Post on 25-Dec-2015
Planning and Financial Literacy: How Do Women Fare?
Annamaria LusardiDartmouth College & NBER
Olivia S. MitchellUniv. of Pennsylvania & NBER
Presentation to the World Bank, January 24, 2008
Significance
This paper is part of a larger research project on financial literacy and retirement security
Individuals are increasingly in charge of making saving and investment decisions Are they well-equipped to make these decisions?
How do women fare?
Women are a particularly important group Women live longer than men, thus savings need
to last a long time Because of shorter labor market tenures, women
are less likely to have pensions or have less experience with pensions.
Are women well equipped to make or continue to make financial decisions?
To evaluate these questions:
We devised a module on Financial Literacy & Planning for the 2004 Health and Retirement Study (HRS)
Financial Literacy- Do women know basic economics/finance?
Planning- Do women calculate how much they need to save for retirement? How well do they plan?
3 questions on Financial Literacy: (I)
Interest Rate/Numeracy“Suppose you had $100 in a savings account
and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow?”
i) more than $102; ii) exactly $102; iii) less than $102; iv) don’t know (DK); v) refuse to answer.
Financial Literacy (II)
Inflation
“Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, would you be able to buy:”i) more than today with the money in this account;
ii) exactly the same as;
iii) less than today
iv) DK;
v) refuse.
Financial Literacy (III)
Risk Diversification
“Do you think the following statement is true or false? Buying a single company stock usually provides a safer return than a stock mutual fund.”i) true;
ii) false;
iii) DK;
iv) Refuse.
Financial Literacy among older women (50+)(HRS module, N= 785)
Responses
Correct Incorrect DK Refuse
Interest rate 61.9% 24.7% 11.6% 1.8%
Inflation 70.6% 14.5% 12.8% 2.1%
Risk diversif. 47.6% 12.0% 39.6% 0.8%
Distribution of Responses Across Gender
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
80.00%
90.00%
Responses
Pro
po
rtio
n o
f G
ive
n R
es
po
ns
es
Male
Female
Male 74.70% 18.60% 6.10% 82.20% 11.50% 5.70% 59.30% 14.80% 24.90%
Female 61.90% 24.70% 11.60% 70.50% 14.70% 12.70% 47.50% 12.30% 39.40%
Correct Incorrect DK Correct Incorrect DK Correct Incorrect DK
Compound Inflation Stock Risk
Measuring Financial Literacy
We have inserted these questions in:• Rand American Life Panel • NLSY• Marketing Surveys • Dutch DNB Survey
We have devised a wider set of questions to measure literacy and financial sophistication. We find similar results.
We have surveyed the evidence on literacy in the US and in other countries and find similar evidence of widespread illiteracy among women (Lusardi and Mitchell, Business Economics 2007).
3 questions on Retirement Planning
Trying to plan
“Have you ever tried to figure out how much your household would need to save for retirement?”
Developing a plan
“Have you developed a plan for retirement saving?”
Sticking to the plan
“How often have you been able to stick to this plan? Would you say:”i) always; ii) mostly; iii) rarely; or iv) never?
What we find:
Tried
Have you ever tried to figure out how much your household would need to save for retirement?
Yes (30.9%) No (68.2%)
Developed a plan
Have you developed a plan for retirement saving?
Yes (58.5%) More or Less (7.3%) No (34.2%)
Stuck to the plan
How often have you been able to stick to the plan?
Always (31.8%) Mostly (53.9%) Rarely 9.1 Never 3.2.%
Retirement Planners
Question Proportion
Simple Planners
Tried to figure out how much to save (yes)
30.9%
Serious Planners
Developed a plan (yes/more or less)
20.3%
Committed Planners
Able to stick to plan (always/mostly)
17.4%
Does financial literacy matter?
Are the more financially literate women : more likely to plan? more likely to succeed in planning?
Probit Analysis of Simple, Serious, and Committed Planners : Accounting for Differences in Demographic Characteristics
Simple Planners
Serious Planners
Committed Planners
Correct on Interest Rate
Correct on Inflation
Correct on Risk Diversificat.
.014 (.042)
.065 (.045)
.095 (.05)*
.003 (.032)
.029 (.036)
.093 (.042)**
-.001 (.029)
.028 (.032)
.061 (.038)*
DK Interest Rate
DK Inflation
DK Risk Diversification
-.182 (.05)**
.054 (.094)
-0.056 (.055)
-.122 (.043)*
.021 (.078)
-.037 (.045)
-.100 (.038)*
.050 (.079)
-.045 (.040)
Pseudo R2 .123 .139 .144
The relationship between literacy and planning
We address reverse causality in another paper using financial literacy in the distant past as an instrument for current literacy.
We find similar results in another paper: “Baby Boomer Retirement Security: The Roles of Planning, Financial Literacy and Housing Wealth” (JME, 2007) which uses different measures of planning and financial literacy.
More on Financial Literacy
Other papers we have written on this topic are available on our web pages: http://www.pensionresearchcouncil.org/ http://www.dartmouth.edu/~alusardi
I edited a book “Overcoming the saving slump: How to increase the effectiveness of financial education and saving programs” for the University of Chicago Press that discusses these topics at length.