This is the third part of a four part series on the consultation document for the Task Force on Literacy. Remember that you have a voice on the future of financial education and literacy in Canada. Starting April 6th, the task force is going to cities across the country to hear your views. If you can’t make these sessions then the task force is taking written submissions by April 30th. The deadline is just around the corner so I would encourage everyone to submit their opinions.
Savings and investing
Next in the consultation document was the topic of Savings and investing which represents the core for financial security and independence. The biggest problem lies in the reality that savings rates have plummeted from a high in 1982 of 17% to a low of 2% in 2006. Savings rates are much lower than they should be.
What motivates people to save?
This question posed by the paper is really a tough on to answer. The problem, in my opinion, is that the motivation to save is far outweighed by our motivation to consume. Instead of practicing delayed gratification we practice delayed consequence. The more money we spend, the less money we save. We don’t save for the future, because we live in the now.
As a collective whole, we don’t save money because there are too many opportunities to spend it.
The other problem is saving money is not a natural behaviour. Spending is more natural. A while back, I wrote an article questioning whether saving money was a trait that was natural. I’m starting to sound repetitive but I think the saving habit is something that needs to be learned at an early age. Some will get it and some won’t but we need to get to people at an earlier age. Frugal spenders are often influenced by the frugal habits of their parents. The challenge is this generation of parent and the next generation of parents has been grossly influenced by advertising and marketing. Marketers and businesses have recognized that young people are influential and will influence buying and spending in a household. I see it more than ever in my house as the parent of 4 young children.
I worry that this will take time to change as education can be a slow process but we cannot give in just because it will take time.
Planning for Retirement
The next section discusses a very timely topic near and dear to my heart in retirement planning. The baby boomers are getting ready to retire and as a result, there is a massive demand for more information and education on preparing and planning for retirement. The document poses three questions:
1. What can be done to encourage Canadians to plan and prepare for retirement at an earlier age?
Get more financial education early and make it mandatory, not optional. In all of my retirement workshops, the most common feedback I get is “I wish I would have taken this sooner”.
Urgency creates interest. Most people in their 20’s and 30’s are not interested in retirement planning because it is so far away. There is no urgency. You can’t create urgency for the young but you can give them essential knowledge tools and resources. That’s precisely why some financial education needs to be mandatory.
We need more financial education in the workplace. Maybe the government can create financial incentives for companies who provide financial and retirement planning workshops for their employees.
2. What, from a financial literacy perspective, can be done to encourage Canadians to participate more fully in their workplace pension plan and/or a retirement plan (e.g., RRSPs)?
We need more mandatory contribution plans. My father worked for the Alberta Government. He worked for over 30 years and he had no choice but to contribute to the pension. In addition to his contributions, the employer contributed and as a result, he has a significant income in retirement. Ask anyone in a pension plan a question, “If it was not mandatory to save that money would they have been disciplined enough to put it away on their own?”
Studies have shown that retirees with a fixed pension have more stability and more success in retirement over those without fixed pensions. We need to encourage or incent employers to add more mandatory savings plans into the workplace. This would go a long way in helping people save for the future.
3. What other initiatives or incentives related to financial literacy should the Task Force consider to help promote the retirement security of Canadians?
CPP is a mandatory savings plan and for many people that’s a significant component of their overall retirement income. What’s interesting is most people think CPP will not be there in the future, which is completely unfounded. CPP has a huge surplus and continues to take in more money than is being paid out so that surplus should continue to grow. People need to be educated that plans like CPP are in solid financial shape and have the confidence in including that income source into their retirement plans.
Next week is my last week in reporting on the consultation document from the National Task force on Financial Literacy. Stay tuned in as I cover the last few topics from the paper.