1. Gender and Financial Literacy: How Much Do Women Know? Annamaria Lusardi Dartmouth College & NBER Presentation to the Herman Colloquium University of Michigan November 3, 2008

2. Significance This paper is part of a larger research project on financial literacy Individuals are increasingly in charge of making saving and investment decisions  Changes in the pension landscape Are people well-equipped to make these decisions?  NO!

3. How do women fare? Women have specific needs  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. Women are a vulnerable group  Death of a spouse often precipitate women into poverty (Willis and Weir, 2000)

4. How much do people know and does knowledge matter? Olivia Mitchell (Wharton School) and I 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?

5. Measuring 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.

6. 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.

7. 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.

8. 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.

9. Financial Literacy among older women (50+) (HRS module, N= 785) Responses CorrectIncorrectDKRefuse Interest rate61.9%24.7%11.6%1.8% Inflation70.6%14.5%12.8%2.1% Risk diversif.47.6%12.0%39.6%0.8%

10. Correct responses: By Gender

11. Financial literacy among the young These questions have now been added to many other surveys in the US and abroad Evidence on financial literacy from wave 11 of the National Longitudinal Survey of Youth (2007-2008) Respondents are 23-27 years old

12. How much do young people (ages 23-27) know? Distribution of Responses to Financial Literacy Questions (%) NB: Only LESS THAN HALF (45%) correctly answer all 3 questions; only around TWO THIRDS (60%) correctly answer at least two questions. Responses CorrectIncorrectDKRefuse Interest rate79.2414.765.870.12 Inflation53.8830.5315.410.18 Risk diversif.46.5715.8637.50.07

13. Correct responses: By Gender

14. Knowledge or cognition? Use data on test score (ASVAB – Armed Services Vocational Aptitudes) in the NLSY Gender differences still exist even after accounting for test scores

15. Gender Differences in Debt Literacy Together with Peter Tufano (HBS), I designed questions about debt literacy We engaged a market research firm (TNS) to provide timely data  TNS is leader firm in opinion polling  Representative sample of US population

16. More on the power of interest compounding (TNS) Suppose you owe $1,000 on your credit card and the interest rate you are charged is 20% per year compounded annually. If you didn’t pay anything off, at this interest rate, how many years would it take for the amount you owe to double? -2 years -Under 5 years -5 to 10 years -More than 10 years -Do not know -Prefer not to answer

17. Paying off credit card debt Suppose you owe $3,000 on your credit card. You pay a minimum payment of $30 each month. At an Annual Percentage Rate of 12% (or 1% per month), how many years would it take to eliminate your credit card debt if you made no additional new charges? -Less than 5 years -Between 5 and 10 years -Between 10 and 15 years -Never, -Do not know -Prefer not to answer

18. Who has lower debt literacy? Differences between men and women Percent answering credit card question correctly or “do not know” by gender

19. Measuring Financial Literacy On a scale of 1(very low) to 7 (very high), how would you assess your overall financial knowledge? Very low Medium Very high

20. Gender Differences in Self-Reported Literacy On a scale of 1(very low) to 7 (very high), how would you assess your overall financial knowledge?

21. People who make errors have “difficulties paying off debt.” Grossly underestimate compounding

22. 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?

23. 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.%

24. Retirement Planners QuestionProportion 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%

25. Does financial literacy matter? Are the more financially literate women :  more likely to plan?  more likely to succeed in planning?

26. 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 R 2.123.139.144

27. 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.

28. Financial Literacy Initiative Work with US Treasury/FINRA to design a survey on financial capability Started a project at Dartmouth to help employees make saving decisions Write a blog dedicated exclusively to financial literacy

29. What to do given widespread illiteracy? The Dartmouth Project Simplify financial decision Provide information and advice Target specific groups Use communication that does not rely on figures and numeracy

31. Most people plan on electing a supplemental retirement account, but feel they don’t have the time or information right now. We have outlined 7 simple steps to help you complete the election process. It will take between 15 – 30 minutes, from start to finish. It will take less time for you to start to insure your future than it takes you to unload your dishwasher! Don’t give up! Contact the Benefits Office (6-3588) if for any reason you could not complete the online application. It takes no time to prepare for your lifetime!

32. b I do not know how much I will need Don’t know where to put $$ Don’t know how to use FlexOnline Few people like me do it. Obstacles to Opening a Supplemental Retirement Account (SRA) I can’t afford $$ Too many unexpected expenses I have no time now I do not have a computer My debt is too expensive

33. Log ID & PIN are in your packet More than 60% of employees contribute Solutions to Opening a Supplemental Retirement Account (SRA) You can start with only $16 per month Make an investment selection now. You can change it at anytime With the tax benefit you will save even more Bring lunch 2/month Carpool Skip the latte Start early & your money will grow fast Computers are available at HR and the library Use an online investment calculator Provided by Annamaria Lusardi, Economics, and Punam Anand Keller, Tuck School of Business, in conjunction with the Retirement Savings Study.

34. More on Financial Literacy  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.  Initiative in progress dedicated to women