Financial Knowledge and Financial Literacy at the Household Level
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Abstract
Pensions and Social Security together account for half the wealth of those approaching retirement age. Thus one would expect knowledge of pensions and Social Security to play a central role in shaping the financial decisions made by those in their early to mid-fifties. In addition, recent studies confirm a link between numeracy and household wealth (Lusardi and Mitchell, 2006; Banks and Oldfield, 2007). Indeed, measures of numeracy, based on simple questions testing the ability to calculate fractions, percentages and compounding, seem to dominate more elaborate measures of cognition in explaining the wealth of those approaching retirement age (McArdle, Smith and Willis, 2009). Thus one would suspect there is a link between numeracy and knowledge of pensions and Social Security, so that, holding the influence of cognition on earnings constant, each plays a role in shaping the accumulation of retirement wealth. To learn more about these potential relationships, we use the Health and Retirement Study to create a number of measures of knowledge of pensions and Social Security. We then demonstrate that knowledge of pensions is higher where the value of the pension is higher. Next we consider the relation of cognition to pension knowledge, with special emphasis on the role played by numeracy. Following that, we relate wealth held outside of pensions and Social Security to measures of cognition, including numeracy, to measures of knowledge of pensions and Social Security, and to wealth accumulated in the form of pensions. We consider the relationship to total wealth as well.
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2010 RRC