Financial illiteracy costs everyone, especially seniors

By Lee Anne Davies on September 20, 2013
Estimated reading time: 2 minutes

The price of financial illiteracy rises as earning potential declines.

An article from the Urban Institute profiled a young woman who “gave up on her local bank five years ago” and now relies exclusively on storefront cheque cashing companies (such as payday loan companies). Her “bank account” is a pre-paid or re-loadable debit card. She admits that she sees no need to ever use a bank again. These less traditional money stores are more accessible to her and offer lower service fees than do traditional banks. This approach takes living paycheque-to-paycheque to a whole new level. Unfortunately, based on the information provided in the article, these non-traditional money exchanges and lenders are increasingly used, by low income earners and surprisingly also used by those earning $50,000 annually. Living paycheque-to-paycheque provides no cushion or contingency for life’s surprises. Not only are there no savings to rely upon, but future opportunities are limited because no credit history is built. Alternative income sources such as pawn shops can only be tapped into as long as the flow of personal salable goods is available for pawning. Most alarming is the lack of financial experience and knowledge of these individuals. Younger individuals’ financial preparation for adulthood would be insufficient and increase their vulnerability to a lifetime of financial instability and stress. In a 2011 article, MoneySense Editor Jonathan Chevreau (then Financial Post columnist) noted the effects of financial illiteracy for seniors and their “failure to take free money when it’s available.” The article referenced findings from the Canadian Task Force on Financial Literacy of $1 billion in unclaimed Old Age Security (OAS) entitlements. This is a high personal price to pay for low financial knowledge. Research by American academics Annamaria Lusardi and Olivia Mitchell has found that those most likely to be unprepared for retirement are those with the least financial knowledge. In an era where financial risk is increasingly the responsibility of the individual as entitlements such as defined-benefit pension plans disappear, personal financial literacy needs to improve dramatically. Otherwise, as the research authors go on to explain, society pays for the problems of those financially illiterate through increased need for government welfare benefits and other social supports.

Financial literacy needs to be a priority at all ages and stages of life, providing:
Techniques to stay out of financial trouble;
Preparation for future needs ranging from living on one’s own through to retirement;
Resourcefulness to recover from financial troubles should they arise;
Access to eligible financial entitlements.

Lee Anne Davies has worked as a consultant for insurance, wealth management, banking and financial education companies. She has a PhD in Aging, Health and Well-being and a Masters of Arts (MA) in Gerontology and Health Studies from the University of Waterloo and an MBA from Athabasca University’s Information Technology Management program. She’s also successfully completed the Canadian Securities Course and the Professional Financial Planning Course. To read more from Davies, visit her blog Agenomics.