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.