Wealth, financial literacy drive RESP investments

Wealth is the biggest reason why richer parents are more likely to open an RESP for their kids, but financial literacy plays a significant role too, according to a study from Statistics Canada.

In a new report, StatsCan said that even as the prevalence of parents opening RESPs has increased, the gap in adoption between higher-income households and lower-income households has persisted. Parents in the top income quartile remain about twice as likely to open as RESP as parents in the bottom quartile.

StatsCan’s study aimed to unpack the reasons for this persistent disparity.

Differences in wealth is by far the biggest factor, the study noted, concluding that wealth inequality accounts for between 50% and 79% of the gap in RESP participation between rich and poor families. The significance of wealth differences varies depending on the method and data used in the analysis, StatsCan noted.

The study also aimed to uncover the other factors that explain the RESP gap, such as differences in parents’ education levels. It found that financial literacy is the most important secondary factor.

Higher financial literacy among parents in the top quartile versus those in the bottom quartile accounts for 13% to 19% of the gap in RESP participation, the study found.

Differences in general literacy and numeracy, and differences in parental education are “statistically insignificant” factors, the paper said.

“The results thus provide no compelling evidence that raising literacy rates among low-income parents would increase their RESP participation rates. However, there may be some role for financial literacy,” the study concluded.

Importantly, StatsCan noted earlier research has shown that having an RESP is a significant factor in determining whether children pursue some form of post-secondary education.

“Youth who had access to an account were more likely to subsequently enrol in university or college than those who did not have an RESP,” StatsCan said. “This was the case even after accounting for differences in family income, parental education and the academic performance of the children.”

The study also suggested that the Covid-19 pandemic may affect RESP participation rates and contribution levels in the years ahead.

While stock market volatility may have damaged the value of RESPs in the short-term, the economic disruption caused by the pandemic could hurt students’ savings capacity and their ability to seek help from family.

“Current and prospective postsecondary students from lower-income families may be facing a particularly challenging financial situation,” the paper said. “Most do not have access to RESP savings. Many will likely have fewer job prospects to finance their studies with in the coming months.”

Additionally, lower-income students may receive less financial help from their families if they’ve also lost income due to the pandemic.

“This may lead some youth to postpone or forgo pursuing or finishing their postsecondary studies altogether,” the paper said.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.