Between soaring inflation and rising interest rates, Canadians are spiraling into unprecedented debt. In fact, a recent report reveals more than half of Canadians are teetering on the edge of insolvency, with a mere $200 cushion.
Research from Ivey faculty Miranda Goode and June Cotte unveils a complex connection between debt and wellbeing. Their findings reveal a phenomenon dubbed "anticipated stigmatization of debt," wherein individuals fearing exposure of their debt spend excessively to conceal it. This perpetuates a cycle of financial instability and triggers a mounting mental health crisis.
“The perception and the worry that others will think less of us because of our debt feels very real, which perpetuates hiding and increased spending,” said Goode. “We need social supports that change perceptions and give people who live with this fear the tools to communicate constructively in social situations. We need to get to a point, where we are okay saying ‘no’ to unnecessary financial obligations and communicating openly about financial priorities that may conflict with social pressures.”
Amidst debt's pervasive grip nationwide, the call for innovative policy intervention has reached a crescendo. Enter the Lawrence National Centre for Policy and Management. Its Director, Romel Mostafa, has recently issued a policy brief, entitled Breaking Out of a Destructive Debt Cycle, which centres on the de-stigmatization of debt. In an interview, Mostafa reveals the policy’s potential and outlines its strategic three-pronged approach.
Out of the myriad of issues facing our country, why is consumer debt such an urgent and timely priority for Canadian policymakers?
Truth be told, after a couple of years of high inflation and high interest rates, most Canadians, especially those in the low- and middle-income brackets, continue to face significant financial stress, burdened by increased debts (both mortgage and non-mortgage loans). To me, this is a fundamental challenge of our time.
Financial stress has been linked to mental health challenges, including depression, anxiety, and other disorders, all of which have potential social and societal ramifications. Dwindling savings and greater debt burden limit opportunities for wealth accumulation, hampering social mobility, and diminishing wellbeing. Left unaddressed, these challenges will put additional pressure on our already strained health and other social infrastructures.
External factors aside, I think it is equally important to understand internal factors — that is consumers’ own decisions that, at times and often inadvertently, exacerbate their financial conditions. This is where insights from the research conducted by Cotte, Goode, and their coauthors become particularly informative.
The Government of Canada has acknowledged the importance of financial literacy and has already implemented several financial education programs and resources. Why do we need further policy around this issue?
Indeed, the federal government through Financial Consumer Agency of Canada (FCAC) has emphasized financial education across the country. Interestingly, Canada has one of the highest financial literacy rates in the world. And yet, we also have one of the highest household debt-to-income ratios in the world.
Clearly tools like budgeting and planning, or principles, such as the time value of money, are all important in managing household finances. But I think we must also consider advancing policy around behavioural factors that shape the way in which we manage debt to have a meaningful impact.
The evidence marshalled by Ivey researchers and their collaborators provides a strong foundation to sketch out behavioural policy designs to redress the issue of debt stigma, and the associated pressure to conceal debt. We believe that such designs can be rolled into FCAC’s existing financial literacy strategy and mobilized for impact.
The Lawrence National Centre is advocating for the development of policy incorporating de-stigmatization of debt into financial literacy through a three-pronged approach. What does this entail?
Before outlining the three-level intervention policy, it's crucial to clarify that the goal of de-stigmatizing debt in behavioral policy design does not endorse accumulating debt carelessly. Instead, we need to develop policy for changing public perception on debt so that individuals do not feel the pressure to spend more to conceal their indebtedness. Equipped with robust financial literacy tools, they should be able to make judicious decisions, without invoking any social sanctions, like embarrassment, sarcasm, or shame.
So, our three-pronged approach starts with public intervention. In particular, we think the government, in addition to disseminating financial tools, must create public information campaigns to address misconceptions about consumer debt and public prejudices of those affected.
Second, at the institutional level, we know mental health and financial wellness are important pillars of employees’ good health. Harnessing this, the FCAC could prepare and supply organizations with tools, resources, and information, which promote financial literacy and help destigmatize debt – all of which could be incorporated within organizational HR practices.
Third, we urge the FCAC and the provincial governments to work collaboratively in enabling school boards to incorporate stand-alone programs on financial well-being into their curricula, covering financial education, which should include insights on management and misperception of debt. This education could begin as early as the third grade.
“Efforts to increase financial literacy also need to increase skills and tools to communicate with others about their financial decisions and priorities.”
- Miranda Goode
Have similar policies been implemented in other countries or regions with success? If so, what lessons can be drawn from those experiences?
There are many financial literacy programs around the world, and there are also various savings products that incorporate behavioural designs, from mental accounting to commitment mechanisms. But to my knowledge, less emphasis has been put on developing policy on managing debt, and none around de-stigmatization of debt. This is, in part, because only recently have we begun to understand the implications of the stigma associated with debt. And this why the systematic research by our colleagues is groundbreaking.
In designing our three-pronged policy framework we looked to experiences of past policy of addressing stigma (e.g. mental health) and suggested interventions around social perception of debt. I am of the opinion that behavioural designs related to financial decision making should not be invasive, which can be counterproductive; rather they should empower consumers to make judicious decisions by themselves, through education and behavioural nudges.
Uncover the in-depth findings of the policy brief, "Breaking Out of a Destructive Debt Cycle," which was cosponsored by Scotiabank Digital Banking Lab at Ivey Business School. For a deeper dive into debt destigmatization, explore Miranda Goode and June Cotte's pivotal research, "Helping Those That Hide: Anticipated Stigmatization Drives Concealment and a Destructive Cycle of Debt" or read Ivey Impact’s coverage.
