Financial literacy and retirement planning: the Russian case

152

We use a representative survey covering 1,500 households to document the level of financial literacy in Switzerland and to examine how financial literacy is related to retirement planning. We measure financial literacy with standardized questions that capture knowledge about three basic financial concepts: Compound interest, inflation, and risk diversification. We measure retirement planning by the incidence of a voluntary retirement savings account. Our results show that financial literacy in Switzerland is high by international standards--a result which is compatible with the high ranking of Switzerland on the PISA mathematical scales. Financial literacy is lower among low-income, less-educated, and immigrant, non-native-speaking households as well as among women. We find that financial literacy is strongly correlated with voluntary retirement saving. Our results also show that financial literacy is correlated with financial market participation and mortgage borrowing.

Section: Related Literaturesupporting

confidence: 83%

Financial Literacy and Retirement Planning in Switzerland

Brown¹,

Graf²

2013

152

“…While there is a distinct north-south divide in terms of financial literacy-with southern regions showing much lower levels of financial knowledge than the northern regions-there are also sharp differences in financial literacy among the regions in the north of Italy. Klapper and Panos (2011) also documented large geographic differences in financial literacy in Russia. According to their work, these differences are particularly pronounced in rural versus urban areas.…”

Section: The Geography Of Financial Literacymentioning

confidence: 95%

The Geography of Financial Literacy

Bumcrot¹,

Lin²,

Lusardi³

2013

This paper explores how well equipped today's households are to make complex financial decisions in the face of often high-cost and high-risk financial instruments. Specifically we focus on financial literacy. Most importantly, we describe the geography of financial literacy, i.e., how financial literacy is distributed across the fifty US states. We describe the correlation of financial literacy and some important aggregate variables, such as state-level poverty rates. Finally, we examine the extent to which differences in financial literacy can be explained by states' demographic and economic characteristics. To assess financial literacy, five questions were added to the 2009 National Financial Capability Study, covering fundamental concepts of economics and finance encountered in everyday life: simple calculations about interest rates and inflation, the workings of risk diversification, the relationship between bond prices and interest rates, and the relationship between interest payments and maturity in mortgages. We constructed an index of financial literacy based on the number of correct answers provided by each respondent to the five financial literacy questions. The financial literacy index reveals wide variation in financial literacy across states. Much of the variation is attributable to differences in the demographic makeup of the states; however, a handful of states have either higher or lower levels of financial literacy than is explained by demographics alone. Also, there is a significant correlation between the financial literacy of a state and that state's poverty level. The findings indicate directions for policy makers and practitioners interested in targeting areas where financial literacy is low.

“…For example, in the Netherlands, those who can do a 2% calculation are much more likely to plan for retirement, and in Italy, those able to do this calculations are more likely to participate in private pension plans Lusardi 2011, Fornero andMonticone 2011, respectively). Similarly, among Russians, those who demonstrate an understanding of interest compounding are much more likely to participate in pension funds (Klapper and Panos 2011). This is perhaps expected, as questions about retirement planning are related to whether people have calculated how much they need to save for their retirement and, thus, the capacity to do calculations, even rudimentary ones, is important.…”

Section: The Impact Of Numeracy On Consumer Behaviormentioning

confidence: 95%

“…For example, the question in Sweden's survey was formulated as follows: Even when respondents are presented with a selection of possible answers, as they were here, rather than come up with a number, the proportion of correct answers is very low. In Russia, only 36% of respondents picked the right answer (more than 150,000 rubles), while 30% chose an incorrect answer, and 33% indicated they could not estimate the answer even roughly (Klapper and Panos 2011).…”

Section: Numeracymentioning

confidence: 99%

Numeracy, Financial Literacy, and Financial Decision-Making

Lusardi¹

2012

134

Financial decisions, be they related to asset building or debt management, require the capacity to do calculations, including some complex ones. But how numerate are individuals, in particular when it comes to calculations related to financial decisions? Studies and surveys implemented in both the United States and in other countries that are described in this paper show the level of numeracy among the population to be very low. Moreover, lack of numeracy is not only widespread but is particularly severe among some demographic groups, such as women, the elderly, and those with low educational attainment. This has potential consequences for individuals and for society as a whole because numeracy is found to be linked to many financial decisions. As we shift responsibility from governments and employers onto individuals, it is increasingly important to find ways to equip people with the skills that are necessary to make savvy financial decisions.