“The secret of change is to focus all your energy not on fighting the old but on building the new.” – Socrates
I heard an interesting comment this week as I was listening to a program on CBC radio about our relationship with food which included tips to help people eat better and manage their weight. The host of the show commented that good choices can’t be made in a vacuum and that the biggest challenge people have in regards to making good food choices is that they’re trying to make those choices in the midst of an overwhelming amount of misinformation from an industry that needs people to make poor choices in order for it to thrive.
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A few minutes later there was a news report about the need to reform CPP and increase the levels of mandatory contributions because too many people were failing to save an adequate amount for retirement and the government needed to step in and help. It struck me that perhaps the people struggling to make smart choices in regards to saving and investing were in the same situation as the people trying to make smart food choices. Both groups are trying to make the right choices but the clamour of temptation and misinformation around them is making it impossible for them to do so. It seems to me that, if the goal is to help people save more for retirement then, rather than mandating participation, there are a few other steps we need to take.
Will financial education help with saving?
Financial literacy is crucial when it comes to making smart financial decisions and yet our children are hugely under educated when it comes to financial literacy. Elementary and High School math curriculum's allow little opportunity for children to explore core financial concepts such as basic money management and the power of compound interest. Organizations such as Junior Achievement attempt to fill the gap with an assortment of great programs that are delivered by volunteers but surely, if the goal is for the general population to make better decisions, then we need to start building basic financial literacy into the school curriculum and to begin training teachers how to teach those core concepts?
Debt reduction means spending reduction
If you look at a graph that shows the average savings rate in Canada over the past 30 years you’ll notice that the savings rate has been in a steady decline since the early 1980s. If you take a look at a graph that shows the average consumer debt in Canada over the past 30 years you’ll see a steady increase that started in the 1980s. Now I’m definitely not a statistician but that seems like a pretty strong correlation to me. If people are carrying an increasingly high level of debt then it stands to reason that their savings rates will be low or non-existent. Restricting the amount of debt people can carry and limiting the interest rates that institutions can charge on that debt would be two simple strategies that might help people avoid building up high levels of consumer debt and allow them to free up more money for saving. The challenge is that anytime you restrict a person’s access to credit, you are also restricting their ability to spend and impacting the bottom line of the lenders who profit far more from debt than they do from savings. Unfortunately, we live in country whose economy depends on consumer spending and it’s simply not in the best interests of the government to help people conquer their debt or to dissuade people from spending because of the consequences for the economy. This means that the only way to conquer the debt mountain and start building a solid financial future for ourselves is for to arm ourselves with the knowledge we need, make a plan and walk the path out of debt valley alone. The trouble with this is that it’s a lot easier to stay in the valley (where all the “stuff’ is) with everyone else than it is to carve your own path so most people choose to stay put.
Given the size of the financial services industry you would think that finding quality, impartial advice would be easy. Unfortunately, that doesn’t seem to be the case. The challenge with any industry where the compensation a person receives is mostly determined on a commission basis is that the industry professionals tend to be driven to produce a high volume of high value sales rather than delivering great advice or excellent customer service. That’s not to say that you can’t find financial advisors who give great advice regardless of the size of your portfolio but unfortunately they are few and far between. This becomes a challenge when it comes to deciding how to invest your hard-earned and carefully saved money and unfortunately it leads to the kind of below-average market returns that leave people discouraged and frustrated. Luckily there are some great resources and some great websites (including Retire Happy!) where you can find good advice and simple strategies for investing your money so that you can make informed choices either with or without the aid of a financial advisor.
What's the solution?
It would be naive to suggest that there’s a simple “one size fits all” solution for the retirement savings conundrum but at the same time it seems to be naive to assume that the government has the best interests of the public at the forefront of their decision making process. In an ideal situation it would be possible to create a win-win scenario which would benefit both the citizens and the economy but I’m not so sure such a solution exists, What do you think? Is it the governments responsibility to mandate a savings program for us to participate in or to create a situation where we have the economic freedom and financial education to make our own decisions? As always, I’d love to hear your opinions!