Planning and Financial Literacy: How Do Women Fare? Presentation to the World Bank, January 24, 2008 Annamaria Lusardi Dartmouth College & NBER Olivia S. Mitchell Univ. of Pennsylvania & NBER
Significance • This paper is part of a larger research project on financial literacy and retirement security • Individuals are increasingly in charge of making saving and investment decisions • Are they well-equipped to make these decisions?
How do women fare? • Women are a particularly important group • Women live longer than men, thus savings need to last a long time • Because of shorter labor market tenures, women are less likely to have pensions or have less experience with pensions. • Are women well equipped to make or continue to make financial decisions?
To evaluate these questions: We devised a module on Financial Literacy & Planning for the 2004 Health and Retirement Study (HRS) • Financial Literacy • Do women know basic economics/finance? • Planning • Do women calculate how much they need to save for retirement? How well do they plan?
3 questions on Financial Literacy: (I) Interest Rate/Numeracy “Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow?” i) more than $102; ii) exactly $102; iii) less than $102; iv) don’t know (DK); v) refuse to answer.
Financial Literacy (II) Inflation “Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, would you be able to buy:” i) more than today with the money in this account; ii) exactly the same as; iii) less than today iv) DK; v) refuse.
Financial Literacy (III) Risk Diversification “Do you think the following statement is true or false? Buying a single company stock usually provides a safer return than a stock mutual fund.” i) true; ii) false; iii) DK; iv) Refuse.
Measuring Financial Literacy • We have inserted these questions in: • Rand American Life Panel • NLSY • Marketing Surveys • Dutch DNB Survey • We have devised a wider set of questions to measure literacy and financial sophistication. We find similar results. • We have surveyed the evidence on literacy in the US and in other countries and find similar evidence of widespread illiteracy among women (Lusardi and Mitchell, Business Economics 2007).
3 questions on Retirement Planning Trying to plan “Have you ever tried to figure out how much your household would need to save for retirement?” Developing a plan “Have you developed a plan for retirement saving?” Sticking to the plan “How often have you been able to stick to this plan? Would you say:” i) always; ii) mostly; iii) rarely; or iv) never?
Yes (30.9%) No (68.2%) Yes (58.5%) No (34.2%) More or Less (7.3%) Always (31.8%) Mostly (53.9%) Rarely 9.1 Never 3.2.% What we find: Tried Have you ever tried to figure out how much your household would need to save for retirement? Developed a plan Have you developed a plan for retirement saving? Stuck to the plan How often have you been able to stick to the plan?
Does financial literacy matter? Are the more financially literate women : • more likely to plan? • more likely to succeed in planning?
Probit Analysis of Simple, Serious, and Committed Planners : Accounting for Differences in Demographic Characteristics
The relationship between literacy and planning • We address reverse causality in another paper using financial literacy in the distant past as an instrument for current literacy. • We find similar results in another paper: “Baby Boomer Retirement Security: The Roles of Planning, Financial Literacy and Housing Wealth” (JME, 2007) which uses different measures of planning and financial literacy.
More on Financial Literacy • Other papers we have written on this topic are available on our web pages: • http://www.pensionresearchcouncil.org/ • http://www.dartmouth.edu/~alusardi • I edited a book “Overcoming the saving slump: How to increase the effectiveness of financial education and saving programs” for the University of Chicago Press that discusses these topics at length.