Working Paper: NBER ID: w20297
Authors: David Boisclair; Annamaria Lusardi; Pierrecarl Michaud
Abstract: Financial literacy and Canadians' capacity to plan for retirement is of primary importance for the policy debate over pension system reform in Canada. In this paper, we draw on internationally comparable survey evidence on financial literacy and retirement planning in Canada to investigate how financially literate Canadians are and who does plan for retirement. We find that 42 percent of respondents are able to correctly answer three simple questions measuring knowledge of interest compounding, inflation, and risk diversification. This is consistent with evidence from other countries, and Canadians perform relatively well in comparison to Americans but worse than individuals in other countries, such as Germany. Among Canadian respondents, the young and the old, women, minorities, and those with lower educational attainment do worse, a pattern that has been consistently found in other countries as well. Retirement planning is strongly associated with financial literacy; those who responded correctly to all three financial literacy questions are 10 percentage points more likely to have retirement savings.
Keywords: financial literacy; retirement planning; Canada
JEL Codes: D14; D91
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Financial literacy (G53) | Retirement planning (J26) |
| Higher levels of financial literacy (G53) | Higher likelihood of having retirement savings (D14) |
| Each additional financial literacy question answered correctly (G53) | Probability of having savings (D14) |
| Understanding of risk diversification (G11) | Probability of having savings (D14) |