Canadians’ financial literacy lacking, study suggests

The assumption that most Canadians can make important financial decisions without help is likely false, a government-sponsored study suggests. Although there’s been relatively little research done on the topic, a recently-released report indicates that there are low levels of financial knowledge in Canada and other developed countries.

The study, called “Why Financial Capability Matters,” a joint venture between Social and Enterprise Development Innovations and the Financial Consumer Agency of Canada, is based on a two-day symposium held in Ottawa last summer.

The paper notes that Canadians with low financial capability may pay higher costs for basic banking costs and short-term credit, “face increased exposure to unregulated and predatory practices, be vulnerable to uninsured risks and may not be benefiting from government services.”

For example, the paper points to the Guaranteed Income Supplement, a monthly benefit paid to retired Canadians who also receive Old Age Security benefits, but have little else in the way of income. Many seniors are unaware of the GIS, the report says, and fail to fill out an income tax form. In 2005, Statistics Canada estimated that several hundred thousand seniors were eligible for, but did not receive, the GIS.

Education grants are another area of concern, the study says, with many Canadians unaware of the Canada Education Savings Grant available to eligible RESP holders and the more recently introduced Canada Learning Bond, which provides $500 to low income families for post-secondary education.

Individuals with low financial knowledge may be at risk of “financial exclusion,” the study’s author suggests, based on their unwillingness to access certain financial products or the belief that such products may not be appropriate for them.

Many of the “financially excluded” do not have any relationship with a mainstream financial institution, and there is an even broader group that is inadequately or improperly serviced.

“These individuals have access to financial products but lack the understanding and ability to take advantage of broader services and opportunities that can be accessed through the financial services sector.”

The study says evidence suggests that improved financial literacy will increase economic efficiency and improve government programs intended to provide financial benefits to Canadians, particularly those in lower income brackets.

“Without basic financial skills and understanding, individuals are left without the knowledge or confidence to take full advantage of financial sector services and government benefits. The recent evolution of market and government activities increases the need to improve the general level of financial understanding of the general population.”

That won’t be easy, the paper suggests, and will require a commitment from all levels of government, as well as the private sector.

“The improvement of financial capability for all Canadians requires that governments at all levels make it an integral part of the policy and programs they develop and deliver.”

In addition, the private sector should take on the role of an active and engaged stakeholder, the study recommends, and should be looking at ways to expand financial information they provide to traditionally underserved clients.

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com