Changes in pensions

Many pensions reforms in European countries

Reliance on individual responsibility

“The Great Risk Shift”

A new way to assess saving decisions: 4 pieces of evidence

Lack of retirement planning

Lack of information about components of a saving plan

Lack of financial literacy

Lack of financial advice from experts

Retirement Planning (age 50+)Tried to plan

Have you ever tried to figure out how much your household would need to save for retirement?

Yes (31.1%) No (67.8%)

Developed a plan

Have you developed a plan for retirement saving?

Yes (58.4%) More or Less (9.0%) No (32.0%)

Stuck to the plan

How often have you been able to stick to the plan?

Always (37.7%) Mostly (50.0%) Rarely 8% Never 2.6%

Prevalence of retirement planners

Retirement Planning

“How much have you thought about

retirement?”

Hardly at AllA little SomeA lot

Distribution of Early Baby Boomers’ (51-56) Net Worth by Planning

Group % of Sample

25th Percentile

Median 75th

PercentileMean

Planning

Hardly at All 27.9% 9,000 79,000 271,000 315,580

A Little 17.0% 62,800 173,400 390,500 356,550

Somewhat 27.7% 51,000 189,000 447,200 365,350

A Lot 27.4% 54,000 199,000 470,000 517,250

Information about pensions and SS

Pensions and SS wealth accounts for 50% of total net worth for median household

Half of older workers (50+) do not know their pension in the US They do not even know which pension they have

(Gustman, Steinmeier, Tabatabai 2008) Similar evidence in Chile and Sweden

Much less than 50% of older workers know about SS

Only 18% of all workers know the correct age at which they are entitled to full SS benefits

Financial literacy

Several surveys have documented financial illiteracy (NCEE, Jump$tart Coalition, Survey of Consumer, SHARE)

2004 HRS module on planning and literacy by Lusardi and Mitchell NLSY and Rand American Life Panel have a similar module

Dutch Central Bank and Bank of Italy have a similar module on financial literacy (also surveys from World Bank)

Assessing Numeracy

Compound Interest“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.

Assessing Financial Literacy

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 with the money in this account:”

i) More than today;

ii) Exactly the same;

iii) Less than today;

iv) DK;

v) Refuse to answer.

Assessing Financial Literacy

Stock Risk

“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 to answer.

How much do older people (ages 50+) know?

NB: Only ONE THIRD (34%) correctly answer all 3 questions; only around HALF (56%) correctly answer Inflation & Compound Interest.

Financial advice

Most individuals rely on family and friends Particularly those with low literacy

Even “planners” use simple planning tools and some use no tools at all!

Many workers state they would be reluctant to follow suggestions of advisors (2007 Retirement Confidence Survey)

Financial Literacy and Sources of Advice (Internet survey, all ages, Dutch data)

Levels of Financial literacy

1st (low) 2nd 3rd 4th (high)

Parents, friends, acquaintances 40.7 37.4 19.9 17.9

Information from newspapers 1.1 6.0 10.6 13.7

Financial magazines, books 2.1 7.6 9.7 17.0

Brochures from my bank 6.6 6.7 11.3 6.2

Advertisement on TV 4.0 3.6 5.0 1.4

Professional advisers 19.4 23.6 27.5 24.1

Fin. Computer programs 0.2 0.3 1.1 0.5

Fin. Information on Internet 6.3 6.6 7.6 12.4

Other 19.7 8.2 7.3 6.9

Takeway points

Financial literacy cannot be taken for granted.

Individuals are grossly un-informed about pensions

Individuals do not rely on experts to overcome lack of knowledge and lack of information

The costs of ignorance and lack of planning

Financial literacy affects saving/investment decisions Those with low literacy are less likely to plan for retirement

(Lusardi and Mitchell (2006, 2007)) Those with low literacy are less likely to participate in the

stock market (many papers) Those with low literacy are more likely to borrow at high

costs (Lusardi and Tufano, 2008)

Retirement planning affects wealth accumulation Lusardi and Mitchell (JME, 2007) and Ameriks et al. (QJE,

2003)

Implications for public policy

Simplify decisions and products (choice architecture) Set up good “nudges”

Automatic enrollment into pensions To guarantee some pension at retirement and make

interest compounding work in favor of saving

Financial education It is a complement not a substitute to a good “architecture” Similarity with a driving license

If you want to read more on these topics

Other papers I have written on this topic are available on my web pages: 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.

I write a blog on financial literacy: http://annalusardi.blogspot.com/