Low financial literacy is a major issue, intersecting daily life and policy design in Canada. It is a top-of-mind concern for consumer financial regulatory agencies, creditors, pension plan administrators, employers, and public service providers. After all, a good base in financial literacy can help individuals to avoid taking on too much debt, to make good savings decisions for major purchases and emergencies, to run a budget and to make sensible retirement plans. A lack of financial literacy can lead to financial decisions with unwanted consequences and, at the extreme, to financial catastrophes. With most Canadians dependent on workplace pensions and voluntary private savings to help them maintain their standard of living in retirement, financial literacy seems to be an essential ingredient to make Canada’s retirement income system work properly.

A recent academic investigation tries to better understand the relationship between financial literacy and retirement decisions. Using a dataset from early 2023 that measures the knowledge of middle-aged Canadians regarding their retirement income system, research examines financial literacy results in Canada and how these link to knowledge of the retirement income system. The overall results on financial literacy are concerning, to put it mildly. Those with higher literacy scores tend to know more about our retirement system and are also more likely to have a plan for retirement. Other countries are struggling with financial literacy as well, and Canada, compared to its peers, sits middle of the pack on average across topics. Nonetheless, there are reasons why decision makers across Canada should be making efforts to improve literacy and why these are critical to solid retirement financial decisions.  

The Retirement and Savings Institute (RSI) Index

In 2023, the annual RSI Index survey solicited responses from over 3,000 Canadians aged 35 to 54 on questions regarding general financial literacy (6 questions) and Canadian retirement programs. General financial knowledge includes the “Big 3” questions widely used in the literature and surveys around the world. These are questions related to the basics of financial literacy with regards to inflation, the role of interest rates, and the importance of risk diversification. In addition, the survey poses 26 questions related to knowledge of: tax sheltered savings options (RRSPs and TFSAs), employer plans, the Canada and Quebec Pension Plans (CPP/QPP), and the Old-Age Security (OAS) and Guaranteed Income Supplement (GIS) programs. 

The Classic Canadian Middle-of-the-Road Results

The results show that Canadians’ scores on financial literacy in 2023 are in line with other industrialized countries. They are also stable over time and contrary to “major advanced economies”, compound interest is the best-understood concept (81 percent correct response) whereas risk diversification is the worst understood (63 percent correct response). 70 percent were able to correctly answer a basic question on the concept of inflation. And overall, only 48 percent of respondents correctly answered all three questions. 

Some groups of the population do better than others. For instance, on average, men score higher than women while those with less than a high-school education, as well as the unemployed, do worse. Those who are part of an employer pension plan tend to do better than average. Further, there are no glaring regional differences, even if the Atlantic provinces do seem to fare slightly worse than average on most measures, except inflation.

After 5 years of administering the survey, we were curious as to whether knowledge of inflation amongst Canadians had shifted due to the uptick in inflation post-pandemic. In the thirty years since the Bank of Canada adopted an inflation target, annual inflation has been consistently around 2 percent. However, in 2021 and in 2022, inflation was 3.4 and 6.8 percent, respectively. Yet, we find that the results on the question on inflation have not changed much during this period. This is perhaps because of how new the experience is for many working-age Canadians. 

Does financial literacy matter for retirement? 

The survey used for this paper contains an outcome connected to financial literacy: whether respondents report having a financial plan for retirement. Those who have a plan for retirement do better on the “Big 3” financial literacy measures – by 3 to 15 percentage points, depending on the question(s) considered.  

There are many complex dimensions to Canada’s retirement income system that require advanced financial knowledge. Qualification and benefit rules for OAS/GIS can have a major impact on financial well-being in retirement. This is especially true for the age at which people claim OAS/GIS as well as CPP/QPP benefits, as the rules for penalties and rewards affect benefits until death. Plus, understanding how the contribution and withdrawal rules of tax-sheltered savings plans (such as TFSAs and RRSPs) interact with taxes is key for most private savings. However, these vehicles are often not well understood, which again highlights how financial literacy can underpin good retirement planning. 

The survey results show an average score of 39 percent on questions related to CPP/QPP, a 37 percent average score on questions about TFSAs and RRSPS, and a 27 percent average score on OAS/GIS rules.  When it comes to questions on how employer pension plans work, the average score was a paltry 21 percent. Scores are higher among individuals participating in the corresponding type of plan.

Importantly, the score on knowledge of the retirement system (sometimes called “retirement literacy”) is correlated with general financial literacy: individuals who answer correctly to all “Big 3” financial literacy questions score higher than those who do not (55% vs. 41%). Another result shows that a 10-percentage point increase in the total RSI score (the entire 29 questions of the RSI Index) is associated with a 3 percent point increase in the probability of having a financial plan for retirement. Of course, it is possible that having a plan for retirement leads to greater financial literacy and not the other way around – we simply cannot say with certainty with the available data. But at the same time, we cannot ignore that retirement planning and financial literacy go hand in hand, and that should help focus the minds of decision makers across Canada.

Moving Forward

Our investigation reinforces the idea that many Canadians are simply not prepared to make important financial decisions, including for retirement. Those that have a plan for retirement, not surprisingly, are more financially literate than those who do not. But literacy is surely essential to wade through the myriad aspects of Canada’s multi-pillar retirement income system. A solid financial well-being is critical to maintaining quality of life when one's career ends. And while Canada, overall, has a sound retirement income system, it is complex. There are many different sources of income and various rules that can affect public benefits, taxes, and private returns. Although Canada’s results on the “Big 3” questions are like those in other advanced economies, it could very well be that for many individuals, our retirement income system requires an even higher degree of literacy than elsewhere. The same could surely be said of “retirement literacy”.

Given that provinces have jurisdiction over education, they likely need to play a major role in improving financial literacy in Canada. Canadian provinces have regularly performed among the top tiers in the annual Programme for International Student Assessment, which measures 15-year-olds' ability in reading, mathematics, and science. When it comes to education, Canada’s decentralized federation has worked well in this regard, as it has allowed provinces to try different approaches to education, see what works and then share those lessons. Improving financial literacy in Canada is key, but retirement literacy requires action beyond the education system. 

The financial and retirement literacy challenge is significant. It will require major efforts in Canada at all levels, including provinces, employers, and plan sponsors. And the results of these should be measured as well to ensure we are making inroads.

David Boisclair, Executive Director, Retirement Savings Institute

Colin Busby, Director of Policy and Outreach at the Retirement Savings Institute at HEC Montréal

Philippe d’Astous, Associate Professor and Director of Financial Education Lab, HEC Montreal