Search

We study the rapidly growing literature on the causal effects of financial education programs in a meta-analysis of 76 randomized experiments with a total sample size of over 160,000 individuals. Many of these experiments are published in top economics and finance journals. The evidence shows that financial education programs have, on average, positive causal treatment effects on financial knowledge and downstream financial behaviors. Treatment effects are economically meaningful in size, similar to those realized by educational interventions in other domains, and robust to accounting for publication bias in the literature. We also discuss the cost-effectiveness of financial education interventions.

The United States’ 44 million African–Americans account for 13% of the US population and have a significant impact on the economy, with $1.2 trillion in purchases annually. Yet the financial well-being of African–Americans lags that of the US population as a whole, and whites in particular. The reasons for these gaps are complex, but one area of importance in addressing them is increased financial literacy, the knowledge and understanding that enable sound financial decision-making and effective management of personal finances. This report uses the 2019 TIAA Institute-GFLEC Personal Finance Index (P-Fin Index) to examine the current state of financial literacy and financial wellness among African–American adults. The study finds that personal finance knowledge among African–American adults lags that of whites. Further, it varies across demographic groups within the African–American population, with greater financial literacy among men, older individuals, those with more formal education, and those with higher incomes. Insuring, comprehending risk, investing, and identifying go-to information sources are the areas where personal finance knowledge is lowest; borrowing and debt management is the area of highest personal finance knowledge. There is a strong link between financial literacy and financial wellness among African–Americans. Those who are more financially literate are more likely to plan and save for retirement, to have non-retirement savings, and to better manage their debt; they are also less likely to be financially fragile. A more refined understanding of financial literacy among African–Americans can inform initiatives to improve financial well-being. While not a cure-all, increased financial literacy can lead to improved financial capability and practices that benefit even those with relatively low incomes. TOPICS:Wealth management, retirement Key Findings • Personal finance knowledge among African–Americans is low and lags that of whites. African–American financial literacy tends to be lowest in the areas of insuring, comprehending risk, investing, and go-to information sources. • Financial literacy varies across demographic groups within the African–American population; it is higher among men, older individuals, those with more formal education and higher incomes. • There is a strong link between financial literacy and financial wellness among African–Americans. Those who are more financially literate are more likely to plan and save for retirement, to have non-retirement savings, and to better manage their debt; they are also less likely to be financially fragile.

We analyze older individuals’ debt and financial vulnerability using data from the Health and Retirement Study (HRS) and the National Financial Capability Study (NFCS). Specifically, in the HRS we examine three different cohorts (individuals age 56–61) in 1992, 2004, and 2010 to evaluate cross-cohort changes in debt over time. We also use two waves of the NFCS (2012 and 2015) to gain additional insights into debt management and older individuals’ capacity to shield themselves against shocks. We show that recent cohorts have taken on more debt and face more financial insecurity, mostly due to having purchased more expensive homes with smaller down payments.

We measure financial literacy using questions assessing basic knowledge of four fundamental concepts in financial decision making: knowledge of interest rates, interest compounding, inflation, and risk diversification. Worldwide, just one in three adults are financially literate—that is, they know at least three out of the four financial concepts. Women, poor adults, and lower educated respondents are more likely to suffer from gaps in financial knowledge. This is true not only in developing countries but also in countries with well‐developed financial markets. Relatively low financial literacy levels exacerbate consumer and financial market risks as increasingly complex financial instruments enter the market. Credit products, many of which carry high interest rates and complex terms and conditions, are becoming more readily available. Yet only around half of adults in major emerging countries who use a credit card or borrow from a financial institution are financially literate. We discuss policies to protect borrowers against risks and encourage account holders to save.

Early in the COVID-19 pandemic, much of the US economy was closed to limit the virus’ spread, and several emergency interventions were implemented. Our analysis of older (45-75) respondents fielded in April-May of 2020 indicates that about one in five respondents was financially fragile and would have difficulty facing a mid-size emergency expense. Some subgroups were at particular risk of facing financial difficulties, especially younger respondents, those with larger families, Hispanics, and the low income. Moreover, the more financially literate were better able to handle such shocks, indicating that knowledge can provide some additional protection during a pandemic.

Poor financial capability can erode well-being in later life. To explore debt and debt management among older Americans, age 51-61, we designed and analyzed a new module in the 2018 Health and Retirement Study along with information from the 2018 National Financial Capability Study. Even though this group should be at the peak of their retirement savings, it nevertheless carries debt due to student loans and unpaid medical bills; having children also contributes to carrying debt close to retirement. By contrast, the financially literate have more positive financial perceptions and behaviors. Specifically, being able to answer one additional financial literacy question correctly is associated with a higher probability of reporting an above average credit record and planning for retirement. Higher financial literacy is also linked to being less likely to carry excessive debt, being contacted by debt collectors, and carrying medical debt or student loans, even after accounting for a large range of demographics and other characteristics. Evidently, financial knowledge can help limit debt exposure at older ages.

Our chapter aims to analyze debt among pre-retirees and its implications for retirement well-being using data from three waves of the National Financial Capability Study (NFCS). In particular, we will analyze what kinds of debt people carry into older ages and how different types of debt are related to older Americans’ ability to save for retirement. Moreover, we will investigate older Americans’ understanding of debt and its consequences by analyzing their level of financial sophistication. For instance, managing debt can be especially difficult for people who do not know the power of interest compounding or do not have the financial savvy to plan for retirement or execute a retirement saving plan. Our analysis is intended to better guide financial sector practitioners as well as policymakers seeking to help older Americans better prepare for retirement and sustain a reasonable standard of living in retirement.

This article uses data from the 2020 TIAA Institute-GFLEC Personal Finance (P-Fin) Index to show that many American families were financially fragile well before the COVID-19 pandemic hit the U.S. economy. Financial fragility is particularly severe among specific demographic groups, such as African-Americans and those with low income. The article also shows that financial fragility is strongly linked to financial literacy and that many Americans are ill-equipped to deal with the financial decisions needed to navigate through a financial crisis. Suggestions are provided to deal with personal finance decisions in times of emergency.

Early in the COVID-19 pandemic, much of the US economy was closed to limit the virus’ spread, and several emergency interventions were implemented. Our analysis of older (45-75) respondents fielded in April-May of 2020 indicates that about one in five respondents was financially fragile and would have difficulty facing a mid-size emergency expense. Some subgroups were at particular risk of facing financial difficulties, especially younger respondents, those with larger families, Hispanics, and the low income. Moreover, the more financially literate were better able to handle such shocks, indicating that knowledge can provide some additional protection during a pandemic.

We study the rapidly growing literature on the causal effects of financial education programs in a meta-analysis of 76 randomized experiments with a total sample size of over 160,000 individuals. The evidence shows that financial education programs have, on average, positive causal treatment effects on financial knowledge and downstream financial behaviors. Treatment effects are economically meaningful in size, similar to those realized by educational interventions in other domains and are at least three times as large as the average effect documented in earlier work. These results are robust to the method used, restricting the sample to papers published in top economics journals, including only studies with adequate power, and accounting for publication selection bias in the literature. We conclude with a discussion of the cost-effectiveness of financial education interventions.

Poor financial capability can erode well-being in later life. To explore debt and debt management among older Americans, age 51-61, we designed and analyzed a new module in the 2018 Health and Retirement Study along with information from the 2018 National Financial Capability Study. Even though this group should be at the peak of their retirement savings, it nevertheless carries debt due to student loans and unpaid medical bills; having children also contributes to carrying debt close to retirement. By contrast, the financially literate have more positive financial perceptions and behaviors. Specifically, being able to answer one additional financial literacy question correctly is associated with a higher probability of reporting an above average credit record and planning for retirement. Higher financial literacy is also linked to being less likely to carry excessive debt, being contacted by debt collectors, and carrying medical debt or student loans, even after accounting for a large range of demographics and other characteristics. Evidently, financial knowledge can help limit debt exposure at older ages. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

This paper analyzes the financial fragility of Dutch households by examining their ability to raise 2,000 euro within a month in case of a financial emergency. Using data from a survey module fielded in 2016 in the CentERpanel, we document that one in seven Dutch households is financially fragile. Moreover, some demographic groups, specifically females, single person households, renters, low-income households, the lower educated and the unemployed are more likely to be financially fragile. While a majority of households would use their savings to cope with a financial emergency, a noticeable fraction of households would resort to other methods, such as relying on family and friends or borrowing using credit cards. Financial literacy, confidence in financially literacy skills and probability numeracy are all associated with financial fragility as well as with the methods people use to cope with an emergency. These results support previous findings on the importance of financial knowledge and numerical ability for financial decision making.

Retirement investing in the United States has changed dramatically. The classic defined-benefit (DB) plan has largely been replaced by the defined contribution (DC) plan. With the latter, individual employees’ decisions about how much to save for retirement and how to invest those savings determine the benefits available upon retirement. We analyze data from the 2015 National Financial Capability Study to show that people whose only exposure to investment decisions is by virtue of their participation in an employer-sponsored 401(k) plan are poorly equipped to make sound investment decisions. Specifically, they suffer from higher levels of financial illiteracy than other investors. This lack of financial literacy is critical both because of the financial consequences of poor financial decisions and because of a legal structure that relies on participant choice to limit the fiduciary obligations of the employer with respect to the structure and options provided by the retirement plan. In response to this concern, we propose mandated employer-provided financial education to address limited employee financial literacy. We identify and discuss three requirements that a financial education program should incorporate – a self-assessment, minimum substantive components, and timing. Formalizing the employer role in evaluating and increasing financial literacy among plan participants is a key step in providing retirement plan participants with the resources necessary to manage important decisions regarding retirement planning and, ultimately, for enhancing the financial security of American workers.

This article uses administrative data on all active employees of the Federal Reserve (FR) System to examine participation in and contributions to the Thrift Saving Plan, the System's defined contribution (DC) plan. We link to administrative records a unique employee survey of economic/demographic factors including a set of financial literacy questions. Not surprisingly, FR employees are substantially more financially literate than the population at large. Most importantly, financially savvy employees are also most likely to participate in their DC plan. Sophisticated workers contribute three percentage points more of their earnings to the DC plan than do the less knowledgeable, and they hold more equity in their pension accounts. We examine changes in employee plan behavior 1 year after employees completed a Learning Module about retirement planning, and we compare it to baseline patterns. We find that those employees who completed the Learning Module were more likely to start contributing and less likely to have stopped contributing to the DC plan postsurvey. In sum, employer-provided learning programs are shown to significantly impact employee retirement saving decisions and consistent with a lot of other research, higher levels of financial literacy are found to have a beneficial impact on retirement saving patterns. (JEL J3, H7)

Prior studies disagree regarding the effectiveness of financial education programs, especially those offered in the workplace. To explain such measurement differences in evaluation and outcomes, we employ a stochastic life cycle model with endogenous financial knowledge accumulation and investigate how financial education programs optimally shape key economic outcomes. This approach permits us to measure how such programs shape wealth accumulation, financial knowledge, and participation in sophisticated assets (e.g. stocks) across heterogeneous consumers. We apply conventional program evaluation econometric techniques to simulated data, distinguishing selection and treatment effects. We show that the more effective programs provide follow-up in order to sustain the knowledge acquired by employees via the program; in such an instance, financial education delivered to employees around the age of 40 can raise savings at retirement by close to 10%. By contrast, one-time education programs do produce short-term but few long-term effects. We also measure how accounting for selection affects estimates of program effectiveness for those who participate. Comparisons of participants and non-participants can be misleading, even using a difference-in-difference strategy when the common-trend assumption is unlikely to hold. Random program assignment is needed to evaluate program effects on those who participate.

Objectives The consequences of poor financial capability at older ages are serious and include making mistakes with credit, spending retirement assets too quickly, and being defrauded by financial predators. Because older persons are at or past the peak of their wealth accumulation, they are often the targets of fraud. Methods Our project analyzes a module we developed and fielded on people aged 50 an older years in the 2016 Health and Retirement Study (HRS). Using this data set, we evaluated the incidence and prospective risk factors (measured in 2010) for investment fraud and prize/lottery fraud using logistic regression (N = 1,220). Results Relatively few HRS respondents mentioned any single form of fraud over the prior 5 years, but 5.0% reported at least one form of investment fraud and 4.4% recounted prize/lottery fraud. Greater wealth (nonhousing) was associated with investment fraud, whereas lower housing wealth and symptoms of depression were associated with prize/lottery fraud. Hispanics were significantly less likely to report either type of fraud. Other suspected risk factors—low social integration and financial literacy—were not significant. Discussion Fraud is a complex phenomenon and no single factor uniquely predicts victimization across different types, even within the category of investment fraud. Prevention programs should educate consumers about various types of fraud and increase awareness among financial services professionals.

Prior studies disagree regarding the effectiveness of financial education programs, especially those offered in the workplace. To explain such measurement differences in evaluation and outcomes, we employ a stochastic life cycle model with endogenous financial knowledge accumulation to investigate how financial education programs optimally shape wealth accumulation, financial knowledge, and participation in sophisticated assets (e.g. stocks) across heterogeneous consumers. We then apply conventional program evaluation econometric techniques to simulated data, distinguishing selection and treatment effects. We show that the more effective programs provide follow-up in order to sustain the knowledge acquired by employees via the program; in such an instance, financial education delivered to employees around the age of 40 can raise savings at retirement by close to 10%. By contrast, one-time education programs do produce short-term but few long-term effects. We also measure how accounting for selection affects estimates of program effectiveness on those who participate. Comparisons of participants and non participants can be misleading, even using a difference-in-difference strategy. Random program assignment is needed to evaluate program effects on those who participate.

We explore whether investors who are more financially knowledgeable earn more on their retirement plan investments compared with their less sophisticated counterparts, using a unique new dataset linking administrative data on investment performance and financial knowledge. Results show that the most financially knowledgeable investors: (a) held 18% points more stock than their least knowledgeable counterparts; (b) could anticipate earning 8 basis points per month more in excess returns; (c) had 40% higher portfolio volatility; and (d) held portfolios with about 38% less idiosyncratic risk, as compared with their least savvy counterparts. Our results are qualitatively similar after controlling on observables as well as modeling sample selection. We also examine portfolio changes to assess the potential impact of the financial literacy intervention. Controlling on other factors, those who elected to take the financial literacy survey boosted their equity allocations by 66 basis points and their monthly expected excess returns rose by 2.3 basis points; no significant difference in volatility or non-systematic risk was detected before versus after the survey. While these findings relate to only one firm, we anticipate that they may spur other efforts to enhance financial knowledge in the workplace.

I am delighted to be asked to give the Colston Warne Lecture at the American Council on Consumer Interests annual conference. What I want to cover in this lecture is what I consider to be one of the most important topics for consumers: financial literacy. This topic is particularly important for the young, and in this lecture, I will describe the findings from the first international survey on financial literacy among high school students: the Programme for International Student Assessment (PISA). I am honored to chair the financial literacy expert group that designed the financial literacy assessment in PISA. Our journey to design that assessment included meetings in many countries and lasted for several years. It is one of the works I have enjoyed the most. I hope the findings from PISA will be a catalyst for changes in education policies, including adding financial literacy to school curricula.

This article reviews what we have learned over the past decade about financial literacy and its relationship to financial decision making around the world. We used three questions to survey people in several countries about their level of fundamental knowledge of economics and finance, which they need to function as effective decision makers. We find that levels of financial literacy are low not only in the United States but also in many other countries, including those with well-developed financial markets. Moreover, financial illiteracy is particularly acute for some demographic groups, especially women and those who are less educated. These findings are important, since financial literacy is linked to borrowing, saving, and spending patterns. We also offer new evidence on financial literacy among high school students, drawing on the 2012 Programme for International Student Assessment implemented in 18 countries. Last, we discuss the implications of this research for policy.

I examine financial literacy—specifically knowledge of risk—using data from surveys in the United States and other countries. I show that risk literacy is very low; the majority of individuals lack knowledge of concepts such as risk diversification and do not understand the relationship between risk and return. Findings are strikingly similar across countries; a third of survey respondents in most countries report that they do not know the answer to risk literacy questions. I also show that risk literacy matters for financial decisions; those who are more knowledgeable about risk are more likely to have precautionary savings and to plan for retirement. Given that individuals have much greater responsibility for their financial well-being before and after retirement than in the past, addressing lack of financial literacy, including risk literacy, may provide new ways to promote saving and financial security.

We analyze older individuals’ debt and financial vulnerability using data from the Health and Retirement Study (HRS) and the National Financial Capability Study (NFCS). Specifically, in the HRS we examine three different cohorts (individuals age 56–61) in 1992, 2004, and 2010 to evaluate cross-cohort changes in debt over time. We also use two waves of the NFCS (2012 and 2015) to gain additional insights into debt management and older individuals’ capacity to shield themselves against shocks. We show that recent cohorts have taken on more debt and face more financial insecurity, mostly due to having purchased more expensive homes with smaller down payments.

Americans increasingly are in charge of their own financial security after retirement. With the shift from defined benefit (DB) to defined contribution (DC) pension plans, workers have to decide not only how much to save for retirement but also how to allocate their pension wealth. Moreover, in recent decades the complexity of financial instruments has increased, so individuals must use new and more sophisticated financial products. How well-equipped are Americans to make their own saving decisions? Do they even plan for retirement? Do they possess adequate financial literacy? These questions will be addressed in this article.

Economists are beginning to investigate the causes and consequences of financial illiteracy to better understand why retirement planning is lacking and why so many households arrive close to retirement with little or no wealth. Our review reveals that many households are unfamiliar with even the most basic economic concepts needed to make saving and investment decisions. Such financial illiteracy is widespread: the young and older people in the United States and other countries appear woefully under-informed about basic financial concepts, with serious implications for saving, retirement planning, mortgages, and other decisions. In response, governments and several nonprofit organizations have undertaken initiatives to enhance financial literacy. The experience of other countries, including a saving campaign in Japan as well as the Swedish pension privatization program, offers insights into possible roles for financial literacy and saving programs.Business Economics (2007) 42, 35–44; doi:10.2145/20070104

Increasingly, individuals are in charge of their own financial security and are confronted with ever more complex financial instruments. However, there is evidence that many individuals are not well-equipped to make sound saving decisions. This article looks at financial literacy, which is defined as the ability to process economic information and make informed decisions about financial planning, wealth accumulation, debt, and pensions. Failure to plan for retirement, lack of participation in the stock market, and poor borrowing behavior can all be linked to ignorance of basic financial concepts. Financial literacy impacts financial decision making, with implications that apply to individuals, communities, countries, and society as a whole. Given the lack of financial literacy among the population, it may be important to remedy it by adding financial literacy to the school curriculum.

This paper uses administrative data on all active employees of the Federal Reserve System to examine participation in and contributions to the Thrift Saving Plan, the system’s defined contribution (DC) plan. We have appended to the administrative records a unique employee survey of economic/demographic factors including a set of financial literacy questions. Not surprisingly, Federal Reserve employees are more financially literate than the general population; furthermore, the most financially savvy are also most likely to participate in and contribute the most to their plan. Sophisticated workers contribute three percentage points more of their earnings to the DC plan than do the less knowledgeable, and they hold more equity in their pension accounts. Finally, we examine changes in employee plan behavior a year after the financial literacy survey and compare it to the baseline. We find that employees who completed an educational module were more likely to start contributing and less likely to have stopped contributing to the DC plan post-survey.

We examine how the economic crisis has affected individuals’ use of routine medical care and assess the extent to which the impact varies depending on national context. Data from a new cross-national survey fielded in the United States, Great Britain, Canada, France, and Germany are used to estimate the effects of employment and wealth shocks and financial fragility on the use of routine care. We document reductions in individuals’ use of routine non-emergency medical care in the midst of the economic crisis. Americans reduced care more than individuals in Great Britain, Canada, France, and Germany. At the national level, reductions in care are related to the degree to which individuals must pay for it, and within countries, reductions are linked to shocks to wealth and employment and to financial fragility. The economic crisis has led to reductions in the use of routine medical care and systems of national insurance provide some protection against these effects.

We developed and experimentally evaluated four novel educational programs delivered online: an informational brochure, a visual interactive tool, a written narrative, and a video narrative. The programs were designed to inform people about risk diversification, an essential concept for financial decision-making. The effectiveness of these programs was evaluated using the American Life Panel. Participants were exposed to one of the programs, and then asked to answer questions measuring financial literacy – in particular, risk literacy – and self-efficacy. All of the programs were found to be effective at increasing self-efficacy, and several improved financial literacy, providing new evidence for the value of programs designed to improve financial decision-making.

Using a unique new data set linking administrative data on investment performance and financial knowledge, we examine whether investors who are more financially knowledgeable earn more on their retirement plan investments, compared to their less sophisticated counterparts. We find that risk-adjusted annual expected returns are 130 basis points higher for the most financially knowledgeable employees, and those scoring higher on our Financial Knowledge Index have slightly more volatile portfolios while they do no better diversifying their portfolios than their peers. Overall, financial knowledge does appear to help people invest more profitably; this may provide a rationale for efforts to enhance financial knowledge in the population at large.

We document strikingly similar gender differences in financial literacy across countries. When asked to answer questions that measure knowledge of basic financial concepts, women are less likely than men to answer correctly and more likely to indicate that they do not know the answer. In addition, women give themselves lower scores on financial literacy self-assessments than men. Both young and old women show low levels of financial literacy. Moreover, women for whom financial knowledge is likely to be very important — for example widows or single women — know little about concepts relevant for day-to-day financial decisions. Even women in favorable economic conditions are less financially knowledgeable than men. This is important because financial literacy has been linked to economic behavior, including retirement planning and wealth accumulation. Women live longer than men and are likely to spend time in widowhood. As a result, improving women’s financial literacy is key to helping them prepare for retirement and promoting their financial security.

Increasingly, individuals are in charge of their own financial security and are confronted with ever more complex financial instruments. However, there is evidence that many individuals are not well-equipped to make sound saving decisions. This paper looks at financial literacy, which is defined as the ability to process economic information and make informed decisions about financial planning, wealth accumulation, debt, and pensions. Failure to plan for retirement, lack of participation in the stock market, and poor borrowing behavior can all be linked to ignorance of basic financial concepts. Financial literacy impacts financial decision-making, with implications that apply to individuals, communities, countries, and society as a whole. Given the lack of financial literacy among the population, it may be important to remedy it by adding financial literacy to the school curriculum.

In this paper, we developed and experimentally evaluated four novel educational programs delivered online: an informational brochure, a visual interactive tool, a written narrative, and a video narrative. The programs were designed to inform people about risk diversification, an essential concept for financial decision-making. The effectiveness of these programs was evaluated using the RAND American Life Panel. Participants were exposed to one of the programs, and then asked to answer questions measuring financial literacy and self-efficacy. All of the programs were found to be effective at increasing self-efficacy, and several improved financial literacy, providing new evidence for the value of programs designed to help individuals make financial decisions. The video was more effective at improving financial literacy scores than the written narrative, highlighting the power of online media in financial education.

We introduce the concept of financial competence, a measure of the extent to which individuals’ financial choices align with those they would make if they properly understood their opportunity sets. Unlike existing measures of the quality of financial decision making, the concept is firmly rooted in the principles of choice-based behavioral welfare analysis; it also avoids the types of paternalistic judgments that are common in policy discussions. We document the importance of assessing financial competence by demonstrating, through an example, that an educational intervention can appear highly successful according to conventional outcome measures while failing to improve the quality of financial decision making. Specifically, we study a simple intervention concerning compound interest that significantly improves performance on a test of conceptual knowledge (which subjects report operationalizing in their decisions), and appears to counteract exponential growth bias. However, financial competence (welfare) does not improve. We trace the mechanisms that account for these seemingly divergent findings.

Using a stochastic life cycle model with endogenous financial knowledge accumulation, we show that financial knowledge is a key determinant of wealth inequality. The mechanism we posit is that financial knowledge enables individuals to better allocate re- sources over their lifetimes in a world of uncertainty and imperfect insurance. Moreover, because of how the U.S. social insurance system works, better-educated individuals have the most to gain from investing in financial knowledge. As a result, making financial knowledge accumulation endogenous amplifies differences in accumulated retirement wealth over the life cycle. According to our estimates, from 30 to 40 percent of wealth inequality can be accounted for by financial knowledge.

In this paper we examine household wealth and income in the Netherlands using data from the Socio Economic Panel (SEP) in the period 1987-89. We provide an evaluation of the quality of the data and some simple statistics which describe the behavior of wealth, saving, and income over the life cycle. We find there is substantial heterogeneity in the behavior of households, and wealth holdings vary substantially even among the same age group. By exploiting the panel feature of the SEP, we derive saving from first differencing wealth. We find that a sizeable fraction of households do not dissave when old and we find some evidence in favor of the bequest motive. Many recent works on saving and consumption behavior have emphasized the importance of examining household data to study the predictions of the life cycle-permanent income model.' Unfortunately, data sets that provide detailed household or individual information on saving, income, and wealth are scarce. Data sets that follow decision-making units over time are even more rare. Finally, micro data can suffer from serious problems of measurement error, which can distort the evaluation of the empirical findings. In this paper, we examine micro data from the Dutch Socio-Economic Panel (SEP). The SEP contains detailed information about household characteristics, income, and wealth. It follows households over time, enabling the researcher to gain greater insight into their behavior. The fact that wealth data is collected Note: We wish to thank John Burbidge and Jim Davies for kindly sending us the GAUSS program to calculate kernel-smoothed conditional quantiles. Annamaria Lusardi would like to thank CentER for its hospitality while writing this paper. We received very useful suggestions and comments from Gary Engelhardt, Arie Kapteyn, Mike Knetter, Arthur Kennickell, Andrew Oswald, Karl Scholz, the Editor of this journal, an anonymous referee, and seminar participants at CentER, the Institute for Fiscal Studies in London, and the Board of Governors of the Federal Reserve System. Vaishali Sachdev and David Sadoff provided excellent research assistance. Any errors are our responsibility. This research is part of the VSB savings project. The dala was provided by the Netherlands Central Bureau of Statistics (CBS). The views expressed in this paper are those of the authors and do not necessarily reflect the views of the CBS. 'see, among others, Deaton ( 1992) and Browning and Lusardi ( 1996).

Of particular interest in the present economic environment is whether access to credit is changing peoples’ indebtedness over time, particularly as they approach retirement. This project analyzes older individuals’ debt, debt management practices, and financial fragility using data from the Health and Retirement Study (HRS) and the National Financial Capability Study (NFCS). Specifically, we examine three different cohorts (individuals age 56–61) in different time periods, 1992, 2002 and 2008, in the HRS to evaluate cross-cohort changes in debt over time. We also draw on recent data from the National Financial Capability Study (NFCS) which provides detailed information on how families manage their debt. Our goal is to assess how wealth and debt among older persons has evolved over time, along with the potential consequences for retirement security. We find that more recent cohorts have taken on more debt and face more financial insecurity, mostly due to having purchased more expensive homes with smaller down payments. In addition, Baby Boomers are more likely to have engaged in expensive borrowing practices. Factors associated with better debt outcomes include having higher income, more education, and greater financial literacy; those associated with financial fragility include having more children and experiencing unexpected large income declines. Thus, shocks do play a role in the accumulation of debt close to retirement. But it is not enough to have resources, people also need the capacity to manage those resources if they are to stay out of debt as they head into retirement.

While financial knowledge is strongly positively related to household wealth, there is also considerable cross-sectional variation in both financial knowledge and net asset levels. To explore these patterns, we develop a calibrated stochastic life cycle model featuring endogenous financial knowledge accumulation. The model generates substantial wealth inequality, over and above that of standard life cycle models; this is because higher earners typically have more hump-shaped labor income profiles and lower retirement benefits which, when interacted with precautionary saving motives, boost their need for private wealth accumulation and thus financial knowledge. Our simulations show that endogenous financial knowledge accumulation has the potential to account for a large proportion of wealth inequality. The fraction of the population which is rationally financially “ignorant” depends on the generosity of the retirement system and the level of means-tested benefits. Educational efforts to enhance financial savvy early in the life cycle so as to produce one percentage point excess return per year would be valued highly by people in all educational groups.

This paper examines data on financial sophistication among the U.S. older population, using a special-purpose module implemented in the Health and Retirement Study. We show that financial sophistication is deficient for older respondents (aged 55+). Specifically, many in this group lack a basic grasp of asset pricing, risk diversification, portfolio choice, and investment fees. Subpopulations with particular deficits include women, the least educated, persons over the age of 75, and non-Whites. In view of the fact that people are increasingly being asked to take on responsibility for their own retirement security, such lack of knowledge can have serious implications.

The ability of consumers to make informed financial decisions improves their chances of having sound personal finance. This paper uses a panel dataset from Russia, where consumer loans grew at an astounding rate -- from about US$10 billion in 2003 to over US$170 billion in 2008 -- to examine the importance of financial literacy and its relationship with behavior. The survey asked questions on financial literacy, consumer borrowing (formal and informal), and spending behavior. The paper studies the consequences of greater financial literacy on the use of financial products and financial planning. Even though consumer borrowing rose rapidly in Russia, only 41 percent of the survey respondents understood how interest compounding worked and only 46 percent could answer a simple question about inflation. Financial literacy is positively related to participation in financial markets and negatively related to the use of informal sources of borrowing. Individuals with higher rates of financial literacy are significantly more likely to report having more unspent income at the end of the month and higher spending capacity. The relationship between financial literacy and the availability of unspent income is more evident during the financial crisis, suggesting that better financial literacy may better equip individuals to deal with macroeconomic shocks.

NBER WORKING PAPER SERIESNUMERACY, FINANCIAL LITERACY, AND FINANCIAL DECISION-MAKINGAnnamaria LusardiWorking Paper 17821http://www.nber.org/papers/w17821NATIONAL BUREAU OF ECONOMIC RESEARCH1050 Massachusetts AvenueCambridge, MA 02138February 2012This paper was invited to be written for Numeracy, the open-access, peer-review journal of the NationalNumeracy Network. I would like to thank Dorothy Wallace, from the department of Mathematicsat Dartmouth College, for encouraging me to write this review article. Audrey Brown provided excellentresearch assistance. All errors are my own. The views expressed herein are those of the author anddo not necessarily reflect the views of the National Bureau of Economic Research.NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies officialNBER publications.© 2012 by Annamaria Lusardi. All rights reserved. Short sections of text, not to exceed two paragraphs,may be quoted without explicit permission provided that full credit, including © notice, is given tothe source.

It is still relatively unusual for financial education programmes to be evaluated. In this chapter, the main benefits of programme evaluation are discussed, along with the challenges faced by evaluation designers and the resulting limitations of existing evaluations. A five tier evaluation framework is assessed as a potential solution to improve evaluation design whilst still allowing flexibility.

Individuals are increasingly put in charge of their financial security after retirement. Moreover, the supply of complex financial products has increased considerably over the years. However, we still have little or no information about whether individuals have the financial knowledge and skills to navigate this new financial environment. To better understand financial literacy and its relation to financial decision-making, we have devised two special modules for the DNB Household Survey. We have designed questions to measure numeracy and basic knowledge related to the working of inflation and interest rates, as well as questions to measure more advanced financial knowledge related to financial market instruments (stocks, bonds, and mutual funds). We evaluate the importance of financial literacy by studying its relation to the stock market: Are more financially knowledgeable individuals more likely to hold stocks? To assess the direction of causality, we make use of questions measuring financial knowledge before investing in the stock market. We find that, while the understanding of basic economic concepts related to inflation and interest rate compounding is far from perfect, it outperforms the limited knowledge of stocks and bonds, the concept of risk diversification, and the working of financial markets. We also find that the measurement of financial literacy is very sensitive to the wording of survey questions. This provides additional evidence for limited financial knowledge. Finally, we report evidence of an independent effect of financial literacy on stock market participation: Those who have low financial literacy are significantly less likely to invest in stocks.

This paper examines Americans' financial capability, using data from a new survey. Financial capability is measured in terms of how well people make ends meet, plan ahead, choose and manage financial products, and possess the skills and knowledge to make financial decisions. The findings reported in this work paint a troubling picture of the state of financial capability in the United States. The majority of Americans do not plan for predictable events such as retirement or children's college education. Most importantly, people do not make provisions for unexpected events and emergencies, leaving themselves and the economy exposed to shocks. To understand financial capability, it is important to look not only at assets but also at debt and debt management, as an increasingly large portion of the population carry debt. In managing debt, Americans engage in behaviors that can generate large expenses, such as sizable interest payments and fees. Moreover, more than one in five Americans has used alternative (and often costly) borrowing methods (payday loans, advances on tax refunds, pawn shops, etc.) in the past five years. The most worrisome finding is that many people do not seem well informed and knowledgeable about their terms of borrowing; a sizeable group does not know the terms of their mortgages or the interest rates they pay on their loans. Finally, the majority of Americans lack basic numeracy and knowledge of fundamental economic principles such as the workings of inflation, risk diversification, and the relationship between asset prices and interest rates.

As financial markets grow more complex and integrated, individuals and their families are increasingly faced with making highly sophisticated and alltoo-often irreversible economicdecisions. Nowhere is this moreevident than with regard to retirement decision-making: a half-century ago, traditional defined benefit (DB) pension schemes were the norm in the United States, Japan, Australia, and much of Europe, but these have now been largely replaced with defined contribution (DC) pensions. In the process, employer and government judgment regarding how much to save and where to invest has been replaced by individuals having to make these choices on their own (perhaps assisted by advisers they also select on their own). Additionally, participants in DC plans must also decide how to spend down their pension assets and determine whether to annuitize or take their benefits in a single lump sum. The trend toward increased individual responsibility and greater financial complexity extends into other realms of life as well, for example regarding decisions over credit cards, adjustable rate mortgages, and when to claim retirement benefits (Campbell, 2006; Ferguson Jr, 2010). Moreover, given the demographic forces at work and the structure of the labor markets, where workers change jobs and employers many times before retiring, the increase in individual responsibility with regard to financial security after retirement will continue to be a feature of many economies around the world. A larger array of sophisticated financial instruments does offer new opportunities for more tailored financial plans than available in the past, but these can also make poor decision-making more costly to the ill-informed investors. Indeed, recent events surrounding the global crisis that began in 2008 show that, when people and institutions make grievous financial errors, poor financial decision-making can have substantial costs, not only for individuals but also for society at large. 1 This volume focuses on key lessons for financial decision-making in the wake of that crisis, exploring how financial literacy can enhance peoples’ skills and abilities to make more informed economic choices. The chapters that follow draw on cutting-edge research by prominent researchers and practitioners engaged in examining how

In an increasingly risky and globalized marketplace, people must be able to make well-informed financial decisions. Yet new international research demonstrates that financial illiteracy is widespread when financial markets are well developed as in Germany, the Netherlands, Sweden, Japan, Italy, New Zealand, and the United States, or when they are changing rapidly as in Russia. Further, across these countries, we show that the older population believes itself well informed, even though it is actually less well informed than average. Other common patterns are also evident: women are less financially literate than men and are aware of this shortfall. More educated people are more informed, yet education is far from a perfect proxy for literacy. There are also ethnic/racial and regional differences: city-dwellers in Russia are better informed than their rural counterparts, while in the U.S., African Americans and Hispanics are relatively less financially literate than others. Moreover, the more financially knowledgeable are also those most likely to plan for retirement. In fact, answering one additional financial question correctly is associated with a 3-4 percentage point higher chance of planning for retirement in countries as diverse as Germany, the U.S., Japan, and Sweden; in the Netherlands, it boosts planning by 10 percentage points. Finally, using instrumental variables, we show that these estimates probably underestimate the effects of financial literacy on retirement planning. In sum, around the world, financial literacy is critical to retirement security.

These videos offer the presentations of the first annual conference of the Financial Literacy Research Consortium, entitled New Insights and Advances in Financial Literacy: Translation, Dissemination, Change. The event on Nov. 18 and 19, 2010 brought together scholars from the Consortium to present their work and discuss how programs, educational products, and policies can best promote financial planning and financial security.

This paper examines households' financial fragility by looking at their capacity to come up with $2,000 in 30 days. Using data from the 2009 TNS Global Economic Crisis survey, we document widespread financial weakness in the United States: Approximately one quarter of Americans report that they would certainly not be able to come up with such funds, and an additional 19% would do so by relying at least in part on pawning or selling possessions or taking payday loans. If we consider the respondents who report being certain or probably not able to cope with an ordinary financial shock of this size, we find that nearly half of Americans are financially fragile. While financial fragility is more severe among those with low educational attainment and no financial education, families with children, those who suffered large wealth losses, and those who are unemployed, a sizable fraction of seemingly "middle class" Americans also judge themselves to be financially fragile. We examine the coping methods people use to deal with shocks. While savings is used most often, relying on family and friends, using formal and alternative credit, increasing work hours, and selling items are also used frequently to deal with emergencies, especially for some subgroups. Household finance researchers must look beyond precautionary savings to understand how families cope with risk. We also find evidence of a "pecking order" of coping methods in which savings appears to be first in the ordering. Finally, the paper compares the levels of financial fragility and methods of coping among eight industrialized countries. While there are differences in coping ability across countries, there is general evidence of a consistent ordering of coping methods

We examine financial literacy in the United States using the new National Financial Capability Study, wherein we demonstrate that financial literacy is particularly low among the young, women, and the less-educated. Moreover, Hispanics and African-Americans score the least well on financial literacy concepts. Interestingly, all groups rate themselves as rather well-informed about financial matters, notwithstanding their actual performance on the key literacy questions. Finally, we show that people who score higher on the financial literacy questions are also much more likely to plan for retirement, which is likely to leave them better positioned for old-age. Our results will inform those seeking to target financial literacy programs to those in most need.