Changes in pensions  Many pensions reforms in European countries  Reliance on individual responsibility  “The Great Risk Shift”

A new way to assess saving decisions: 4 pieces of evidence  Lack of retirement planning  Lack of information about components of a saving plan  Lack of financial literacy  Lack of financial advice from experts

Retirement Planning (age 50+) Tried to plan Have you ever tried to figure out how much your household would need to save for retirement? Yes (31.1%)No (67.8%) Developed a plan Have you developed a plan for retirement saving? Yes (58.4%) More or Less (9.0%) No (32.0%) Stuck to the plan How often have you been able to stick to the plan? Always (37.7%)Mostly (50.0%) Rarely 8% Never 2.6%

Prevalence of retirement planners

Retirement Planning “ How much have you thought about retirement?” Hardly at All A little Some A lot

Distribution of Early Baby Boomers’ (51-56) Net Worth by Planning Group% of Sample 25 th Percentile Median75 th Percentile Mean Planning Hardly at All27.9%9,00079,000271,000315,580 A Little17.0%62,800173,400390,500356,550 Somewhat27.7%51,000189,000447,200365,350 A Lot27.4%54,000199,000470,000517,250

Information about pensions and SS  Pensions and SS wealth accounts for 50% of total net worth for median household  Half of older workers (50+) do not know their pension in the US  They do not even know which pension they have (Gustman, Steinmeier, Tabatabai 2008)  Similar evidence in Chile and Sweden  Much less than 50% of older workers know about SS  Only 18% of all workers know the correct age at which they are entitled to full SS benefits

Financial literacy  Several surveys have documented financial illiteracy (NCEE, Jump$tart Coalition, Survey of Consumer, SHARE)  2004 HRS module on planning and literacy by Lusardi and Mitchell  NLSY and Rand American Life Panel have a similar module  Dutch Central Bank and Bank of Italy have a similar module on financial literacy (also surveys from World Bank)

Assessing Numeracy Compound Interest “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.

Assessing Financial Literacy 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 with the money in this account:” i) More than today; ii) Exactly the same; iii) Less than today; iv) DK; v) Refuse to answer.

Assessing Financial Literacy Stock Risk “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 to answer.

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.

Financial advice  Most individuals rely on family and friends  Particularly those with low literacy  Even “planners” use simple planning tools and some use no tools at all!  Many workers state they would be reluctant to follow suggestions of advisors (2007 Retirement Confidence Survey)

Financial Literacy and Sources of Advice (Internet survey, all ages, Dutch data) Levels of Financial literacy 1 st (low)2nd3rd4 th (high) Parents, friends, acquaintances Information from newspapers Financial magazines, books Brochures from my bank Advertisement on TV Professional advisers Fin. Computer programs Fin. Information on Internet Other

Takeway points  Financial literacy cannot be taken for granted.  Individuals are grossly un-informed about pensions  Individuals do not rely on experts to overcome lack of knowledge and lack of information

The costs of ignorance and lack of planning  Financial literacy affects saving/investment decisions  Those with low literacy are less likely to plan for retirement (Lusardi and Mitchell (2006, 2007))  Those with low literacy are less likely to participate in the stock market (many papers)  Those with low literacy are more likely to borrow at high costs (Lusardi and Tufano, 2008)  Retirement planning affects wealth accumulation  Lusardi and Mitchell (JME, 2007) and Ameriks et al. (QJE, 2003)

Implications for public policy  Simplify decisions and products (choice architecture)  Set up good “nudges”  Automatic enrollment into pensions  To guarantee some pension at retirement and make interest compounding work in favor of saving  Financial education  It is a complement not a substitute to a good “architecture”  Similarity with a driving license

If you want to read more on these topics  Other papers I have written on this topic are available on my web pages:   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.  I write a blog on financial literacy: