Financial Illiteracy

The Report of the Task Force on Financial Literacy is all that one would have expected from one co chaired by the CEO of Sun Life Financial and the Chairman of  BMO Nesbitt Burns.

There is hardly a whisper of criticism of financial institutions and the myriad fees, charges and interest rates they extract from ordinary Canadians. You will not discover from this report that the management expense fees charged on retail equity mutual funds in Canada are among the highest in the world. Or that the banks charge extortionate interest rates on credit card debt compared to other forms of consumer borrowing. Or that providers of payday loans prey on low income workers. Or that the annuities needed to turn RRSP savings into a secure lifetime retirement income are an extraordinarily expensive product.

There is barely a hint of an argument that financial institutions and advisers face an inherent conflict of interest unless they play a clearly specified fiduciary role similar to that of employer sponsors of workplace pension plans.  Most financial advisers, for example, personally benefit if they advise clients to buy high load funds and those employed by financial institutions can earn more by frequent trading of client assets. And so on.

There is no call for stronger regulation of financial institutions to protect Canadians. Instead, there are calls for the financial sector, the educational system, governments, employers and others to provide simpler, clearer information to individuals so that they can make more “responsible” decisions.

Remarkably, there is very little said on the precise meaning and content of “financial literacy.”

Growing debt is, apparently, entirely attributable to individuals wanting to consume more than they earn. No reference is made to stagnant real wages for the many, and the huge shift of income to the very affluent.

The report fails to mention the many submissions from labour and other organizations arguing that expansion of the very low cost Canada Pension Plan is the superior choice to individualized retirement savings options such as RRSPs and the “Pooled Registered Pension Plans” proposed by Finance Minister Flaherty.

It does, however, support “nudging” individuals into the arms of the banks and insurance companies though automatic enrollment into retirement savings plans, and built in escalation of contributions.

To summarize, the report puts the blame for poor outcomes on “uninformed” individuals, and completely ignores the reality of financial institutions profiting from poor choices.

6 comments

  • The report defines financial literacy as “having the knowledge, skills, and confidence to make responsible financial decisions”.

    You can read the report at:

    (http://www.financialliteracyincanada.com/eng/documents/pdf/canadians-and-their-money-1-report-eng.pdf)

    If you don’t have time to read the whole thing, you can just read Appendix A, which summarizes the report’s recommendations.

  • What about citizens’ political and economic ignorance (why are we misusing the word “illiteracy”?) that this article implies? Society frowns on the little guy actually understanding what’s being done to him, and by whom. It’s the culture, “stupid” (not you, Andrew, just the saying, you know?). It’s a tale as old as the hills, isn’t it?

  • A secondary document, “What We Heard”, at:

    (http://www.financialliteracyincanada.com/documents/Summary-of-Public-Consultations-eng.pdf)

    partially addresses the CPP expansion issue, which was outside of the mandate of the task force.

  • The best analogy is between debt and obesity – both are the result of a very complex set of factors.

    In my view, financial literacy is about as likely to solve debt problems as nutritional information is to solve obesity problems. Telling people that potato chips are bad for them is useless. If I’m hungry and tired and have a zillion things to do and the potato chips are the only food in the vending machine I’ll give in. And the ads on TV make them so tempting…

    There is something to be said for some of this nudging stuff, but look at Keith Horner’s report for the Department of Finance back in 2009. If you’re a single parent or couple with young kids earning $40,000 a year or less, you’ll be better off in retirement than you are now anyways, so why worry?

    So this is the real agenda: remember what happened to social assistance programs in the 1990s? When the generation that’s always lived in a world of insecure unemployment/low wages for unskilled workers/relatively low marriage rates hits retirement age, we’ll see the same kind of changes happening to GIS, etc. My guess is 2020. What do you think?

  • rcp – when I said they did not define financial literacy, I meant that there was little detail re the many ways in which people get taken advantage of – like high interest credit cards; not paying off credit card balances; high load mutual funds; actively managed mutual funds; trusting Goldman Sachs not to trade at your expense etc etc.

  • Andrew – I agree that they were relatively uncritical of the financial industry – not surprising given the composition of the panel. There’s clearly room for a lot more education, and it’s surprising to me that it’s not mandatory in high schools, for example. Basic personal finance and home economics courses could do a lot of good.

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