, Annamaria Lusardi, and Pierre-Carl Michaud. All rights reserved. Shortsections of text, not to exceed two paragraphs, may be quoted without explicit permission providedthat full credit, including © notice, is given to the source.

Financial Literacy and Retirement Planning in CanadaDavid Boisclair, Annamaria Lusardi, and Pierre-Carl MichaudNBER Working Paper No. 20297July 2014JEL No. D14,D91

ABSTRACT

Financial literacy and Canadians’ capacity to plan for retirement is of primary importance for the policydebate over pension system reform in Canada. In this paper, we draw on internationally comparablesurvey evidence on financial literacy and retirement planning in Canada to investigate how financiallyliterate Canadians are and who does plan for retirement. We find that 42 percent of respondents areable to correctly answer three simple questions measuring knowledge of interest compounding, inflation,and risk diversification. This is consistent with evidence from other countries, and Canadians performrelatively well in comparison to Americans but worse than individuals in other countries, such as Germany.Among Canadian respondents, the young and the old, women, minorities, and those with lower educationalattainment do worse, a pattern that has been consistently found in other countries as well. Retirementplanning is strongly associated with financial literacy; those who responded correctly to all three financialliteracy questions are 10 percentage points more likely to have retirement savings.

David BoisclairUniversité du Québec à MontréalDépartement des sciences économiquesCase postale 8888, Succ. Centre-VilleMontréal (Québec)CANADA H3C 3P8 davidboisclair@yahoo.ca

Annamaria LusardiThe George Washington UniversitySchool of Business2201 G Street, NWDuques Hall, Suite 450EWashington, DC 20052and NBERalusardi@gwu.edu

Pierre-Carl MichaudUniversité du Québec à MontréalDépartement des sciences économiquesCase postale 8888, Succ. Centre-VilleMontréal, (Québec)CANADA H3C 3P8michaud.pierre_carl@uqam.ca

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1. Introduction

Researchfrommanycountriesaroundtheworldshowsnotonlythatindividualsdisplay

lowlevelsoffinancialliteracybutalsothatfinancialilliteracycanbelinkedtolackof

financialplanningandinsufficientresourcesinretirement(LusardiandMitchell,2011a,

2014).Usingdatarecentlycollectedviaaquestionnaireespeciallydesignedtobe

comparabletosurveysadministeredinanumberofothercountries(Australia,France,

Germany,Italy,Japan,theNetherlands,NewZealand,Romania,Russia,Sweden,

Switzerland,andtheUnitedStates),thispaperaimstoassesshowCanadiansfareinterms

offinancialliteracyandretirementplanning.

TheCanadiancaseisimportantformanyreasons.Fordecades,Canadahashadsomeof

thelowestlevelsofpovertyamongseniors(see,e.g.,OECD,2011).Althoughold‐agepoverty

seemstobechangingaccordingtorecentandforecastedtrends(Fréchet,2012;OECD,

2013;Clavetetal.,2013),publicretirementprogramsprovideahighincomereplacement

ratio,typicallyfrom60percentto90percentormore,forworkerswithearningsbelowthe

median.4Forthoseindividuals,retirementplanningmayberelativelysimple.5

Ontheotherhand,retirementplanningcanbeparticularlyimportantforCanadians

earningabovethemedianincome.Incomefloorprograms(theso‐called1stpillar)in

combinationwithcompulsorypublicsavingsplans(the2ndpillar)donotguaranteea

sufficientlyhighreplacementratio.Indeed,theseprogramsprovideretirementincome

4MedianearningswereaboutCA$30,000in2011,orCA$48,000forfull‐yearfull‐timeworkers(StatisticsCanada,2014).

5Thereare,however,exceptionstothisstatement.Suchexceptionsrelateforinstancetohouseholdsbreakinguppriortoretirement,andtothefactthatmeans‐testedprogramsfortheelderlyinteractindifferingwayswithvarioussavingsvehicles(e.g.,theGuaranteedIncomeSupplementandtheTax‐FreeSavingsAccountvs.theRegisteredRetirementSavingsPlan).

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cappedatapproximatelyCA$19,000peryearin2014,meaningthatreplacementratios

declinetowellbelow50percentforthoseearningabovethemedian.Hence,workersin

theseearningsbracketsneedtoputasideadditionalsavings(theso‐called3rdpillar)to

ensurethattheirretirementincomeadequatelyreplacesearnings,forexamplethroughan

employer‐sponsoredpensionplanortax‐shelteredvehicles.Inrecentyears,muchofthe

policydebatehasevolvedaroundthequestionofwhetherornotmiddle‐andhigh‐income

Canadiansaresavingenoughforretirement.Otherimportanttrendsarealsotakingplace,

includingashiftfromdefined‐benefit(DB)todefined‐contribution(DC)pensionplans,

thoughthishasbeenmorelimitedinCanadathanelsewhere(Gougeon,2009),6anda

declineinthecoverageofprivate‐sectoremployer‐sponsoredplans,whichmayhave

stabilized(MilliganandSchirle,2014).

Proposedreformshavefollowedtwostrands.Thefirststrandhasfocusedonexpanding

the2ndpillar(thecontributoryCanadaPensionPlananditssisterQuebecPensionPlan;see

forinstanceWolfson,2011and2013,andMilliganandSchirle,2014,foranoverview),and

sometimesthe1stand3rdpillars(see,respectively,Townson,2009,andAmbachtsheer,

2008,forexamples).OneargumentoftenmadeisthatCanadianshavelowlevelsof

financialliteracyandthusexpansionofrelativelysimplemandatoryprogramsmaybe

advantageous.

Thesecondstrandfocusesonvoluntarysavingsplans.Onechangetothe3rdpillaris

currentlybeinggraduallyimplementedatthefederallevelandinsomeprovinces:Pooled

RetirementPensionPlans(PRPPs),whicharebeinglegislatedundervariousnamesineach

province.PRPPsareindividualaccountswith“groupinvestmentoptions,”offeredby

6Whether“groupRRSPs”aretakenintoaccountmayalterthisstatement,butexhaustivecoveragefiguresfortheseDC‐typeplansaredifficulttoobtain.

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privatefinancialinstitutions.Accountsincludeadditionalfeaturessuchasautomatic

enrollmentanddefaultoptions,andtheinclusionoftheseoptionscanbelinkedtothe

notionthatpurelyvoluntarysavingsprogramsareunlikelytobeeffectivedue,amongother

factors,tolackoffinancialknowledge.

TheTaskForceonFinancialLiteracyrecommendedinits2010report“thatemployers

offerautomaticsavingprogramsandtoolstofacilitateincreasedlifelongsavingby

Canadians,drawingoninternationalbestpracticesinthisarea”(TaskForceonFinancial

Literacy,2010).Thereportalsoemphasizedtheimportanceoffinancialliteracy—not

merelyforretirementplanningbutforotherreasonsaswell—andrecommended“the

appointmentofaFinancialLiteracyLeadertocoordinateeffortsintheimplementationofa

nationalstrategyforfinancialliteracyinCanada”(FCAC,2014).Legislationwasadoptedin

2013toappointsuchapersonwithintheFinancialConsumerAgencyofCanada(FCAC),

thusexpandingforthethirdtimesince2007themandateofthisfederalagency,which“was

createdin2001toprotectandeducateconsumersoffinancialservices”(ibid.).7

ExistingevidencerevealedlowlevelsoffinancialliteracyinCanada(TaskForceon

FinancialLiteracy,2010;MacKay,2011;MullockandTurcotte,2012;LalimeandMichaud,

forthcoming).However,thisevidencedrewmostlyfromthe2009CanadianFinancial

CapabilitySurvey,whichdidnotusequestionscomparabletothoseusedinothercountries.

Comparisonscanbeusefulastheyhighlightsimilaritiesanddifferencesacrosscountries.

Theycanalsodrawattentiontoimportantfeaturesofthedata,forexamplethegroupsthat

consistentlydisplaythelowestlevelsoffinancialliteracy,irrespectiveofinstitutional

setting,andtheeffectsoffinancialilliteracy.

7JaneRooneywasappointedtothepositiononApril15,2014.

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Insection2,wediscussthesurveyanddatacollectionmethod.Insection3,wepresent

theempiricalevidenceontheleveloffinancialliteracyandretirementplanning.Wethen

compareresultstothoseobtainedfromothercountriesanddiscusstheimplicationsofour

findingsforpublicpolicy.

2. TheSurvey

InCanada,securitiesregulationandoversightisdoneattheprovinciallevel.Consequently,

thereare13provincialandterritorialsecuritiesadministrators,collectivelyknownasthe

CanadianSecuritiesAdministrators(CSA).In2012,theCSAsponsoredathirdeditionofa

surveythathadbeenfieldedin2006and2009,mainlyaimedatinvestigatingand

measuringvariousaspectsofinvestmentknowledgeandbehavioramongCanadians.

ThesurveywasconductedovertheInternetbetweenMay17andMay31,2012,inboth

FrenchandEnglish,usinganationalpanelrunbyInnovativeResearch.Respondentswere

drawnfromnationallyrepresentativesamplesandwereofferedachancetowinCA$1,000.

DatawereweightedtoensurethesamplewasrepresentativeoftheCanadianpopulation.8

Atotalof6,911Canadianswereinterviewed.Importantforourpurposeisthat2012was

thefirstyearinwhichthesurveyincludedthethreespecificquestionsdesignedtomeasure

financialliteracythathavebeenusedinmorethantwelveothercountries.9

8Weusedthe2008SurveyofHouseholdSpendingtoconstructweightsbasedonage,sex,regionofresidence,andeducationlevel.DetailsontheconstructionoftheseweightsareprovidedinAppendixA.

9Whilethequestionsarethesameorverysimilaracrosscountries,themodeofinterviewvariesacrosssurveysfieldedindifferentcountries.Forexample,somecountriesusetelephone‐basedsurveys(U.S.),whereassome(Germany)usedpaperandpencil.Also,somedifferencesexistintermsoftheyearinwhichthesurveywasfielded.However,thefinancialliteracylandscapeisunlikelytohavechangedoverahorizonofafewyears.

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3. EmpiricalEvidence

3.1. HowfinanciallyliterateareCanadians?

3.1.1. Measurementoffinancialliteracy

Wereportbelowthewordingofthethreequestions—takenfromthequestionnaire

originallydesignedbyLusardiandMitchell(2011b)—thatwereusedtomeasurefinancial

literacyamongCanadianrespondents.

UnderstandingofInterestRates

“Supposeyouhad$100inasavingsaccountandtheinterestratewas2%peryear.

After5years,howmuchdoyouthinkyouwouldhaveintheaccountifyouleftthe

moneytogrow?Morethan$102;Exactly$102;Lessthan$102;Don’tknow.”

UnderstandingofInflation

“Imaginethattheinterestrateonyoursavingsaccountwas1%peryearand

inflationwas2%peryear.After1year,howmuchwouldyoubeabletobuywiththe

moneyinthisaccount?Morethantoday;Exactlythesame;Lessthantoday;Don’t

know.”

UnderstandingofRiskandDiversification

“Isthefollowingstatementtrueorfalse?[...]Buyingasinglecompany’sstockusually

providesasaferreturnthanastockmutualfund.True;False;Don’tknow.”

The first question measures numeracy/interest compounding, or the capacity to do a

simplecalculationrelatedtointerestrates.Thesecondquestionmeasuresunderstandingof

inflation,againinthecontextofasimplefinancialdecision.Thethirdquestionisajointtest

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ofknowledgeaboutstocksandstockmutualfundsandofriskdiversification,sinceknowing

theanswertothisquestionrequiresknowledgeofwhatastockisandthatamutualfundis

composedofmanystocks.

ThesequestionsarerelevantformostrespondentsinCanada,albeitwithdifferent

degreesofsaliencefordifferentagegroups.Forinstance,onlyolderindividuals(40or50

yearsandolderatthetimeofsurvey)arelikelytohaveexperiencedinflation,sincethelast

inflationaryepisodetookplaceintheearly1980s(duringthatperiod,inflationwasat10–

12percent).Since1991theBankofCanadahasfollowedamonetarypolicybasedona2

percentinflationtarget.Olderrespondentsmayalsohavethemostexperiencewiththe

powerofinterestcompounding,asindividualsover40—andevenmoreso,thoseover60—

willlikelyrememberthehighmortgageratesofthesameperiod.

Topicssuchascompoundinterest,inflation,andthestockmarkethavebeentaughtin

varyingwaysacrossCanadaovertheyears,andmanymiddle‐agedindividualsarelikelyto

havehadsomeexposuretothesetopicsinschool.InQuebec,forinstance,thesetopicswere

taughtforseveraldecadesaspartofamandatory12thgradeeconomicscourse;however,

thiscoursewasdroppedfromthecurriculumin2009,meaningthatindividualsunder20in

2012willnothavebeenexposedtoit.Ontheotherhand,anewoptionalcoursebeginning

in2015isbeingcontemplated;BritishColumbiaintroducedamandatorycoursein2004;

andOntariospecificallyintroducedfinancialliteracyelementsintoitscurriculain2011.

Moreover,sinceCanada—Quebecinparticular—performswellinmathematicsonPISA

(ProgrammeforInternationalStudentAssessment;seeKnightonetal.,2010),onemay

expectarelativelyhighleveloffinancialliteracyamongtheadultpopulation(Jappelli,

2010;JappelliandPadula,2013).

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Fromtheearly1990sonwards,incentivesforindividualstocontributetoretirement

savingsplanshavebeenenhancedwiththeexpansionoftax‐deferredvehiclesandother

initiatives(forexample,indexationofthecontributionceilingfortheRegisteredRetirement

SavingsPlan,orRRSP,10andcreationoftheTax‐FreeSavingsAccount,orTFSA11).Asa

result,thevalueofhouseholds’directinvestmentsinfinancialmarkets—asopposedto

thoseheldthroughacollectivevehicle,suchasapensionplan—hasrisensignificantlyasa

multipleofearningsoverthelast30years(Horner,2009).Theproportionofhouseholds

owningdirectequityisnowamongthehighestintheworld(Groutetal.,2009),so

Canadiansshouldberatherfamiliarwithconceptsrelatedtoriskandportfolio

diversification.

3.1.2. Evidenceonfinancialliteracy

InTable1,wepresentthedistributionofanswerstoeachofthethreefinancialliteracy

questionsaswellasthedistributionofanswerstoallthreequestions.Overthree‐quarters

ofsurveyrespondentscorrectlyansweredthecompoundinterestquestionandmorethan

oneintengotthisquestionwrong.Abouttwo‐thirdscorrectlyansweredthequestionabout

inflationandmorethan17percentofrespondentsgotthisquestionwrong.Thequestion

thatelicitedthelowestnumberofcorrectanswerswasthequestionaboutrisk

diversification:59percentofrespondentsansweredthisquestioncorrectly.Moreover,the

patternofresponseschangeswhenlookingatriskdiversification;morethan30percentof10TheRRSPissimilartoanIRAintheU.S.“GroupRRSPs”areindividualaccountssetupbyemployers,usuallywithmatchingcontributions,andaresimilarto401(k)plansintheU.S.RRSPcontributionsaretaxdeductible,andwithdrawalsarefullytaxableatthebeneficiary’smarginalincometaxrate.Asmentionedabove,groupRRSPsalsohaveanew—andverysimilar—“competitor”savingsvehicle:PooledRegisteredPensionPlans,whichQuebeclaunchedin2014underthenameVoluntaryRetirementSavingsPlans(VRSPs).

11TheTFSAissimilartoaRothIRAintheU.S.“GroupTFSAs”areindividualaccountssetupbyemployers,usuallywithmatchingcontributions,andaresimilartoRoth401(k)plansintheU.S.TFSAcontributionsarenottaxdeductibleandwithdrawalsarenottaxable;likeRothplansintheU.S.,theTFSAisthereforesaidtobe“taxprepaid”.

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respondentsindicatedtheydidnotknowtheanswertothisquestion,whiletheproportion

of“donotknow”answerswasmuchlowerforthequestionsoninterestratesandinflation

(9and16percent,respectively).Resultsareverysimilarwhetherlookingatindividualsof

workingage(age25to64)oratthepopulationasawhole.Consideringallquestions

together,onlyabout42percentofrespondentscorrectlyansweredallthreequestionsand

morethan37percentofrespondentsansweredwithatleastone“donotknow”response.

Thesefindingsarestrikinglysimilartothosefromothercountries.Forexample,studies

fromtheU.S.,Germany,andJapan—tomentionbutafewcountriesthataregeographically

diversebuthavesimilarfinancialmarkets—reportsimilarfindings,withahigherrateof

correctresponsestotheinterestrateandinflationquestions,butaloweronefortherisk

diversificationquestion.Moreover,thequestionaboutriskdiversificationistheonethat

elicitsthehighestnumberof“donotknow”responsesacrosscountries.Forexample,“do

notknow”responsesare34and32percentintheU.S.andGermany,respectively,andas

highas56percentinJapan.Inmanycountries,thenumberofrespondentswhocan

correctlyanswerallquestionsisratherlow;forexample30percentintheU.S.and45

percentintheNetherlands.12PercentagesaresomewhathigherinGermany,with53

percentofrespondentsabletoanswerallthreequestionscorrectly.

12Formoredetailanddiscussionabouttheinternationalcomparisonacrosstwelvecountries,seeLusardiandMitchell(2014).

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Table1.Summarystatisticsonthethreefinancialliteracyquestions

  Full sample (%) Age 25‐64 (%) 

  (A) Interest question   

  > $ 102  77.92 79.04 

  = $ 102  7.04 7.12 

  < $ 102  6.20 6.10 

  DK  8.84 7.74 

  (B) Inflation question   

  More  8.14 8.10 

  Exactly the same  9.55 9.91 

  Less  66.18 66.92 

  DK  16.13 15.07 

  (C) Risk question   

  Correct (false)  59.35 61.26 

  Incorrect (true)  9.36 8.13 

  DK  31.29 30.62 

  (D) Cross‐question consistency   

  Correct: Interest and Inflation  58.12 58.83 

  All correct  42.46 43.93 

  None correct  10.27 9.46 

  At least 1 DK  37.23 35.60 

  All DK  5.96 5.60 

  Number of observations  6,805 4,950 

Note:Distributionofresponsestothefinancialliteracyquestionsinfullsampleandforthoseage25–64.Allfiguresareweighted.DKindicatesrespondentdoesnotknowtheanswer.Italicsindicatethecorrectanswertoeachquestion.

3.2. Whoknowstheleast?

Table2showsthedistributionofresponsestothefinancialliteracyquestionsacross

demographicgroups.Tobeabletocomparewithothercountries,weconsideredthe

distributionofresponsesacrossage,sex,educationalattainment,andemploymentstatus.

Althoughinasinglecross‐sectionwecannotdistinguishbetweenageandcohorteffects,

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thereisaninverseU‐shapedpatternofresponsesacrossage,withtheyoungnormally

havingthelowestpercentageofcorrectanswers,andtherateofcorrectanswersagain

showinga(small)declinewithage.Inallcases,however,individualsyoungerthan35

performedworsethanolderindividuals.

Womenperformedworsethanmenonallthreequestions.Notonlyistheproportionof

correctanswerslowerforwomen,butforeachquestion,womenweremorelikelythanmen

tohaveselectedthe“don’tknow”option,withtheproportionparticularlyhighfortherisk

diversificationquestion,towhichmorethan40percentofwomenreplied“donotknow.”

Thereisalsoastrongeducationgradient,withindividualswithgreatereducational

attainmentdisplayingahigherleveloffinancialliteracy.Theproportionofrespondents

answeringwith“donotknow”decreasesaseducationlevelincreases.

Retiredrespondentshadthehighestproportionofcorrectanswerstotheinflation

question.Butontheotherquestions,theself‐employedperformedbest.Thesetwogroups

performedsomewhatbetterthanemployedrespondentsoninflationandoverall,buton

interestandrisk,employedindividualsweremoreknowledgeablethanretirees.Individuals

whowerenotworking(students,homemakers,andtheunemployed)performedworston

allquestions.

Thesefindingsareagainveryconsistentwiththeevidencefromothercountries;the

young,women,thosewithloweducationalattainment,andindividualswhoarenot

workingareconsistentlyfoundtodisplaylowlevelsoffinancialliteracyinternationally.In

particular,therearestrikingsimilaritiesinthegenderdifferencesinfinancialliteracy;the

patternthatisfoundinCanadaverycloselymirrorstheevidencefromothercountries.

Thesepatternsareonereasonwhyinternationalcomparisonscanbequiteinformative.

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Table2.Distributionofresponsestofinancialliteracyquestionsbyage,sex,educationlevel,

andemploymentstatus

Interest  Inflation Risk Overall

Correct  DK Correct DK Correct DK 3 Correct  >= 1 DK

Age     

< 35  74.12  10.01 46.58 23.78 50.61 34.31 29.73  43.58

35‐54  79.80  7.59 66.84 14.86 61.84 29.58 45.06  34.27

55‐64  78.51  7.75 75.11 12.73 62.67 31.90 46.31  36.31

65+  76.82  11.89 75.77 14.79 58.99 31.44 45.66  38.56

Sex     

Male  81.69  6.97 72.15 11.02 66.76 22.71 51.36  27.71

Female  73.85  10.86 59.72 21.65 51.34 40.56 32.85  47.52

Education     

< High school  63.21  16.21 54.28 26.48 40.24 49.32 23.50  57.45

High school graduate  71.29  12.36 53.50 22.25 50.84 36.71 30.33  45.20

Technical & vocational  79.34  7.69 65.62 15.81 58.80 31.70 40.50  37.07

CEGEP or Some college  82.40  6.26 69.70 12.91 64.57 26.35 48.00  31.50

College Graduate  86.79  4.36 78.66 8.37 73.68 19.83 58.70  23.89

Post Graduate  90.62  3.61 82.51 6.37 75.78 16.48 63.85  19.85

Employment status     

Not working  68.56  13.64 48.86 27.04 42.98 44.63 25.88  50.63

Employed for wage  80.93  6.74 65.82 13.76 63.26 27.64 44.90  33.39

Self‐employed  83.39  4.24 75.07 11.52 67.35 24.29 52.29  29.75

Retired  77.19  10.75 76.39 14.36 61.05 30.90 46.62  37.31

Note:Allfiguresareweighted.DKindicatesrespondentdoesnotknowtheanswer.“Notworking”includesstudents,homemakers,andtheunemployed.

GiventheregionaldifferencesthathavebeenfoundinItaly,Russia,andtheUnitedStates,

welookedatfinancialliteracydifferencesbyCanadianprovince/region.13Wealsolookedat

13Wereportstatisticsbyregioninsteadofindividualprovincemostlyforconvenience.Differencesbetweenprovinceswithineachregion(NewfoundlandandLabrador,PrinceEdwardIsland,NovaScotiaandNewBrunswickintheAtlantic;Manitoba,SaskatchewanandAlbertainthePrairies)werenotsignificant.

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differencesbyself‐reportedvisibleminoritystatus,andaccordingtothelanguageinwhich

therespondenttookthesurvey.ResultsareshowninTable3.

Thereareslightdifferencesinfinancialliteracyacrossregions:respondentsinQuebec

andtheAtlanticprovincesperformedpoorlyontheinterestandinflationquestions,while

respondentsonthecoasts(BritishColumbiaandAtlantic)didworseonriskdiversification.

Overall,respondentsfromOntarioandthePrairiesperformedbest,whilethosefromthe

Atlanticprovincesdidtheworst.Differenceswerenotverylarge,however;therewasno

singlequestiononwhichthedifferencebetweenthe“mostliterate”andthe“leastliterate”

regionexceeded10percentagepoints.

Thepictureissomewhatdifferentwhenlookingattheresultsaccordingtolanguage

(i.e.,whetherthesurveywastakeninFrenchorEnglish).14FrenchrespondentsinQuebec

doworsethanEnglishrespondentsinQuebec.FrenchrespondentsintherestofCanadado

betterthanFrenchrespondentsinQuebecandeventhanEnglishrespondentsinQuebec

andtherestofCanada,apartfromthequestiononriskdiversification.Thepictureisalso

differentwhencomparinglanguageminorities(EnglishinQuebecvs.Frenchinother

provinces)andmajorities(FrenchinQuebecvs.Englishelsewhere).Amongtheminorities,

Englishrespondentsdobetteronriskandoverall,whiletheirresultsaresimilartoFrench

respondentsoninterestandinflation.EnglishrespondentsfromoutsideQuebecdobetter

thanFrenchrespondentsfromQuebec,exceptonrisk.Inallcasesexceptonrisk,English

respondentsfromQuebecfarebest,whileFrenchrespondentsfromQuebecfareworst.

Theseareonlyunivariatestatistics,notcontrollingfortheotherdifferencesthatare

mentionedearlierinthetable.Giventheimportanceofthisfinding,wealsoperforma

14Thesub‐sampleofFrenchrespondentsoutsideQuebecisverysmall.

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multivariateanalysis.Interestingly,regionalandlanguagedifferencesapparentinTable3

allbutdisappearwhencontrollingforeducationalattainmentinaregressionframework.15

Hence,thegapisalmostentirelyexplainedbydifferencesineducationacrossregions.

Table3.Distributionofresponsestofinancialliteracyquestionsbyregion,language,andself‐reportedvisibleminoritystatus

  Interest  Inflation Risk Overall

  Correct  DK Correct DK Correct DK 3 Correct  >= 1 DK

Region (N=6,805)     

Atlantic  74.55  10.79 64.29 20.48 53.75 38.56 36.93  45.37

Quebec   74.68  9.19 62.76 16.87 60.17 30.48 39.43  37.91

Ontario  79.65  8.50 67.81 14.73 61.11 29.41 44.69  34.74

Prairies  78.83  8.83 67.66 16.06 58.86 31.43 45.06  36.73

British Columbia and Territories 

79.97  8.05 67.30 16.36 56.55 33.93 41.79  39.07

Language (N=6,805)     

French (Quebec)  73.86  9.53 61.45 17.60 59.72 30.82 38.08  38.61

French (ROC)  79.23  0.00 78.69 3.57 70.57 12.95 53.43  15.65

English (Quebec)  85.06  4.73 79.53 7.47 65.89 26.23 56.76  29.01

English (ROC)  79.03  8.76 67.28 15.94 59.01 31.66 43.45  37.11

Visible minority 

 (N=6,198) 

   

Yes  69.24  9.78 56.93 16.55 53.04 29.76 31.79  35.43

No  82.09  7.15 70.56 13.58 64.32 27.86 47.99  33.40

Note:Allfiguresareweighted.DKindicatesrespondentdoesnotknowtheanswer.ROCreferstoCanadaoutsideQuebec(“restofCanada”).

15Thisconclusionwasreachedbyregressingthevariableindicatingthatanindividualhadcorrectlyansweredallthreefinancialliteracyquestionsonage,sex,regionofresidence,andaninteractiondummyindicatingFrenchsurvey‐takersfromQuebec,andsubsequentlyaddingeducationlevel(theseareOLSregressions).Thelatteroperationwipedoutregionalandlanguagedifferences.Thesubsequentintroductionofincomeandemploymentstatusintotheregressionloweredtheeducationaleffect,butdidnotchangethestatisticalsignificanceofregion,languageandeducation’scoefficients.Resultsareavailableuponrequest.

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Finally,self‐declared“visibleminoritystatus”seemstobestronglycorrelatedwithlower

financialliteracy.Respondentswhoidentifythemselvesasbelongingtoavisibleminority

faremuchworse,onaverage,thanthosewhodonot.Thesuccessrateismuchloweronall

questions(by11–15percentagepoints)aswellasoverall(16percentagepoints).Contrary

totheregional/languagedifferences,thisresultdoesnotgoawaywhencontrollingfor

income,employmentstatusand,mostimportantly,educationalattainment.

3.3. Doesfinancialliteracymatter?

Weturnnexttoexaminingthelinkbetweenfinancialliteracyandretirementplanning.

Plannersaredefinedasthosewhohaveanytypeofvoluntarysavings.Thisisabroad

measure,butthewordingofthesurveyquestionmakesitappropriateasfarasretirement

planningisconcerned(welabelasplannersrespondentswhoselectanswers#1,#2or#3

tothequestionbelow):16

Doyoupersonallyhaveanysavingsorinvestmentssetasideforthefuture?This

couldbeeitherinoroutsideofanRRSP(RegisteredRetirementSavingsPlan),RRIF

(RegisteredRetirementIncomeFund)orTFSA(Tax‐FreeSavingsAccount).Checkall

thatapply.

1.SavingsorinvestmentsINanRRSP,RRIForpensionplan

2.SavingsorinvestmentsINaTFSA

3.SavingsorinvestmentsOUTSIDEanRRSP,RRIF,pensionplanorTFSA

4.Currentlydonothaveanysavingsorinvestmentssetasideforthefuture

16Onemightarguethatonlyindividualswithsavingsintax‐shelteredvehiclesshouldbelabelled"planners”,butitcanbesimilarlyarguedthatotherformsofsavingsarealsolinkedtoplanning—forretirementandotherpurposes.About200individuals,outofmorethan4,000inourregressionsample,reporthavingsavingsonlyoutsideoftax‐shelteredvehicles,i.e.,answer#3.

16

Asdidthestudiesinothercountries,werestrictoursampletonon‐retiredrespondents

age25to64.17Table4showstherelationshipbetweenretirementplanningandfinancial

literacy.Resultsindicatethathigherlevelsoffinancialliteracyareassociatedwithahigher

likelihoodthattherespondentplansforretirement.Thefractionwhocorrectlyanswered

allquestionsismuchhigherat53.5percentamongplannersversus29.0percentamong

non‐planners,andthefractionwhoansweredwithatleastone“don’tknow”ismuchlower

amongplannersat26.0percentversus49.2percentamongnon‐planners.

Table4.Financialliteracyofplannersandnon‐planners

  Planners Non‐planners  

  (A) Interest question   

  Correct  84.63 71.29  

  DK  4.96 11.40  

  (B) Inflation question   

  Correct  73.60 53.88  

  DK  9.01 24.11  

  (C) Risk question   

  Correct   71.08 46.53  

  DK  21.23 43.76  

  (D) Summary   

  Correct: Interest and Inflation 67.11 44.52  

  All correct  53.45 29.00  

  None correct  5.53 15.46  

  At least 1 DK  26.00 49.17  

  All DK  2.86 9.20  

  Number of observations  2,368 1,713

Note:Sampleconsistsofnon‐retiredrespondentsage25–64.DKindicatesrespondentdoesnotknowtheanswer.Plannersareindividualswhohaveanyvoluntarysavings.

17Eighthundredandseventy‐threeretiredrespondentsareunderage65.

17

InTable5weshowtheresultsofregressionstoassesstheimpactoffinancialliteracyon

retirementplanning—thistimecontrollingforarichsetofdemographiccharacteristicsand

income.18Asinthestudiesinothercountries,weusethreedifferentspecificationsfor

financialliteracy:(1)whethertherespondentansweredallthreequestionscorrectly;(2)

thenumberofquestionstherespondentansweredcorrectly;and(3)dummiesforeachof

thequestionstherespondentsansweredcorrectly.

Incomeinformationisreportedusingeightbroadcategories,ratherthanasa

continuousvariable.Thesecategoriesarecodedusingdummyvariables(onedummyfor

eachincomecategory).19Thesameistrueforage,whichisrepresentedasasetofdummies

foragegroupsratherthanasacontinuousvariable.

Wedonotusevisibleminoritystatusasacontrolbecauseofthelargenumberof“don’t

know/prefernottosay”responses(almost10percent;i.e.,asmanyasthenumberof

individualswhoidentifythemselvesasbelongingtoavisibleminority).Thesurveydoesnot

provideinformationregardingmaritalstatusand,asaresult,wecannotusethisvariablein

ourregressions.20

Evenaftercontrollingformanydemographiccharacteristics,includingincome,Table5

showstherecontinuestobeastronglinkbetweenfinancialliteracyandretirement

planning.Specifically,thosewhoansweredallthreequestionscorrectlyareabout10

percentagepointsmorelikelytohavesavings,includinginanRRSP,RRIF,pensionplan,or

TFSA.Similarly,thosewhocanansweroneextrafinancialliteracyquestionhavean

18LogitmarginaleffectswereverysimilartoOLSestimates.Hereweusethelinearprobabilitymodeltocompareresultswithothercountries

19About15percentofrespondentsdidnotreporttheirincome.Tobeabletorelyonthefullsample,weimputedthemissingobservationsonincomeasdescribedinAppendixB.

20AppendixCprovidesdescriptivestatisticsforthefullsampleandthesampleusedintheregressions.

18

increasedprobability(5.3percentagepoints)ofhavingsavings.Theconceptthatmatters

themostforretirementplanningisriskdiversification:thosewhocorrectlyansweredthe

riskdiversificationquestionhavea10.2‐percentage‐point‐higherprobabilityofhaving

savings.

Table5.Linearprobabilitymodelsforretirementplanning

1 2 3 

Financial literacy measures    

All three correct  0.0977***

(0.0164) 

 

Total number correct  0.0530***

(0.0090) 

 

Inflation correct  0.0332* 

(0.0201) 

Interest correct  0.0148 

(0.0237) 

Risk correct  0.1021*** 

(0.0186) 

Socio‐demographic controls   

Age (ref. 25‐34)   

35‐54   0.0202

(0.0189) 

0.0183

(0.0188) 

0.0196 

(0.0188) 

55‐64    0.1058***

(0.0252) 

0.0990***

(0.0251) 

0.0994*** 

(0.0251) 

Sex (ref. Female)   

Male (=1 if male)   ‐0.0468***

(0.0164) 

‐0.0461***

(0.0163) 

‐0.0466*** 

(0.0162) 

Region (ref. Quebec)   

Atlantic  ‐0.0937***

(0.0268) 

‐0.0961***

(0.0267) 

‐0.0934*** 

(0.0262) 

Ontario  ‐0.0095

(0.0207) 

‐0.0089

(0.0206) 

‐0.0068 

(0.0206) 

Prairies  ‐0.0226

(0.0253) 

‐0.0202

(0.0251) 

‐0.0182 

(0.0251) 

19

British Columbia and Territories  ‐0.0258

(0.0274) 

‐0.0261

(0.0275) 

‐0.0214 

(0.0277) 

Education (ref. <High School)   

High School   0.1221***

(0.0401) 

0.1159***

(0.0401) 

0.1138*** 

(0.0400) 

Technical, Vocational Post‐Secondary School  0.1618***

(0.0401) 

0.1530***

(0.0402) 

0.1516*** 

(0.0401) 

CEGEP or Some University  0.1878***

(0.0414) 

0.1790***

(0.0416) 

0.1774*** 

(0.0416) 

College and Post Graduate   0.2314

(0.0403) 

0.2207***

(0.0407) 

0.2187*** 

(0.0407) 

Income (ref.under$20,000)   

$20,000 to under 40,000   0.1472***

(0.0366) 

0.1392***

(0.0363) 

0.1404*** 

(0.0362) 

$40,000 to under $60,000  0.2266***

(0.0371) 

0.2162***

(0.0371) 

0.2178*** 

(0.0368) 

$60,000 to under $80,000   0.3423***

(0.0366) 

0.3352***

(0.0366) 

0.3358*** 

(0.0366) 

$80,000 to under $100,000   0.3643***

(0.0368) 

0.3555***

(0.0368) 

0.3565*** 

(0.0368) 

$100,000 to under $125,000   0.4087***

(0.0371) 

0.4014***

(0.0370) 

0.4017*** 

(0.0370) 

$125,000 to under $150,000   0.3828***

(0.0452) 

0.3707***

(0.0451) 

0.3723*** 

(0.0453) 

$150,000 or more   0.3929***

(0.0386) 

0.3857***

(0.0386) 

0.3881*** 

(0.0384) 

Employment status (ref.Empl.forwage)  

Self‐employed   ‐0.0770***

(0.0291) 

‐0.0774***

(0.0289) 

‐0.0774*** 

(0.0291) 

Not working   ‐0.1841***

(0.0252) 

‐0.1799***

(0.0251) 

‐0.1780*** 

(0.0250) 

Constant   0.2934***

(0.0491) 

0.2431***

(0.0478) 

0.2539*** 

(0.0485) 

R2  0.2434 0.2449 0.2480 

Note:Robuststandarderrorsinparentheses;***P<0.01;**P<0.05;*P<0.10.Sampleconsistsof4,082non‐retiredrespondentsage25–64.“Notworking”includesstudents,homemakersandtheunemployed.

20

Bothhigherincomeandhighereducationalattainmentareassociatedwithhigherlevelsof

planning.Thesevariableshavepositiveandgenerallylargeandsignificanteffectson

retirementplanning,whichisconsistentwiththefindingsofmanyothercountries(see,e.g.,

LusardiandMitchell,2009,2014).Agealsohasasignificanteffect,witholderindividuals

beingmorelikelytoholdretirementsavings.Whencontrollingforotherpersonal

characteristics,includingincome,educationandfinancialliteracy,wefindthatwomenare

morelikelytoplanforretirement.Thisfindingisconsistentwithevidencefromother

countries,suchasJapan(LusardiandMitchell,2011c).

Becauseofpossiblydifferingincentivestoplanforretirementaccordingtothelevelof

incomeinCanada,wehavesplitthesampleaccordingtoincome,atCA$60,000.Asan

alternativestrategy,wehaveincludedaninteractiontermbetweenfinancialliteracy(each

ofthethreemeasuresinturn)andadummyindicatingthatanindividualhasahighincome,

i.e.,overCA$60,000.Wereachthesamequalitativeconclusionusingbothmethods:allelse

equal,financialliteracyappearstohaveagreaterimpactonretirementplanningfor

individualswithlowerincome.Thismakessensetotheextentthathigher‐income

individualsaremorelikelytobeawareofthebasicfeaturesoftheretirementincome

system,andthusoftheirneedtosave,regardlessoftheirmeasuredleveloffinancial

literacy.Butthisfindingmaywarrantfurtherresearch.

Financialliteracycanitselfbeanendogenousvariable.Oneframeworkusedto

conceptualizefinancialliteracyisdescribedinLusardi,Michaud,andMitchell(2013).

Financialliteracyisaformofhumancapital,whichmayenhancereturnsonsavingsbut

whichiscostlytoacquire.Insuchamodel,financialliteracyaffectssavingsbyraisingthe

returnsonavailableassets,butbothareachoicevariable.Finally,thereisthepossibility

thatindividualsacquirefinancialliteracybyplanningforretirement,alearning‐by‐doing

21

mechanism.Onecommonstrategyusedtoaddresstheseissuesistorelyoninstrumental

variablesestimation.Unfortunately,wedonothaveinformationthatwouldenableusto

constructinstrumentsforfinancialliteracy,suchaswhetherrespondentshavebeen

exposedtofinancialeducation,eitherinschooloratwork(LusardiandMitchell,2014).

Nevertheless,inmostofthecountriescoveredintheinternationalcomparison,

instrumentalvariablesestimationhasyieldedconsistentlyhigherestimatesofthe

relationshipbetweenfinancialliteracyandplanningthanthosemeasuredbytheOLS

estimates(LusardiandMitchell,2014,Table4).

4. DiscussionandConclusions

Inthispaper,weexaminefinancialliteracyviaresponsestoquestionsthathavebeenused

insurveysinmanyothercountries.Wereportseveralimportantfindings.First,only42

percentofrespondentsinCanadacorrectlyanswerbasicquestionsrelevanttopersonal

financialdecisions.Thisislowbutnotverydifferentfromfindingsinothercountrieswhere

thesamequestionswereasked.Forexample,only30percentofAmericanrespondents

correctlyansweredthesamequestionswhile53percentofGermanrespondentsdidso.

Second,Canadaisnodifferentfromothercountrieswhenitcomestothegroupswho

knowtheleast:financialliteracyisloweramongtheyoungandtheold,women,minorities,

andthosewithlowereducationalattainment.ItisalsolowerinQuebecandAtlantic

provincesand,inparticular,lowamongthosespeakingFrenchinQuebec.However,these

differencesseemmostlyduetodifferencesineducationalattainmentamongregionsand

languagegroups.Financialliteracyincreaseswitheducation,butevenamongthosewith

highlevelsofeducation,forexamplecollege‐educatedrespondents,only60percentcould

22

answerallthreequestionscorrectly.Thisisparticularlyrelevantforthedebateoverhowto

reformtheretirementincomesysteminCanada.

Retirementplanningisstronglyassociatedwithfinancialliteracy.Thisresulthasbeen

foundinmanycountriesandtheestimatesinCanadaaresimilartothoseofothercountries.

ThisisrelevantintheCanadiancontextbecauseoftherelativelylowleveloffinancial

literacy,evenamongthemorefortunateCanadians(i.e.,thosewithhighereducationand

income),whomayneedtorelymoreandmoreonvoluntarysavingsprogramstofundtheir

accustomedlevelofconsumptioninretirement.

23

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26

AppendixA:Weightingprocedure

ToensurethatoursampleisrepresentativeoftheCanadianpopulation,wereweightedit

usingtheweightsoftheSurveyofHouseholdSpending(SHS)ascalculatedbyStatistics

Canada,andtheweightsoftheCSAInvestorIndex(CSAII)survey.Initially,thelatterwere

basedonthreecensusvariables:agegroup(3categories),sex(2),andprovinceof

residence(10).Becauseeducationisimportantforouranalysis,weaddedittothislist.To

implementthis,forthetwosurveyswefoundthedistributionbyage,sex,regionof

residence,andeducationalattainment.Weconsideredthreecategoriesforage:18–34,35–

54,and55+;fiveregionsofresidence:Quebec,Ontario,Prairies,BritishColumbiaand

Territories,andAtlantic;andtwolevelsofeducationalattainment:lessthanhighschool

andhighschoolandmore.LettingNc,csabethenumberofobservationsobtainedfromthe

CSAIIsurveyandNc,shsthoseobtainedfromtheSHSforeachofthe60groups,wecameup

withthenewweight:Wc=Nc,shs/Nc,csa,c=1,…,60.Usingthisnewweight,weobtained

column4ofTableA.

TableA:Distributionsdifferences

CSAIIsample(%,weighted)

(1)

SHSsample(%,weighted)

(2)

Difference(%points)(3)=(1)‐(2)

CSAIIrwsample(%,reweighted)

(4)

Difference(%points)(5)=(4)‐(2)

(A)Age

18‐24  10.28 (0.30) 

    

3.75(0.19)

6.53    

7.25  (0.26) 

   

3.50    

25‐34  17.24   (0.38) 

  

15.87(0.37)

1.37    

12.03  (0.33) 

   

‐3.84   

35‐44  15.31 (0.36) 

     

20.19(0.40)

‐4.88  

16.99   (0.38) 

  

 ‐3.20   

45‐54  21.84   (0.41) 

  

22.28(0.42)

‐0.44  

25.85 (0.44) 

    

3.57    

55‐64  20.35   (0.40) 

  

17.49(0.38)

2.86    

20.51 (0.40) 

    

3.02    

27

65+ 14.99 (0.36) 

20.42(0.40)

‐5.43 

17.37 (0.38) 

‐3.05 

N 6,805  9,739 6,805 

(B)Education

<HighSchool 5.34    (0.22) 

 

18.67(0.39)

‐13.33  

18.59  (0.39) 

   

‐0.08   

>=HighSchool 94.66 (0.22)

81.32(0.82)

13.34

81.41 (0.39)

0.09

N 6,805  9,739 6,805 

(C)Gender

Male

 48.23     (0.50) 

51.75(0.50)

‐3.52  

51.94  (0.5)    

0.19    

Female 51.77 (0.50) 

48.25(0.50)

3.52 

48.06 (0.5) 

‐0.19

N 6,805  9,739 6,805 

(D)Province

Alberta  10.56   (0.31) 

  

10.24(0.10)

0.32    

 9.46  (0.29) 

   

‐0.78   

BritishColumbia  13.50 (0.34) 

    

13.48(0.34)

0.02    

 13.19  (0.34) 

   

‐0.29  

Manitoba  3.52   (0.18) 

  

3.51(0.18)

0.01    

 3.81 (0.19) 

    

0.30    

NewBrunswick  2.31 (0.15) 

    

2.34(0.15)

‐0.03   

 3.06  (0.17) 

   

0.72    

NewfoundlandandLabrador

 1.59 (0.13) 

    

1.55(0.12)

0.04    

 1.41 (0.12) 

    

‐0.14   

NovaScotia  2.87  (0.17) 

   

2.95(0.17)

‐0.08   

 1.71 (0.13) 

‐1.24   

Ontario  38.42    (0.49) 

 

37.08(0.48)

1.34    

 37.43 (0.48) 

0.35    

PrinceEdwardIsland

 0.42  (0.06) 

   

0.42(0.06)

0.00    

 1.10 (0.10) 

0.68    

Quebec  23.77   (0.43) 

  

25.46(0.44)

‐1.69   

 25.45 (0.44) 

‐0.01  

Saskatchewan 3.03 (0.17) 

2.97(0.17)

0.06

3.38 (0.18) 

0.41

N 6,790  9,739 6,790 

28

Note:Standarderrorsinparentheses.CSAIIsampleisthesampleasoriginallyweightedbyInnovativeResearch;CSAIIrwsampleisthereweightedsample.Territoriesareexcluded,whichexplainswhythenumberofobservationsissmallerinthedistributionbyprovince.AppendixB:Incomeimputation

About15percentofrespondentstotheCSAInvestorIndex(CSAII)surveydidnotreport

theirincome(i.e.,theysaidthattheydidnotknoworpreferrednottoanswer).Because

incomeisanimportantvariableinouranalyses,weimputedthemissingobservationstobe

abletorelyonthefullsample.Wedidsobyusinganorderedlogitestimationforthose

individualswhodidprovidetheirincome,wherethedependentvariablewasincomeas

reportedinthecategoriesoriginallyusedintheCSAIIsurvey.Theregressorsincludedage,

gender,surveylanguage,visibleminoritystatus,provinceofresidence,educational

attainment,andemploymentstatus—allwiththeiroriginalcategories,asprovidedbythe

surveyfirm.Usingthecoefficientsobtainedfromthisregression,wethenimputedan

incometorespondentswhohadanswered“don’tknow”or“prefernottosay”.Thusthese

individualswereattributedanincomecategorybasedontheirage,gender,survey

language,visibleminoritystatus,provinceofresidence,educationalattainment,and

employmentstatus.

AppendixC:Descriptivestatistics

TableCpresentsdescriptivestatisticsforthesurveyvariablesusedinthispaper.Statistics

areprovidedforboththefullsampleandourregressionsub‐sampleofnon‐retired

individualsage25–64.

TableC:Descriptivestatistics

  Full sample (%) Age 25‐64, non‐

retired (%) 

Retirement planning  (N=6,805) (N=4,082) 

Planner  69.51 69.88 

29

Non‐planner  30.49  

30.12 

Age  (N=6,805) (N=4,082) 

< 35  19.28 18.51 

35‐54  42.84 63.02 

55‐64  20.51 18.47 

65+  17.37 

‐‐ 

Sex  (N=6,805) (N=4,082) 

Male  51.94 51.42 

Female  48.06 

48.58  

Region  (N=6,805) (N=4,082) 

Atlantic  7.27 6.91 

Quebec  25.38 25.12 

Ontario  37.34 37.11 

Prairies  16.60 17.40 

British Columbia and Territories 13.40 

13.46 

Survey language  (N=6,805) (N=4,082) 

French  23.92 23.75 

English  76.08 

76.25 

Education  (N=6,805) (N=4,082) 

< High school  18.59 13.55 

High school graduate  17.38 17.47 

Technical & vocational  20.62 23.31 

CEGEP or Some college  13.96 13.45 

College Graduate  20.01 22.42 

Post Graduate  9.44 

9.80 

Employment status   (N=6,805) (N=4,082) 

Not working  17.90 21.20 

Employed for wage/Salary  49.09 69.06 

Self‐employed  7.13 9.74 

Retired  25.87 

‐‐ 

Visible minority  (N=6,198) (N=3,721) 

Yes  12.96 13.93 

No  87.04 86.07 

Note:Allfiguresareweighted.Distributionsofcharacteristicsinfullsampleandfornon‐retiredindividualsage25–64(thisistheregressionsampleusedinthepaper).“Don’tknow”responsesarenotreported,whichexplainsthevaryingsamplesize.“Notworking”includesstudents,homemakersandtheunemployed.Individualsare“planners”iftheyreporthavinganysavingsorinvestments“setasideforthefuture”(savingsorinvestmentsinanRRSP,RRIForpensionplan;inaTFSA;oroutsideanRRSP,RRIF,pensionplanorTFSA).