Cognitive Function, Numeracy and Retirement Saving Trajectories

Abstract

This paper examines the extent to which cognitive abilities relate to differences in trajectories for key economic outcomes as individuals move towards and through their retirement. We look at whether differences in baseline numeracy (measured in the English Longitudinal Study of Ageing in 2002) and broader cognitive ability predict the subsequent trajectories of outcomes such as wealth, retirement income and key dimensions of retirement expectations. Those with lower numeracy are shown to have different wealth trajectories both pre- and post-retirement than their more numerate counterparts, but the distributions of retirement expectations and net replacement rates are similar across numeracy groups.

Investment in financial literacy and saving decisions

“…Banks and Oldfield (2007) look at numerical ability and other dimensions of cognitive function in a sample of older adults in England (the English Longitudinal Study of Ageing) and find that numeracy levels are strongly correlated with measures of retirement savings and investment portfolios, understanding of pension arrangements, and perceived financial security. In subsequent work, Banks et al (2010) look at the extent to which differences in numeracy and broader cognitive ability predict subsequent trajectories for key economic outcomes such as wealth, retirement income and retirement expectations. 1 Christelis et al (2010) study the relation between cognitive abilities and stockholding using SHARE data, and find that the propensity to invest directly and indirectly in stocks (through mutual funds and retirement accounts) is strongly associated with mathematical ability, verbal fluency, and recall skills.…”

The adequacy of wealth among those approaching retirement

“…Banks et al (2010) compared the incidence of downsizing in the US and in England among a population over the age of 50. They found that, while it is less common in England than in the US, downsizing does happen.…”

“…We use the answers to these to divide respondents into four groups, following the methodology in Banks, O'Dea and Oldfield (2010). Numeracy is likely to be associated with an ability to understand pension products, and has also been shown to have clear associations with household saving behaviour even once education has been controlled for (Banks, O'Dea and Oldfield, 2010). …”

Financial Illiteracy and Pension Contributions: A Field Experiment on Compound Interest in China

“…19 These questions were adopted from Banks et al (2010), Lusardi and Mitchell (2006), Eisenstein and Hoch (2005), and Cole et al (2011). 20 There is a concern that households do not like to report their investments and wealth.…”