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Working Paper
WP 2006-144
Project #: UM06-05
MR
RC
Financial Literacy and Retirement
Preparedness: Evidence and Implications for
Financial Education
Annamaria Lusardi and Olivia S. Mitchell
Michigan
University o
f
Research
Retiremen
t
Center
“Financial Literacy and Retirement Preparedness: Evidence
and Implications for Financial Education Programs”
Annamaria Lusardi
Dartmouth College and NBER
Oiliva S. Mitchell
Wharton School
December 2006
Michigan Retirement Research Center
University of Michigan
P.O. Box 1248
Ann Arbor, MI 48104
http://www.mrrc.isr.umich.edu/
(734) 615-0422
Acknowledgements
This work was supported by a grant from the Social Security Administration through the
Michigan Retirement Research Center (Grant # 10-P-98358-5). The findings and
conclusions expressed are solely those of the author and do not represent the views of the
Social Security Administration, any agency of the Federal government, or the Michigan
Retirement Research Center.
Regents of the University of Michigan
David A. Brandon, Ann Arbor; Laurence B. Deitch, Bingham Farms; Olivia P. Maynard, Goodrich;
Rebecca McGowan, Ann Arbor; Andrea Fischer Newman, Ann Arbor; Andrew C. Richner, Grosse Pointe
Park; S. Martin Taylor, Gross Pointe Farms; Katherine E. White, Ann Arbor; Mary Sue Coleman, ex
officio
Financial Literacy and Retirement Preparedness: Evidence and
Implications for Financial Education Programs
Annamaria Lusardi and Olivia S. Mitchell
Abstract
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 computations, 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.
Authors’ Acknowledgements
We thank Chetan Mehta for outstanding research assistance but opinions and errors are solely
those of the authors and not of the institutions with whom the authors are affiliated. © 2006
Lusardi and Mitchell. All Rights Reserved.
Financial Literacy and Retirement Preparedness:
Evidence and Implications for Financial Education Programs
Workers and retirees have increasingly been asked to take on an unprecedented degree of
responsibility for their retirement and other saving, as defined benefit pensions decline and
government programs face insolvency in one country after another. As a result, consumers now
confront a bewildering array of financial decisions and a wide range of financial products
ranging from 401(k) plans to Roth to regular Individual Retirement Accounts, phased withdrawal
plans to annuities, and many more. This process implies that it is becoming ever more important
for households to acquire and manage economic know-how. But in practice, there is widespread
financial illiteracy; many households are unfamiliar with even the most basic economic concepts
needed to make sensible saving and investment decisions. This has serious implications for
saving, retirement planning, retirement, mortgage, and other decisions, and it highlights a role for
policymakers working to boost financial literacy and education in the population. As one
example, the Organization for Economic Cooperation and Development (OECD, 2005) defines
“financial education” as:
“The process by which financial consumers/investors improve their understanding of
financial products and concepts and, through information, instruction, and/or objective
advice, develop the skills and confidence to become more aware of financial risks and
opportunities to make informed choices, to know where to go for help, and to take other
effective actions to improve their financial well-being.”
Building upon this definition, we provide a review of the current state of financial literacy and
financial education programs, and we discuss whether consumers/investors appear to possess the
financial literacy necessary to process financial information and formulate adequate saving plans.
We also offer some examples of efforts to enhance financial literacy.
2
U.S. Evidence on Financial Literacy
Economists have undertaken several recent studies of financial literacy in the United
States. For instance, a survey conducted for the National Council on Economic Education
(NCEE) by Harris Interactive in 2005 indicated that nearly all US adults believe that it is
“important to have a good understanding of economics.” But despite this lofty goal, the evidence
shows that actual financial knowledge was sorely deficient for both high school students and
working-age adults. The survey consisted of a 24-item questionnaire on topics grouped into
categories including “Economics and the Consumer;” “Money, Interest Rates and Inflation;” and
“Personal Finance.”1 When results were tallied using standard grading criterion, adults had an
average score of C while the high school population fared worse, with most earning an F
(average score of 53%). Particularly troublesome were the sections dealing with money, interest
rates, inflation, government and trade, and personal finance. The report also indicated gender
and minority gaps: White students and adults tended to score higher than their Black and
Hispanic peers and women scored lower than men.
Low levels of financial literacy are confirmed by related research by the Jump$tart
Coalition for Personal Financial Literacy focusing on US high school students (Mandell, 2004).
That group’s biannual survey on basic personal financial management skills and how to improve
them showed that students fared poorly on credit management and personal finance questions,
and they also knew little about stocks, bonds, and other investments in 2004 and 2006.
Americans’ lack of financial knowledge has been confirmed in the larger population by
Hilgert and Hogarth (2002) who used data from the University of Michigan’s 2001 Survey of
Consumers focusing on respondents age 18-97. Some 1000 respondents were given a 28-
1 Some of the questions include the following: “Where do most people derive the largest portion of their personal
income?”; “What are business most likely to do when banks reduce their interest rates?”; and “Why do people
prefer to buy mutual funds rather than stocks in individual companies?”
3
question True/False Financial Literacy quiz, with questions examining knowledge about credit
(e.g. credit card statements, APR, debt payments); saving patterns (e.g. interest rates, mutual
funds, insurance); mortgages (e.g. interest rate fluctuations, refinancing, use of one’s home as
collateral); and general financial management (e.g. emergency funds, employer responsibilities
in retirement, bank obligations). Overall, that study found that Americans could correctly answer
only two-thirds of the questions. They were best informed regarding mortgages (81% correct
responses), followed by saving patterns (67% correct), credit cards (65% correct), and general
financial management (60% correct). Respondents were less knowledgeable about mutual funds
and the stock market: only half knew that mutual funds do not pay a guaranteed rate of return,
and 56% knew that “over the long-term, stocks have the highest rate of return on money
invested.” On dividing respondents into two groups, those more and those less financially
knowledgeable, the study confirmed that less financially knowledgeable respondents were more
likely to be single, relatively uneducated, relatively low income, minority, and either young or
old (not middle aged).
To explore the financial literacy issue in more depth, we have devised and fielded a
purpose-built module on planning and financial literacy for the 2004 Health and Retirement
Study (HRS), a survey that covers respondents over the age of 50 (Mitchell and Lusardi, 2006a).
This module includes questions measuring how workers made saving decisions, how they
collected the information for making these decisions, and, most importantly, whether they
possessed the financial literacy needed to make informed decisions. Our research shows that only
half of the HRS respondents surveyed could answer two simple questions regarding interest
compounding and inflation correctly. Furthermore only one-third could correctly answer those
two questions as well as an additional one on risk diversification. We also found that financial
4
illiteracy was particularly acute for Blacks and Hispanics, women, and those with low
educational attainment.
In related work, we employ data from the 2004 HRS to evaluate whether Baby Boomers
are relatively well informed about financial matters (Mitchell and Lusardi 2006b). Specifically
we focus on some 1,700 Early Boomers age 51-56 in 2004. The following financial literacy
questions are posed to these respondents:
1) “If the chance of getting a disease is 10 percent, how many people out of 1,000
would be expected to get the disease?”
2) “If 5 people all have the winning number in the lottery and the prize is 2
million dollars, how much will each of them get?”
For respondents who answered either the first or the second question correctly, the following
question was asked:
3) “Let’s say you have 200 dollars in a savings account. The account earns 10
percent interest per year. How much would you have in the account at the end of
two years?”
We call these variables, respectively, the “Percentage Calculation,” the “Lottery Division,” and
the “Compound Interest” questions. We also determine whether the respondent could be deemed
“Political Literate,” by considering a question on whether he knew the names of the US President
and Vice President.
Table 1 summarizes how this group of Boomers answered the economic and political
literacy questions. The good news is that over 80% got the Percentage Calculation question
correct. But only about half could divide $2 million by 5 to get the Lottery Division right. And
more distressingly, only 18% correctly computed the compound interest question; of those who
got that interest question wrong, 43% undertook a simple interest calculation, thereby ignoring
the interest accruing on both principal and interest. These are uncomforting findings, especially
5
considering that these respondents are only a dozen years from retirement and, one surmises,
handled numerous financial decisions during their lives. It is also worth noting that fully one-
fifth of the sample could not name either the US President or Vice President.
Further details on financial literacy appear in Figure 1, which reports the distribution of
correct responses for respondents in different educational and racial/ethnic groups. For all four
measures, financial literacy rises steeply with education: the more educated are much more likely
to answer the economic and political literacy queries correctly. Moreover, Blacks and Hispanics
are less likely to answer correctly than Whites. There are also similarities across answers. For
instance, all three racial/ethnic groups score over 50% on the percentage calculation, but all three
score low on the compound interest question.
Our findings confirm those provided by Bernheim (1995, 1998), who was among the first
to warn of the lack of financial literacy among savers and investors. It also confirms studies of
smaller and more limited samples. For example, the State of Washington sponsored a survey to
assess financial literacy among its residents (Moore, 2003), and concluded that people know the
least about financial instruments. Specifically, most respondents did not know the inverse
relationship between bonds prices and interest rates. They were also uninformed about mutual
funds, as many did not know what a no-load mutual fund was, or that mutual funds do not pay a
guaranteed rate of return. More than one-third did not know that stocks had returned more than
bonds over the last forty years, and many did not know about risk diversification. Finally, a
large fraction of these respondents did not understand interest rates, which was especially
troublesome since a subset of the respondents had applied for loans.
Similar findings are reported by Agnew and Szykman (2005), who devised a financial
literacy survey as part of an experiment held at a mid-size public university in the Southeast
6
designed in the spirit of a John Hancock Financial Services Defined Contribution Plan Survey
(2002). Their respondents produced similar patterns: college employees, tourists, parents of
students, and local construction workers, all knew little about mutual funds and they could not
explain even simple differences between stocks, bonds, and money market mutual funds. This
research also confirmed conclusions from surveys conducted by the Employee Benefit Research
Institute. For example, their survey in 1996 showed that only 55 percent of workers knew that
US government bonds provided lower returns over the past 20 years, compared to the US stock
market.
International Evidence on Financial Literacy
Evidence from outside the United States on financial literacy is no more comforting. In
2005, the ANZ Banking Group conducted an extensive survey on the financial practices of
consumers in Australia and New Zealand. The Australian survey of some 3,500 randomly chosen
respondents age 18+ evaluated understanding of topics ranging from investment fundamentals,
retirement planning and financial records, to basic arithmetic. In the Financial Terms section of
the survey, 67% of respondents said they understood compound interest, but a mere 28% were
rated as having a “good level” of comprehension when faced with an actual problem to solve. As
in the United States case, those with low levels of financial literacy also had low education and
income. This survey also confirmed the gender gap, with women concentrated in the lowest 20%
of the literacy distribution. In the New Zealand survey of respondents age 18+, similar results
obtained. Some 54% of respondents believed that fixed income investments would provide
higher returns than stocks over an 18-year period, and again financial literacy was strongly
positively correlated with socio-economic status.
7
The results extend to Europe, where Miles (2004) showed that UK borrowers display a
weak understanding of mortgages and interest rates. The UK Financial Services Authority also
concluded that younger people, those in low social classes, and those with low incomes, were the
least sophisticated financial consumers. Christelis, Jappelli, and Padula (2005) documented that
respondents in several European nations scored low on financial numeracy and literacy scales.
Meanwhile, on the other side of the Pacific, a Japanese consumer finance survey showed
that 71% of adult respondents knew little about equity and bond investments, and more than 50%
lacked any knowledge of financial products (OECD 2005). A Korean youth survey in 2000
conducted by the Jump$tart coalition showed that young Koreans fared no better than their
American counterparts when tested on economics and finance knowledge, with most receiving a
failing grade. Again, a positive correlation was detected between family income and education,
and the students’ performance on the financial literacy test (OECD, 2005).
While financial knowledge is weak, it is also the case that people tend to be more
confident in their abilities than should be warranted. For instance, a German survey conducted by
Commerzbank AG in 2003 found that 80% of respondents were confident in their understanding
of financial issues, but only 42% could answer half of the survey questions correctly (OECD,
2005). Similar patterns obtain in the United States, the United Kingdom, and Australia. Indeed,
consumer overconfidence regarding their financial knowledge may be a deterrent to seeking out
professional advice, thus widening the ‘knowledge gap’.
Linking Financial Literacy and Economic Behavior
While the low levels of financial literacy are troubling in and of themselves,
policymakers are most concerned because of the potential implications of financial illiteracy for
8
economic behavior. One example is offered by Hogarth, Anguelov, and Lee (2005), who
demonstrate that low educated consumers are disproportionately represented amongst the
“unbanked,” those lacking any kind of transaction account.
To examine further how financial illiteracy is tied to economic behavior, we use the 2004
HRS to connect financial knowledge to retirement planning abilities (Lusardi and Mitchell
2006b). Table 2 reveals that, for this population over the age of 50, those who are more
financially knowledgeable are also much more likely to have thought about retirement. Further,
planners are most likely to know about of interest compounding, which makes sense inasmuch as
it is critical for effective saving plans. Even after accounting for factors such as education,
marital status, number of children, retirement status, race, and sex , we still find that financial
literacy plays an independent role: those who understand compound interest and can do a simple
lottery division are much more likely to have planned for retirement. This is important, since in
related work, we show that lack of planning is tantamount to lack of saving (Lusardi and
Mitchell, 2006a; Lusardi, 1999).
Other authors have also confirmed the positive association between knowledge and
financial behavior. For example, Calvert, Campbell, and Sodini (2005) find that more financially
sophisticated households are more likely to buy risky assets and invest more efficiently. Kimball
and Shumway (2006) report a large positive correlation between financial sophistication and
portfolio choice. Hilgerth, Hogarth, and Beverly (2003) also document a positive link between
financial knowledge and financial behavior.
Campbell (2006) has highlighted how household mortgage decisions, particularly the
refinancing of fixed-rate mortgages, should be understood in the larger context of ‘investment
mistakes’ and their relation to consumers’ financial knowledge. This is a particularly important
9
topic, given that most US families are homeowners and many have mortgages. The sad reality is
that many households are confused about the terms of their mortgages. Campbell (2006) also
finds that younger, smaller, better-educated, better-off White consumers with more expensive
houses were more likely to refinance their mortgages over the 2001-2003 period when interest
rates were falling. His findings are confirmed by Bucks and Pence (2006), who examine whether
homeowners know the value of their home equity and the terms of their home mortgages. They
show that many borrowers underestimate the amount by which their interest rates can change and
that low-income, low-educated households are least knowledgeable about the details of their
mortgages (especially those with adjustable rate mortgages). Further evidence of biases is
provided by Stango and Zinman (2006) who well document the systematic tendency of people to
underestimate the interest rate associated with a stream of loan payments. The consequences of
this bias are important: those who underestimate the annual percentage rate (APR) on a loan are
more likely to borrow and less likely to save.
Consumers are not only poorly informed about mortgages or incorrect about interest
rates, but they know little about Social Security and pensions, two of the most important
components of retirement wealth. Close to half of workers in the HRS sample analyzed by
Gustman and Steinmeier (2004) could not report their type of pension plan, and an even larger
portion was ignorant of future Social Security benefits, confirming earlier findings from Mitchell
(1988). There is mounting evidence that knowledge about pensions and Social Security affects
retirement decisions (Chan and Huff Stevens (2003) and Mastrobuoni (2005)).
Programs Aimed at Fostering Retirement Saving
10
Responding to reports of widespread financial illiteracy and workers’ undersaving, some
employers have begun to offer employees with financial education in the workplace. For
instance, retirement seminars are often provided by firms which offer defined contribution
pensions (DC) in order to enhance employee interest in and willingness to participate in these
voluntary saving programs. Whether such programs have an impact is, of course, a key question.
The idea is that if seminars provide financial information and improve financial literacy,
they should reduce workers’ planning costs and thus enhance retirement saving. Yet it is difficult
to evaluate the impact of such retirement seminars for several reasons. One is that participation
in these seminars is generally voluntary, so workers who attend them probably differ from those
who do not (for instance, they may have more retirement wealth and thus, stand to benefit
differently from seminars than low wealth workers). Another is that workers who participate in a
retirement seminar may also be more patient or diligent, personal characteristics associated with
higher wealth accumulation. Third, as noted by Bernheim and Garrett (2003), employers may
offer retirement education as a remedial device, when they perceive workers to be undersaving.
This leads to a negative rather than positive correlation between seminars and seminars. These
complexities have meant that few researchers have been able to sort out the effects of seminars
cleanly, and empirical findings are mixed.2
Fortunately, the HRS can overcome some of these data challenges. For instance, Lusardi
(2002, 2004) posits that if financial education is offered to those who need it most, the saving
impacts would be strongest among the least educated and least wealthy. As shown in Table 3, the
HRS data bear this out: retirement seminars are found to have a positive wealth effect mainly in
the lower half of the wealth distribution and particularly for the least educated. Estimated effects
2 See, among others, McCarthy and Turner (1996), Bernheim (1995, 1998), Bayer, Bernheim and Scholz (1996),
Clark and Schieber (1998), Muller (2000), Clark and D’Ambrosio (2002), Clark, D’Ambrosio, McDermed and
Sawant (2003) and Bernheim and Garrett (2003).
11
are sizable, particularly for the least wealthy, for whom attending seminars appears to increase
financial wealth (a measure of retirement savings which excludes housing equity) by
approximately 18%. This effect derives mainly from the very poorest, where wealth increased by
more than 70%. The effect of financial education is also large for those with low education,
where financial wealth rose almost 100%. Of course these large percentage changes are
measured off a low base, of only about $2000 (Lusardi, 2004). Other authors have also suggested
that financial education can be effective when targeted at the least well off. For instance, Caskey
(2006) finds that personal financial management education has positive impacts on the wealth
and credit patterns of low- and moderate-income households.
Yet even when the impacts work in the predicted direction, they can be rather small in
dollar terms. Thus Duflo and Saez (2003; 2004) focus on non-faculty employees at a large
university who where given financial incentives to participate in an employee benefits fair. The
authors compared pension participation and contributions in that group with that of employees
not induced to participate. Overall, they found that the program had fairly small effects:
attending the fair did induce more employees to participate in the pension, but the increase in
contributions was negligible. And good intentions do not always translate into desired behavior.
For instance, Clark and D’Ambrosio (2002) and Clark, D’Ambosio, McDermed and Sawant
(2003) report that exposing workers to retirement seminars does influence workers stated desire
to save more. Yet several authors, including Choi, Laibson, Madrian and Metrick (2004) and
Madrian and Shea (2001), show that seminar participants who say they will start contributing to
pensions or boost their contributions often fail to do so, in practice.
Further findings on the impact of financial education programs are available from
Schreiner, Clancy, and Sheradden (2002). That project studied the effectiveness of Individual
12
Development Accounts (IDAs), which are subsidized savings accounts targeted on the poor that
provide matching contributions if the balance is used for a specific purpose (e.g. home purchase,
starting a business, etc.). As part of the American Dream Demonstration, that study included
2,364 participants (in 2001) age 13-72, of whom 80% were female. The project had a financial
education component, and the authors found that those with no financial education saved less
than those exposed to the educational program. But the effect was nonlinear: after 8–10 hours of
financial education, the result tapered off with no appreciable additional increases in saving after
that.
Historical Evidence and Privatization Episodes
There are historical precedents for a governmental role in the design and implementation
of programs aimed at increasing saving. For example after WWII, the Japanese government
sought to build a saving culture among its citizens. Accordingly it launched a national campaign
to promote saving (Bernheim,1991), with public interest agencies including the Central Council
of Savings Promotion and media dissemination techniques (leaflets and booklets, posters,
advertisements, films, magazines etc) to instill “values of conservatism and frugality” in the
Japanese population. This campaign built on the Japanese bonus or lump sum system (almost
16% of employee compensation during the 1950s came from these bonuses), and it led financial
institutions to court savers aggressively at bonus time with advertising campaigns and new
financial instruments. Most households made it a rule to save half of their annual bonus, and
Bernheim (1991) argues that this initiative may have played a role in Japan’s high saving rate
over the last several decades.
13
Government involvement in financial education programs has also become important in
light of many state pension reforms. For example, Sweden recently implemented an individual
defined contribution individual account scheme as part of its social security system, giving
workers responsible for investing part of their retirement money in capital markets. Contributors
had to select from approximately 460 fund companies; the number of funds then burgeoned to
more than 650 by 2004 (Sunden, 2004). The government also established a ‘default’ plan for
participants who did not wish to make an active investment choice. Initially, to inform and
educate the population about the new pension system, the National Social Insurance Board
launched a major information campaign, and over two-thirds of participants made an active
investment choice. But subsequently the educational effort declined and the fraction making an
active investment election fell to only about 10% of participants.
Another state pension reform which has required workers to make financial decisions is
the much-vaunted individual account system in Chile, where a national mandatory defined
contribution system was implemented in 1981. Workers must select a single pension
administrator to manage their money, and within that structure, they can also choose which of
five accounts they will hold their money in. Despite the fact that the system has been in place for
25 years, recent research using the Encuesta de Previsión Social (EPS) shows that participants
are woefully underinformed about their pension system (Arenas et al., 2006). For instance, most
Chilean workers do not know what they are required to contribute under the system, how much
they pay in commissions, what the rules are for minimum guaranteed pensions, or how their
funds are invested. Two-thirds of the system affiliates said they received reports on contributions
and projected future benefits, but very few could give critical details such as the tax rates and
fees they pay on the investments. Most participants also did not know their fund balances, details
14
regarding how their money was invested, or the eligibility rules for a minimum pension. As in
other cases, lack of knowledge is concentrated among those with poorer backgrounds, less
education, and women. The analysts also compared workers’ self-reports with administrative
data on actual balances and contributions, and they find that levels of pension system knowledge
are lowest among workers but highest among retirees; two-thirds of beneficiaries knew what
kind of pension they were receiving, and about the same fraction knew their benefit amount. In
general, those who knew their pension amounts were those receiving higher benefits. It is
interesting that the more knowledgeable participants are also more likely to save additional
amounts via a voluntary savings vehicle, underscoring the link between financial literacy and
retirement saving behavior. One explanation for the low levels of financial literacy in the
Chilean case is that the nation’s pension reform was initially adopted during a dictatorship and
little effort was devoted to raising awareness about the system. Most recently, the new
President’s reform commission has proposed that the government create a pension education
program to promote, spread, and teach workers about the need to save and invest for retirement
(Consejo, 2006).
Concluding Remarks
Financial literacy surveys in many developed nations show that consumers are poorly
informed about financial products and practices. This is troubling, in that financial illiteracy may
stunt peoples’ ability to save and invest for retirement, undermining their well-being in old age.
It is also concerning that these deficiencies are concentrated among particular population
subgroups – those with low income and low education, minorities, and women – where being
financially illiterate may render them most vulnerable to economic hardship in retirement.
15
While more is being learned about the causes and consequences of financial illiteracy, it
is still the case that one must be cautious when concluding that financial education has a potent
effect on retirement saving. First, a small fraction of workers ever attend retirement seminars, so
many are left untouched by this initiative.3 Second, widespread financial illiteracy will not be
“cured” by a one-time benefit fair or a single lecture on financial economics. This is not because
financial education is ineffective, but rather that the “cure” is inadequate for the problem. Third,
the finding that people have difficulty following through on planned actions suggests that
education alone many not be sufficient. Rather, it is important to give consumers the tools to
change their behaviors, rather than simply delivering financial education. Fourth, people differ
widely in their degree of financial literacy and saving patterns are very diverse (Browning and
Lusardi, 1996). Accordingly, a “one-size-fits-all” education program will do little to stimulate
saving and could even be a disincentive to participate in a financial literacy effort. For instance,
in the Washington Financial Literacy survey, most respondents stated that they would prefer
personalized ways to learn how to manage money, rather than attend information sessions
(Moore 2003).
Evidently, consumers require additional support for old-age retirement planning and
saving. Also, education programs will be most effective if they are targeted to particular
population subgroups, so as to address differences in saving needs and in preferences. As old-age
dependency ratios rise across the developed world, and as government-run pay-as-you-go social
security programs increasingly confront insolvency, these issues will become increasingly
important. So the crucial challenge is to better equip a wide range of households with the
3 For example, in the sample used by Lusardi (2004) only 13% of older workers have ever attended a seminar
offered by their employer.
16
financial literacy toolbox they require, so they can built better build retirement plans and execute
them.
17
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Table 1: Financial Literacy Among Early Baby Boomers
(HRS observations = 1,984)
Question Type Correct (%) Incorrect (%) Do Not Know (%)
Percentage
Calculation 83.5 13.2 2.8
Lottery
Division 55.9 34.4 8.7
Compound
Interest* 17.8 78.5 3.2
Political
Literacy 81.1 11.0 7.7
Notes: *Conditional on being asked the question. Percentages may not sum to 100 due to a few respondents who
refused to answer the questions. Observations weighted using HRS household weights. Adapted from Lusardi and
Mitchell (2006b).
2
Table 2: Empirical Effects of Financial Literacy on Retirement Planning
Marginal Effects Reported (HRS observations = 1,716)
Probability of Being a Retirement Planner
1 2 3
Correct Percentage Calculation
-.016
(.061) -.012
(.062) -.034
(.060)
Correct Lottery Division
.059*
(.030) .034
(.031) .001
(.032)
Correct Compound Interest
.153***
(.035) .149***
(.035) .114***
(.039)
Correct Political Literacy
.104***
(.032) .084**
(.040) .016
(.042)
DK Percentage Calculation
.021
(.068) .054
(.067)
DK Lottery Division
-.154***
(.050) -.141***
(.051)
DK Compound Interest
-.114
(.080) -.073
(.081)
DK Political Literacy
-.019
(.053) -.016
(.054)
Demographic controls No No Yes
Pseudo R2 .031 .038 .074
Note: This table reports Probit estimates of the effects of literacy on planning; marginal effects reported. Analysis
sample consists of HRS Early Baby Boomers who responded to financial literacy questions. Additional controls
include age, education, race, sex, marital status, retirement status, number of children, and a dummy variable for
those not asked the question about interest compounding. DK indicates respondent said he could not answer.
Observations weighted using HRS household weights. * Significant at 10%; ** significant at 5%; *** significant at
1%. Adapted from Lusardi and Mitchell (2006b).
3
Table 3: The Effect of Retirement Seminars on Retirement Accumulation
Total sample 1st quartile median 3rd quartile
a. Financial net worth
Total sample 17.6 %** 78.7%** 32.8%** 10.0%
Low education 19.5% 95.2%** 30.0%** 8.8%
High education 13.1% 70.0%** 19.4%** 10.2%
b. Total net worth
Total sample 5.7% 29.2%** 8.7% 0.5%
Low education 3.4% 27.0%** 7.1% 4.0%
High education 7.3% 26.5%** 6.5% 3.6%
c. Total net worth +
Pensions
Total sample 20.5%** 32.7%** 26.8%** 19.5%**
Low education 20.7%** 31.4%** 14.6%* 18.2%**
High education 19.4%** 39.3%** 31.2%** 17.6%**
d. Total net worth +
Pensions and Social
Security
Total sample 16.0%** 18.6%** 20.4%** 17.2%**
Low education 12.7%** 14.7%** 12.7%** 9.5%**
High education 17.7%** 25.4%** 25.8%** 17.0%**
Note: This table reports the percentage changes in different measures of retirement accumulation resulting
from attending retirement seminars. Adapted from Lusardi (2004)l.
* indicates that the estimates from which percentages are based are statistically significant at the 10% level
** indicates that the estimates from which percentages are based are statistically significant at the 5% level
4
Figure 1: Financial Literacy by Education and Race/Ethnicity: Early Baby Boomers (2004)
0
0.2
0.4
0.6
0.8
1
Percentage
Calculation Lottery Division Compound Interest Political Literacy
Proportion of Subgroup
Less than High School High School Some College College or More
0
0.2
0.4
0.6
0.8
1
Percentage
Calculation Lottery Division Compound Interest Political Literacy
Proportion of Subgroup
White Black Hispanic
Note: Observations weighted using HRS household weights. Source: Lusardi and Mitchell (2006b).
