Context

There is an increasing onus on individuals to make well-informed financial decisions in the face of progressively risky and globalised financial markets. A transformation of pension savings schemes around the world from defined benefit to defined contribution schemes has largely shifted the responsibility for effective retirement planning from organisations to individuals. This places much greater importance on individuals to be financial literate; that is to understand economic information and make informed financial decisions. Effective retirement planning is associated with greater wealth accumulation and, in turn, the key reason people fail to plan for retirement is that they are ‘financially unsophisticated’, underpinned by financial literacy (Lusardi and Mitchell, 2011; p8). Financial literacy is widespread in both developed and rapidly changing financial markets, however, older people are particularly likely to overestimate how well informed they are financially.

The study

The study provides an overview of levels and patterns of financial literacy in eight countries worldwide using questions based closely on the US Health Retirement Study implemented in national surveys. The questions require respondents to make simplified calculations covering three core economic concepts:

• interest compounding;
• inflation; and
• risk diversification.

Since their initial implementation in 2004, the measures have been included and validated in several US surveys of people of different ages, although they are susceptible to measurement error. The study was undertaken for the US National Bureau of Economic Research (NBER) and was part-funded by a grant from Netspar and the Pension Research Council and Boettner Center, Wharton School, University of Pennsylvania.

Key findings

Based exclusively on the three survey questions:

• Financial illiteracy is widespread even in countries with well-developed financial markets, although there are notable differences across countries.
• In particular, people tend to be more knowledgeable about inflation if their country has experienced high inflation compared with deflation, and more knowledgeable about risk diversification if their country has recently experienced privatisation.
• Financial literacy is highest mid-lifecycle, and lowest among younger and older populations, most likely as a result of ageing (rather than cohort) effects.
• Except in Russia and east Germany (where men and women are equally literate), women tend to score more poorly on financial literacy measures.
• Financial literacy is higher for people with higher educational qualifications. Nonetheless, education is not a good proxy for financial literacy, and their effects are independent.
• Financial literacy is higher for respondents in work.
• Depending on the country, there are also differences by ethnicity, region and area of residence and religion.
• Younger people and women are more likely to acknowledge a lack of knowledge, in contrast with older people who tend to rate their knowledge highly.
• The conclusions from the country studies examined show that financial literacy is an important predictor of retirement planning, for both instrumented and non-instrumented empirical models.
• Across the countries, answering one additional financial question correctly increased the likelihood of planning for retirement by 3 to 4 percentage points.

Additionally, in most countries, higher rates of retirement planning are predicted by higher financial literacy independently of socio-demographic and socio-economic characteristics and in some countries it was possible to identify ordering (implying causal) effects.

Points to consider

• The authors note the measures’ susceptibility to measurement error, primarily through respondents guessing a correct answer when they do not know what a term means. This report provides an overview of results only. Figures are not given and there is no mention of effective sample sizes, sampling or weighting strategies or any indication that statistical significance testing has been undertaken, except in relation to multivariate regression analyses.
• The study is highly relevant for understanding base levels and variations in population-wide financial literacy, and linking financial literacy to one key financial capability outcome, retirement planning.
• The research is limited to a snapshot of a selection of the 33 2016 IMF advanced economies: Germany, Italy, Japan, Netherlands, New Zealand, Russia, Sweden, US. As such, findings may quickly become outdated, particularly where intervention either serves to improve financial literacy in particular target groups or changes the retirement planning landscape. The findings have limited applicability to countries characterised by different (e.g. developing) economies.

Full report

Financial literacy around the world - full report