The Effects of Education on Canadians' Retirement Savings Behaviour. Analytical Studies Branch Research Paper Series

This paper assesses the extent to which education affects how Canadians save and accumulate wealth for retirement. The paper makes three contributions. First, a descriptive analysis is presented of differences in savings and home values across individuals based on their levels of educational attainment. To this end, new datasets that link survey respondents from the 1991 and 2006 censuses of Canada to their administrative tax records are used. These data provide a unique opportunity to jointly observe education, savings, home values, and a plethora of other factors of relevance. The data show that both savings and home values increase with the highest level of schooling attained. Second, the causal effect of high school completion on savings rates in tax-preferred accounts is estimated, exploiting compulsory schooling reforms in the identification. The analysis indicates that high school completion boosts retirement savings rates by 2 to 6 percentage points annually, even after controlling for income and many other factors that may indirectly affect this result. Third, building on a recent study by Messacar (2015), education is also found to affect how individuals re-optimize their savings rates in response to an automatic change in pension wealth accumulation. Overall, individuals with lower levels of education are found to save less for retirement than those with higher levels of education but to benefit from an automatic pension contribution by remaining passive, whereas those with higher levels of education respond to the distortion by actively adjusting contributions across savings vehicles at relatively low cost. The implications of this study's findings for the "nudge paradigm" in behavioural economics are discussed.