Proper retirement preparation requires a good understanding of general financial principles as well as how Canada’s retirement income and savings system works. In academic research, a relationship has been established in several countries demonstrating the importance of general financial literacy and the level of retirement preparation of citizens. 

Financial illiteracy has serious implications for individuals, institutions, and policymakers. Financially informed individuals are less likely to have credit card debt, manage borrowing better and avoid major and potentially ruinous financial mistakes. Un- or mis-informed decisions about financial savings can lead to poor investment returns. Further, international evidence shows that certain aspects of financial literacy can be concentrated in certain subgroups of the population. 

Although there have been many attempts to measure the retirement preparedness of Canadians, there has been, before 2019, no systematic way of measuring the level of knowledge of Canadians with respect to their retirement income system. 

The Retirement and Savings Institute (RSI) Index

In 2022, the 4^th edition of the annual RSI index solicited responses of over 3,000 Canadians aged 35 to 54 on questions regarding general financial literacy and Canadian retirement programs. These individuals, in principle, are at a stage of their career when they ought to be setting aside significant portions of their income for retirement savings. We target this group because those age 55 and up should know the retirement income system much more closely, and those under age 35 tend to be concerned principally with saving for a downpayment on a house or on the costs of post-secondary education. 

The RSI index poses 29 questions related to knowledge of: general financial principles, tax sheltered savings options (RRSPs and TFSAs), employer plans, the Canada and Quebec Pension Plans (CPP/QPP), and the Old-Age Security (OAS) and Guaranteed Income Supplement (GIS) programs. 

Sobering Results on Canadians’ Financial Literacy

This edition of the index saw an average correct score of 35.7% on all questions, not much different from previous years. The level of general financial literacy is fairly low, though comparable to what is observed in other industrialized countries. Scores improve significantly from 35-39 to 50-54 years of age (from 30.9% to 39.9%), and as one’s level of education and income increases. 

In terms of general financial products, mortgages are well understood by Canadians. Given the high levels of home ownership in Canada, this is not very surprising. Still, no other financial product or principle is understood nearly as well by Canadians as mortgages. Related concepts of compound interest and inflation are also reasonably well understood.  

When it comes to TFSAs and RRSPs, most Canadians’ knowledge of their respective features is not encouraging. In most instances, our results show that most fundamentally guess which vehicle features what (e.g., tax deductibility of contributions). This raises some ongoing concerns as to whether TFSA contributions are being fully taken advantage of by those who would benefit the most from them. Further, Canadians do not understand employer pension plans very well – although those who are covered by one do better. 

Although respondents show a relatively greater knowledge of CPP/QPP features, it is worth noting that under one quarter of respondents are aware that working while collecting CPP/QPP is permitted. Given that this provision was introduced around a decade ago to improve the opportunities for Canadians to remain in the workforce, this has worrisome implications. 

Last but not least, the myriad tax and clawback implications of OAS/GIS benefits seems to create confusion among most Canadian savers. 

Additional Literacy Challenges and Implications

One major challenge facing Canadians approaching retirement age is how to manage longevity risks – and the risk of outliving one’s private savings. Despite all the best information available to individuals regarding their health risks, it is common to incorrectly estimate how long one is likely to live, in part because gains in average life expectancy are distributed in largely unequal ways. This can have significant implications, especially when it comes to how one should draw down on their private savings or employer pension and when to take out a public pension. 

Many take out their public pension too early. Although it is possible to claim a CPP/QPP pension between the ages of 60 and 70 (in January 2024, it will be possible to apply for the QPP until age 72), a large share of Canadians withdraw their pensions earlier rather than later. In 2021, the proportion of population starting to receive CPP payments at age 60 was around for 25% for women and 23% for men, down from about one third a few years earlier. This possibly goes contrary to what is in their financial interest, as studies have shown that the majority of Canadians would be better off delaying withdrawing their pension to gain access to a larger, inflation-protected benefit. The role of employer plans in tackling this challenge is relatively unexplored from an academic perspective.

A Comprehensive yet Complex Canadian Retirement Income System

There are many reasons to be confident in the current state of Canada’s multi-pillar retirement income system. OAS/GIS benefits, paid by the federal government, are financially sustainable and seem to be a big reason why poverty rates among seniors in Canada are among the lowest across OECD countries. The CPP/QPP are also the financial envy of many western countries, providing a reliable foundation for pension income. And the CPP/QPP are expanding and will continue to do so until 2025. Further, private wealth and savings have increased in recent decades, which should be helping to position many households for a financially-sound retirement. 

However, to fully take advantage of Canada’s retirement income system, most individuals require both an appropriate base of financial literacy as well as a sophisticated understanding of the many savings vehicles and benefit options across our multi-pillar system. Recent adjustments to public and private savings programs – such as the ability to work and collect CPP/QPP without having to make contributions, as well the introduction of TFSAs in 2009 – should in general improve the lives of Canadian savers. However, this is not necessarily the case among all subsets of Canadians, and it is possible that the complexity of our retirement income system increases the risk that Canadians may make decisions that are not, financially speaking, in their best interest. 

Ongoing Need to Emphasize Financial Literacy

As the RSI index lays bare, there is ample room both to boost the general financial literacy of Canadians and to communicate the complexities of the programs in our multi-pillar system. Issues of basic financial knowledge are generally the responsibilities of education systems, which principally fall under the purview of the provinces. But research has long shown the importance of timely transmission of relevant knowledge; as such, the responsibility for improved understanding of the Canadian retirement income system rests with various organizations, including federal and provincial departments and agencies, community partners, financial planners, and pension fund managers. Improving both aspects of financial literacy will be challenging and may not be needed for all Canadians, but measurable progress could make a significant difference for many.