There is a certain Zen-like appeal to the idea of financial literacy.
More education leads to greater knowledge, and ultimately produces sounder behaviour. That, in turn, nets improved financial outcomes for people.
We save more, earn more and have something left for retirement. What could possibly be wrong with that?
The catch – as Canada celebrates financial literacy month – is that there is no evidence any of this is true.
And yet the federal government, many provinces and the pillars of the financial services industry continue to embrace financial literacy as if it were the Holy Grail.
Finance Minister Jim Flaherty, who launched the $5-million Task Force on Financial Literacy in his 2009 budget, is poised to name the government's first financial literacy czar. Ontario put the topic into the provincial curriculum for grades 4 through 12. The Ontario Securities Commission is spending $2-million to train teachers. Toronto-Dominion Bank sponsors the Canadian Centre for Financial Literacy to promote better knowledge among low-income Canadians. Almost every major financial institution talks up literacy at every turn.
This all comes as profound policy and structural changes in the economy are rapidly shifting the financial burden of retirement from companies and governments to individuals. Companies are abandoning defined-benefit pensions in favour of defined-contribution plans, leaving workers to fend for themselves in retirement. Mandatory government programs, such as the Canada Pension Plan, aren't nearly generous enough for workers without supplementary retirement plans.
Looking to financial literacy to fill the void is like asking ordinary Canadians to be their own brain surgeons and airline pilots. The dizzying array of financial products, mixed with chaotic and increasingly irrational financial markets, makes the job of do-it-yourself financial planning almost impossible – no matter how literate you are. The average credit-card agreement is as intuitive as quantum physics.
The financial services industry wants it both ways. It preaches literacy and it advises government on sound policy. Mr. Flaherty's task force is headed by Sun Life Financial Inc. chief executive officer Donald Stewart and BMO Nesbitt Burns chairman Jacques Ménard.
But literacy isn't particularly lucrative. Armed with hundreds of millions in advertising dollars, Mr. Stewart's and Mr. Ménard's industry is simultaneously selling another story to consumers. Canadians are constantly bombarded with pitches to take on more debt, whether it's right for them or not. They're often blindly steered toward high-fee products and complex financial instruments. The accompanying disclosure statements are written by, and for, lawyers.
Central banks aren't much help, either. Their vows to keep interest rates near zero indefinitely have made us all a generation of reluctant speculators, desperately seeking a better-than-2-per-cent return.
Financial literacy is a smokescreen.
Carleton University economist Saul Schwartz concluded in a 2010 study for the Institute for Research on Public Policy that evidence of better financial outcomes, particularly for retirees, shows "mixed results at best."
A raft of U.S. research found similar results. "We do not find conclusive evidence that … financial education programs lead to greater financial knowledge, and ultimately, to better financial behaviour," economists Ian Hathaway and Sameer Khatiwada argued in a 2008 study for the Federal Reserve Bank of Cleveland.
Even armed with education, consumers will too often make the wrong choices. Experts report, for example, that workers in defined-contribution plans typically don't adjust their risk profiles as retirement nears, leaving them dangerously exposed to market downturns.
There is a sounder and arguably less-costly path, but it doesn't suit the financial services industry or many business groups. Ottawa could mandate plain-English disclosure. Working with the provinces, it could enhance regulation of industry sales incentives and defined-contribution pensions.
And Ottawa could beef up the CPP, mandating that Canadians sock away more money for retirement, while benefitting from the CPP Investment Board's low administrative costs.
Instead, the Harper government is going with a private-sector solution – perhaps not coincidentally, given its financial literacy advisers. Last Thursday, it tabled legislation to create pooled registered pension plans for the millions of Canadians without workplace pensions, including small business owners, their workers and the self-employed.
Banks and insurance companies will manage the PRPPs – for a fee, of course.