plans & trusts may/june 20146

The trend toward increased debt and less saving has put many Canadians on the financial edge. One remedy, the author suggests, is workplace-based financial literacy programs.

by | Caroline Cakebread

Why Should Employers Care About

Financial Literacy?

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How the Workplace Can Contribute to Financial Wellness in Canada

Google the term financial literacy and you’ll get thousands of hits, with each source defining it slightly differently. A 2010 report by the Task Force on Financial Literacy in

Canada defines it as having the knowledge, confidence and skills to make responsible financial decisions. In Canada and around the world poor financial choices are putting individuals and the economy as a whole at risk—and it’s raised alarm bells among policy makers and financial professionals alike. People are increasingly digging themselves into deeper holes of debt, with little or no money left over for basic savings.

Financial literacy can’t fix all the problems, but it certainly can play a role in setting up Canadians for better outcomes around debt and retirement savings. Employers can strengthen the financial literacy of their employees. In fact, it could be con-sidered a wellness issue that can help improve productivity.

Financial Literacy—Why Now? Many believe the relationship Canadians have with their

money has reached a turning point. Canadians owe more than ever before, and savings rates are at a historically low point. The trend toward increased debt and less saving has put many on the financial edge. To see how critical the situation has be-come, one need only look at the data:

• One-third of Canadian households live paycheque to paycheque.1

• The average consumer debt load is $27,355, not in-cluding mortgage debt.2

• On average, Canadians owe a little more than $1.64 for every dollar they earn.3

• One in four Canadians polled said they can’t come up with $2,000 to cover a financial emergency in 30 days.4

• Canadians save just 5% of their income compared to the 9% average since 1961.5

• Only 28% of working Canadians expect to be fully re-tired at 66.6

• Canadians have an estimated $683.6 billion in unused registered retirement savings plan contribution room.7

These statistics show many Canadians are in worse shape financially than ever. Increasing debt loads are mounting at the same time Canadians are assuming responsibility for their own retirement savings. Pension coverage isn’t available to 60% of the population, leaving critical investment deci-sions up to individuals who must choose from a complex and ever-evolving menu of savings programs and products.

But can more financial literacy help? Or are we now just a nation of debtors doomed to a retirement lived on a shoestring?

Financial Literacy Can Make a Difference— But There Are Limits

Strengthening the financial literacy of working Canadians can help address financial skill and knowledge deficits as well as behavioural and attitudinal issues. However, it is not a panacea. Key structural challenges have put Canadians in a poor position for managing debt, savings and retirement plans. Financial literacy can’t combat low interest rates or unemployment or change the trend away from defined ben-efit pension plans. Nor will it boost pension coverage or re-duce the mounting cost of postsecondary education.

However, greater financial literacy can help people become better savers and more savvy spenders. That will allow Canadi-ans to be more adaptable and flexible to handle those structural changes, with money saved for a rainy day and the capability to assess and navigate the changing spectrum of financial prod-ucts in the marketplace.

Strong financial literacy skills and knowledge can have a positive impact at a national economic as well as individual level. In fact, research shows that financial literacy is positively correlated to economic development (measured by gross do-mestic product [GDP] per capita) and financial development (the GDP ratio of stock market capitalization plus private credit).8 And higher literacy leads to more efficient allocation of savings and higher per dollar returns, attracting more invest-ment and growth in the country.9 On an individual level, finan-

Reproduced with permission from Plans & Trusts, Volume 32, No. 3, May/June 2014, pages 6-9, published by the International Foundation of Employee Benefit Plans (www.ifebp.org), Brookfield, Wis. All rights reserved. Statements or opinions expressed in this article are those of the author and do not necessarily represent the views or positions of the International Foundation, its officers, directors or staff. No further transmission or electronic distribution of this material is permitted.

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financial literacy

cial sophistication is associated with higher wealth and a higher probability to invest in the stock market as well as a higher propensity to plan for retire-ment.10

Higher levels of financial literacy also can reduce dependency on high-cost ways of borrowing (one-third of Canadians carry a balance on their credit cards from month to month) and boost wealth accumulation. Low finan-cial literacy has also been shown to lead to higher social safety net usage.11

Financial Literacy as a Policy Imperative

Countries like the U.K., Australia, New Zealand, the U.S. and now Canada understand the importance of better fi-nancial literacy in creating a stronger social and economic fabric. Each has developed its own financial literacy strategy. More countries are following suit—Across the world national poli-cies, strategies and programs are inte-grating financial literacy into schools and targeting high-risk populations.

The Financial Consumer Agency of Canada is responsible for financial liter-acy in Canada. The country is imple-menting a national strategy for strength-ening financial literacy based on recommendations by the Task Force on Financial Literacy (published in 2010).There is huge momentum to ensure fi-nancial literacy is part of the formal cur-riculum in schools. British Columbia has included it in its mandatory tenth-grade curriculum since 2004, and On-tario has moved ahead to integrate fi-nancial literacy into fourth through 12th grades. Other provinces may follow suit.

Financial Literacy at Work Yet with all this attention on financial

literacy, the working public is one of the most overlooked groups. Workers repre-sent a high-need area for financial edu-cation. After schools, workplaces repre-sent one of the most effective venues for delivering financial literacy. In fact, the Task Force on Financial Literacy’s rec-ommendations identified workplace fi-nancial literacy training as a potential policy imperative for Canada.

Task Force on Financial LiteracyThe task force recommends that

employers incorporate financial liter-acy training into workplace training programs and communications and making such programs eligible for tax assistance. The recommendation makes a lot of sense—Most people get their money through the workplace and are encouraged to save for retirement through savings programs and deduc-tions for both the Canada Pension Plan and Old Age Security. And, by best es-timates, employers in Canada already pay for the vast majority of the formal and informal training and education received by working-age adults.

Workplace financial education can support employees in developing skills to manage their wages in the short term (credit, saving, debt) and over the long term (managing for retirement).

The benefits are not one-sided—employees who are less burdened by fi-nancial stresses are more productive, positively inclined to the employer and less absent and stressed from work. In the U.K. for example, accesses for fi-nancial counseling and consultation from employee assistance programs (EAPs) are increasing twice as fast as all other EAP services.12 Financially stressed employees also spend an esti-mated 20 hours a month of work time trying to solve their financial problems.

Canadians’ primary cause of stress, anxiety or depression—excluding the workplace—is money, according to the Centre for Addiction and Mental Health in Toronto. Nearly half (44%) of respon-dents cite money issues as their top stressor.

A growing body of research links better productivity to financial well-ness. Research by Joo,13 for example, found that good financial wellness and worker productivity are positively re-

Top websites in Canada for financial literacy resources:

• Getsmarteraboutmoney.ca: Information and tools on all things money, including invest-ments, debt, spending and lifestyle. It’s run by the Investor Education Fund, an arm of the Ontario Securities Commission.

• Moneysense.ca: Engaging articles and tools on how to manage all aspects of money, brought to you by a solid roster of writers

• The Financial Consumer Agency of Canada: Highlights include a credit card selector tool based on regularly updated information like interest rates, points, etc. Visit www.fcac-acfc.gc.ca/Eng/Pages/home-accueil.aspx.

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lated. Bagwell and Kim found that employees with more fi-nancial distress were absent from the workplace more of-ten.14, 15 They also found that employees with more financial distress displayed less commitment to their organization and are less satisfied with their pay, regardless of the amount of money they make.16

Best Practices As employers recognize the benefits of financial literacy

in the workplace and their potential role, the question is—How should they do it? Below are a few key best practices:

• Focus on the basics. Understand and work toward building the core skills your employees need to under-stand about money and savings.

• Leverage free tools. As policy makers jump on board the financial literacy concept, they’re putting money into producing some excellent resources (see sidebar of websites).

• Consider segmenting financial education based on employee groups. Whether it’s women, new Canadi-ans or people at different stages of life, not everyone has the same needs at the same time.

• Make it holistic. Employers need to put saving for re-tirement in context. Educating employees about saving and spending is just as important.

• Fight apathy with innovation. Draw on what we know about the potential for auto-enrolment, etc., to overcome employee behavioural biases.

• Be consistent. Make financial education a constant in the workplace and take every opportunity to clearly communicate financial information.

• Make financial literacy a wellness issue. High debt loads and the results of poor financial choices are huge stressors for employees. Basic financial education can promote mental health.

• Quality. Resources and programs should be unbiased (product-driven information does not support finan-cial literacy).

• Encourage behaviour change. Support good practices in the workplace.

As policy makers wake up to the importance of financial literacy among the broad population, employers also can

play a role. By boosting levels of financial wellness, employ-ers can help employees succeed in different areas of their lives and contribute to the strength of the overall Canadian economy. &

Endnotes

1. Money Talks: Emphasizing Wealth in Household Finances, Certified General Accountants Association Canada, May 2013. 2. Market Trends, third quarter, TransUnion, November, 2013. 3. “National Balance Sheet and Financial Flow Accounts, Third Quarter 2013,” Statistics Canada, December 13, 2013. 4. Hoyes Michalos Harris/Decima Poll, September 24, 2012. 5. “Economic Indicators, by Province and Territory (Monthly and Quarterly,” Statistics Canada, fourth quarter, 2013. 6. Sun Life Canadian Unretirement Index, 2014. 7. Statistics Canada, 2011. 8. T. Beck, A.Demirgüç-Kunt and R.E. Levine, “A New Database on Fi-nancial Development and Structure (updated May 2009),” working paper, World Bank Policy Research, 2009. 9. R. Alessie, A. Lusardi and M. Van Rooij, “Financial Literacy and Stock Market Participation,” NBER Working Paper No. 13565, 2007. 10. R. Alessie, A. Lusardi and M. Van Rooij, “Financial Literacy, Retire-ment Planning, and Household Wealth,” working paper, Dartmouth Col-lege, 2008. 11. J.Y. Campbell, H. Jackson, B.C. Madrian and P. Tufano, “Consumer Financial Protection,” Journal of Economic Perspectives, 25(1): pp. 91-114, 2011. 12. CIPD/Benefex Reward Management Survey, 2012. 13. S. Joo, and E. T. Garman, “Workers Want More Than Retirement Education at Their Workplace: A Report of Research Findings,” Personal Fi-nances and Worker Productivity, 2(2), pp. 156-161, 1998. 14. J. Kim and E. T. Garman, “Financial Stress and Absenteeism: An Em-pirically Derived Research Model,” Financial Counseling and Planning, 14(1), pp. 31–42, 2003. 15. D. C. Bagwell, “Work and Personal Financial Outcomes of Credit Counseling Clients,” Unpublished doctoral dissertation, Virginia Polytech-nic Institute and State University, 2000. 16. J. Kim, and E. T. Garman, “Financial Stress, Pay Satisfaction, and Workplace Performance,” Compensations and Benefits Review, pp. 69–76, 2004.

financial literacy

Caroline Cakebread writes on all things financial and personal finance for Chatelaine, the Globe and Mail and Canadian Invest-ment Review. She has also been active in the financial literacy policy and research space in Canada and internationally for over 15 years.

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