TD Bank argues for a national strategy to foster financial literacy, but recognizes that there are limitations to that approach.

The bank has published its submission to the Task Force on Financial Literacy, which held consultations and received submissions on the subject earlier this year. The task force is due to publish a final report by the end of the year, and will publish the submissions it received in the fall.

In its submission, TD calls for a national strategy that aims to create the most financially literate society possible. It notes that in recent years, the Canadians have begun saving less out of income and more reliant on asset returns to generate savings.

In particular, the bank observes that the recent trends in RRSP savings are “discouraging”. It reports that between 1997 and 2008 overall participation in RRSP plans fell from 41% to 34%. “Even more alarming, participation has fallen in every income quintile and across age groups over this time,” it says.

While this sort of saving has dwindled, the accumulation of assets that does represent household saving is increasingly financed by debt, it observes. “This has resulted in Canadians becoming much more vulnerable to asset price movements and changes to borrowing costs,” it says. And, it notes that there is a concern that this sort of savings will decline over time, “because home prices and financial assets will experience a slower rate of increase in the coming decades than in the past.”

“It is very possible that many Canadians are overestimating the future increase in net worth that their assets will provide,” it warns. Additionally, the fact that these assets are increasingly acquired through debt financing is a big worry too. “The rapid growth in debt financing suggests that the pace of net worth accumulation in the future will be less than that of the past generations and may fall short of retirement needs,” it says.

Given that interest rates, and therefore the debt service costs, can only go in one direction, TD says, “The increased exposure and vulnerability to financial conditions increases the need for strong financial literacy skills.”
@page_break@A three-pronged approach to enhancing literacy

It advocates a three-pronged approach to enhancing literacy: improving basic financial knowledge and encouraging saving behaviour from youth to adulthood; assisting people when they make pivotal financial decisions; and, targeting the specialized needs of low-income workers and newcomers to Canada.

TD maintains that financial literacy should begin in the primary and secondary school system. “First, numeracy skills should be given a greater priority. Second, a primary school program, for example a classroom unit around the time of Grade 8, should be implemented to teach rudimentary financial skills and encourage investment in post-secondary education,” it says. “A secondary school unit in financial literacy should then be implemented late in the program, around Grade 11, to reinforce the merits of post-secondary education and to foster the financial skills that will be needed upon leaving the school system. This could include budgeting, credit card and debt management.”

Beyond the school system, there is a need to enhance adult financial literacy too, particularly targeted at specific life events such as starting a job, buying a home, and having kids. While this sort of effort could benefit all Canadians, there is an added need among low-income workers and immigrants, it suggests.

Apart from developing a literacy strategy, a key challenge is likely to be implementation, TD says. It suggests that the federal government should serve as a catalyst, providing resources and educational support, but that the provinces should be primarily responsible for implementing the strategy, both through the education system, and for youth and adults through government offices, or through the voluntary sector (charities and non-profit organizations that deal with target groups).

It also says that the financial services industry has a role to play. “The sector has expert knowledge in financial planning that should be leveraged. The infrastructure of the financial services sector, both in terms of physical locations and internet platforms, could also be instrumental in the delivery of the financial literacy training,” it says.

That said, it recognizes that there are serious limitations to trying to improve household finances solely through education. “It should be stressed that heightened financial literacy training is not a silver bullet that will completely solve problems like personal insolvency or inadequate savings,” it says, noting that research shows that people often too heavily discount the future and overvalue the present, “in a way that leads to inconsistent decisions and under saving.”

“In recognition of this, policymakers need to consider a national financial literacy strategy as complementing other policies aimed at increasing the incentives to save and invest,” it says.

“This is where complementary public policy and regulations have a role to play in curtailing the ‘market failure’ that cannot be eliminated,” it says. “We would support additional incentives to encourage saving and investment over consumption at the societal level.

IE