Are We Saving Yet?

Financial Literacy Month is over today. Did most Canadians benefit from it? Despite best efforts, likely not. Soon we will get into RRSP season - commercials, flyers and other attempts to get us to save will bombard us with more "facts". I can't help but reflect on the fact that, despite all of this "education" thrown our way, the majority of Canadian taxpayers are not contributing to their RRSPs. This despite the fact that RRSPs are one of our few substantive tax benefits, incenting us to help ourselves in retirement, by allowing tax savings during our working years.

While Canada gained about 1.5 million tax-filers between 2010 and 2014, the number of total RRSP contributors went up by less than 20,000 individuals. The percentage of tax-filers who contributed to an RRSP edged down from 23.7% in 2012 to 23.0% in 2014. Those who are contributing, are contributing more, showing growth in total RRSP savings. However, the median individual income of the non-contributing 77%, remains around $30,000 annually. All of these trends suggest that those in the upper-income brackets are saving more and benefiting from this financial opportunity while the middle majority is leaving itself behind.

On the positive side, parents do save for their children's education. As a percentage, most Canadian children have education savings. The bad news is, the income factor creeps in here as well. According to Statistics Canada, as of October/November 2013, 44% of children living in households with income of less than $30,000 had parents who were saving. This proportion increases by income group to about 67% for those earning between $50-100,000 and to 82% for children living in households with income of $100,000 or more.  Not surprisingly, the value of RESP savings for children was lowest among those in households with income from $30,000 to less than $50,000 - arguably the income group that needs the tax support most to help their kids' attain a post-secondary degree. We do have to factor in other supports that children of middle and lower income families can access, despite the savings gap, yet the broad range of middle income is where kids can fall through the cracks.

“Wealth, like debt, is self-replicating. Compound interest turns wealth into more wealth and debt into more debt... Thus even a neutral government policy toward wealth and asset building will end up exacerbating the wealth gap” Ray Boshara, 2003

Fair access to financial services and products should be a given in our society, and many would argue that it is. Yet many Canadians lack the nudge, the impetus and sometimes the financial know-how of where to start. How do I know if an RRSP account is better for me or if I should save the little bit I can in a TFSA? If I put the little bit I have into an RRSP and then need the money, can I even get it out? How much money do I need to start investing? I can barely square my budget so how would I even save? I'm only [input age] once and I want to live my life - I can always save later. I have to gather all those documents to open an account - I don't have the time. These are the types of questions and responses you get when you ask individuals why they don't save. Simple behavioral economics provides answers. With a financial advisor acting as a coach in our corner, nudging us into a different mindset, we can overcome these challenges.

The Conference Board of Canada estimates that if 10 per cent of unadvised Canadians obtained financial advice and increased their saving rates to match those of advised investors, household income and economic output would increase in the long term

Financial advisers are a window-of-entry to an infinite universe of financial products and vehicles. They are also a great equalizer with the ability to compensate vulnerable consumers for the additional barriers they face. Expanding access to professional financial advice is a matter of equity, as well as sensible social and economic policy. We need to consider behavioural insights when we think of investor protection and include consumer empowerment as a factor. Layering more stringent requirements, and making access to advice and investing out of reach, is simply not in the best interest of the majority of the population who are small investors, or would be so if they start saving. Forcing a one size fits all regime of forced pensions is also not the answer as this doesn't provide the same types of flexibilities that a tax-advantaged savings plan offers.

In a soon to be released White Paper commissioned by Primerica, the authors argue that Canada’s changing financial landscape demands a renewed understanding of financial inclusion. The banked/unbanked binary is no longer an appropriate indicator of financial inclusion. Rather, notions of financial inclusion must be expanded to include access to insurance, credit and investment products and services. Because seeking, accessing and following financial advice is complicated by socio-economic, demographic, psychological and behavioural variables, achieving increased uptake and improved financial inclusion will require a concerted collective effort on the part of government, industry, regulators and consumers. Flexible saving and investment strategies that support wealth accumulation for all Canadians will increase social and economic well-being at the individual, household and society level. Failure to improve access to financial advice, services and products will exacerbate the marginalization of certain groups and threaten overall social cohesion and economic well-being.

The good news for most is that it is not too late to start - the ship may have sailed but is not beyond the horizon. As we approach RRSP season, let's consider and overcome what is keeping us from benefitting from the few tax advantages that our country offers to all taxpayers. The first step is to talk to a financial advisor and explore where to start. Not sure how to deal with an advisor? The Investment Funds Institute's Investor Centre and many other financial services associations offer guidance to help you. Let's change the savings dynamics so that the system that can make the rich richer, makes the middle class better off as well.