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Financial literacy and the need for financial education: evidence and implications

Financial literacy and the need for financial education: evidence and implications Lusardi Swiss Journal of Economics and Statistics (2019) 155:1 Swiss Journal of https://doi.org/10.1186/s41937-019-0027-5 Economics and Statistics CONFERENCE KEY NOTE Open Access Financial literacy and the need for financial education: evidence and implications Annamaria Lusardi 1 Introduction financial behavior, and this paper will analyze research Throughout their lifetime, individuals today are more re- on both topics. sponsible for their personal finances than ever before. With As I describe in more detail below, findings around the life expectancies rising, pension and social welfare systems world are sobering. Financial literacy is low even in ad- are being strained. In many countries, employer-sponsored vanced economies with well-developed financial markets. defined benefit (DB) pension plans are swiftly giving way On average, about one third of the global population has to private defined contribution (DC) plans, shifting the re- familiarity with the basic concepts that underlie everyday sponsibility for retirement saving and investing from em- financial decisions (Lusardi and Mitchell, 2011c). The ployers to employees. Individuals have also experienced average hides gaping vulnerabilities of certain population changes in labor markets. Skills are becoming more critical, subgroups and even lower knowledge of specific financial leading to divergence in wages between those with a col- topics. Furthermore, there is evidence of a lack of confi- lege education, or higher, and those with lower levels of dence, particularly among women, and this has implica- education. Simultaneously, financial markets are rapidly tions for how people approach and make financial changing, with developments in technology and new and decisions. In the following sections, I describe how we more complex financial products. From student loans to measure financial literacy, the levels of literacy we find mortgages, credit cards, mutual funds, and annuities, the around the world, the implications of those findings for fi- range of financial products people have to choose from is nancial decision-making, and how we can improve finan- very different from what it was in the past, and decisions cial literacy. relating to these financial products have implications for individual well-being. Moreover, the exponential growth in 2 How financially literate are people? financial technology (fintech) is revolutionizing the way 2.1 Measuring financial literacy: the Big Three people make payments, decide about their financial invest- In the context of rapid changes and constant develop- ments, and seek financial advice. In this context, it is im- ments in the financial sector and the broader economy, portant to understand how financially knowledgeable it is important to understand whether people are people are and to what extent their knowledge of finance equipped to effectively navigate the maze of financial de- affects their financial decision-making. cisions that they face every day. To provide the tools for An essential indicator of people’s ability to make finan- better financial decision-making, one must assess not cial decisions is their level of financial literacy. The Or- only what people know but also what they need to know, ganisation for Economic Co-operation and Development and then evaluate the gap between those things. There (OECD) aptly defines financial literacy as not only the are a few fundamental concepts at the basis of most fi- knowledge and understanding of financial concepts and nancial decision-making. These concepts are universal, risks but also the skills, motivation, and confidence to applying to every context and economic environment. apply such knowledge and understanding in order to Three such concepts are (1) numeracy as it relates to make effective decisions across a range of financial con- the capacity to do interest rate calculations and under- texts, to improve the financial well-being of individuals stand interest compounding; (2) understanding of infla- and society, and to enable participation in economic life. tion; and (3) understanding of risk diversification. Thus, financial literacy refers to both knowledge and Translating these concepts into easily measured financial literacy metrics is difficult, but Lusardi and Mitchell Correspondence: alusardi@gwu.edu (2008, 2011b, 2011c) have designed a standard set of The George Washington University School of Business Global Financial questions around these concepts and implemented them Literacy Excellence Center and Italian Committee for Financial Education, Washington, D.C., USA in numerous surveys in the USA and around the world. © The Author(s). 2019 Open Access This article is distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license, and indicate if changes were made. Lusardi Swiss Journal of Economics and Statistics (2019) 155:1 Page 2 of 8 Four principles informed the design of these questions, Table 1 The “Big Three” financial literacy questions as described in detail by Lusardi and Mitchell (2014). 1) 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 first is simplicity: the questions should measure the account if you left the money to grow? knowledge of the building blocks fundamental to More than $102** decision-making in an intertemporal setting. The second Exactly $102 is relevance: the questions should relate to concepts per- tinent to peoples’ day-to-day financial decisions over the Less than $102 life cycle; moreover, they must capture general rather Do not know than context-specific ideas. Third is brevity: the number Refuse to answer of questions must be few enough to secure widespread 2) Imagine that the interest rate on your savings account was 1% per adoption; and fourth is capacity to differentiate, meaning year and inflation was 2% per year. After 1 year, how much would you that questions should differentiate financial knowledge be able to buy with the money in this account? in such a way as to permit comparisons across people. More than today Each of these principles is important in the context of Exactly the same face-to-face, telephone, and online surveys. Less than today** Three basic questions (since dubbed the “Big Three”)to Do not know measure financial literacy have been fielded in many sur- Refuse to answer veys in the USA, including the National Financial Capabil- ity Study (NFCS) and, more recently, the Survey of 3) Please tell me whether this statement is true or false. “Buying a single company’s stock usually provides a safer return than a stock mutual Consumer Finances (SCF), and in many national surveys fund.” around the world. They have also become the standard True way to measure financial literacy in surveys used by the False** private sector. For example, the Aegon Center for Longev- ity and Retirement included the Big Three questions in Do not know the 2018 Aegon Retirement Readiness Survey, covering Refuse to answer around 16,000 people in 15 countries. Both ING and Alli- Source: Lusardi and Mitchell (2011b) anz, but also investment funds, and pension funds have **Correct answers used the Big Three to measure financial literacy. The exact wording of the questions is provided in Table 1. Findings from the FLat World project, which so far in- cludes data from 15 countries, including Switzerland, 2.2 Cross-country comparison highlight the urgent need to improve financial literacy The first examination of financial literacy using the Big (see Table 2). Across countries, financial literacy is at a Three was possible due to a special module on financial crisis level, with the average rate of financial literacy, as literacy and retirement planning that Lusardi and Mitch- measured by those answering correctly all three ques- ell designed for the 2004 Health and Retirement Study tions, at around 30%. Moreover, only around 50% of re- (HRS), which is a survey of Americans over age 50. As- spondents in most countries are able to correctly answer tonishingly, the data showed that only half of older the two financial literacy questions on interest rates and Americans—who presumably had made many financial inflation correctly. A noteworthy point is that most decisions in their lives—could answer the two basic countries included in the FLat World project have questions measuring understanding of interest rates and well-developed financial markets, which further high- inflation (Lusardi and Mitchell, 2011b). And just one lights the cause for alarm over the demonstrated lack of third demonstrated understanding of these two concepts the financial literacy. The fact that levels of financial lit- and answered the third question, measuring understand- eracy are so similar across countries with varying levels ing of risk diversification, correctly. It is sobering that re- of economic development—indicating that in terms of fi- cent US surveys, such as the 2015 NFCS, the 2016 SCF, nancial knowledge, the world is indeed flat—shows that and the 2017 Survey of Household Economics and Fi- income levels or ubiquity of complex financial products nancial Decisionmaking (SHED), show that financial do not by themselves equate to a more financially liter- knowledge has remained stubbornly low over time. ate population. Over time, the Big Three have been added to other na- Other noteworthy findings emerge in Table 2. For in- tional surveys across countries and Lusardi and Mitchell stance, as expected, understanding of the effects of infla- have coordinated a project called Financial Literacy tion (i.e., of real versus nominal values) among survey around the World (FLat World), which is an inter- respondents is low in countries that have experienced de- national comparison of financial literacy (Lusardi and flation rather than inflation: in Japan, understanding of in- Mitchell, 2011c). flation is at 59%; in other countries, such as Germany, it is Lusardi Swiss Journal of Economics and Statistics (2019) 155:1 Page 3 of 8 Table 2 Findings from the FLat World project across 15 countries Authors Country Year of Interest rate Q Inflation Q Risk divers. Q All 3 At least N data correct 1 do not Correct DK Correct DK (%) Correct (%) DK (%) (%) know (%) (%) (%) (%) Lusardi and Mitchell (2011c) USA 2009 64.9 13.5 64.3 14.2 51.8 33.7 30.2 42.4 1488 Van Rooij, Lusardi, and Alessie (2011) Netherlands 2010 84.8 8.9 76.9 13.5 51.9 33.2 44.8 37.6 1665 Bucher-Koenen and Lusardi (2011) Germany 2009 82.4 11.0 78.4 17.0 61.8 32.3 53.2 37.0 1059 Sekita (2011) Japan 2010 70.5 12.5 58.8 28.6 39.5 56.1 27.0 61.5 5268 Agnew, Bateman, and Thorp (2013) Australia 2012 83.1 6.4 69.3 13.0 54.7 37.6 42.7 41.3 1024 Crossan, Feslier, and Hurnard (2011) New Zealand 2009 86.0 4.0 81.0 5.0 49.0 2.0 24.0 7.0 850 Brown and Graf (2013) Switzerland 2011 79.3 2.8* 78.4 4.2* 73.5* 13.0* 50.1* 16.9* 1500 Fornero and Monticone (2011) Italy 2007 40.0* 28.2* 59.3* 30.7* 52.2* 33.7* 24.9* 44.9* 3992 Almenberg and Säve-Söderbergh (2011) Sweden 2010 35.2* 15.6* 59.5 16.5 68.4 18.4 21.4* 34.7* 1302 Arrondel, Debbich, and Savignac France 2011 48.0* 11.5* 61.2 21.3 66.8* 14.6* 30.9* 33.4* 3616 (2013) Klapper and Panos (2011) Russia 2009 36.3* 32.9* 50.8* 26.1* 12.8* 35.4* 3.7* 53.7* 1366 Beckmann (2013) Romania 2011 41.3 34.4 31.8* 40.4* 14.7 63.5 3.8* 75.5* 1030 Moure (2016) Chile 2009 47.4 32.1 17.7 20.9 40.6* N/A* 7.7 53.1 14,463 Boisclair, Lusardi, and Michaud (2017) Canada 2012 77.9 8.8 66.18 16.13 9.36 31.29 42.5 37.23 6805 Kalmi and Ruuskanen (2017) Finland 2014 58.1 6.1 76.5 6.4 65.8 10.25 35.6 14 1477 *Questions that have slightly different wording than the baseline financial literacy questions listed in the text at 78% and, in the Netherlands, it is at 77%. Across Other surveys show that the findings about financial countries, individuals have the lowest level of know- literacy correlate in an expected way with other data. ledge around the concept of risk, and the percentage of For example, performance on the mathematics and sci- correct answers is particularly low when looking at ence sections of the OECD Program for International knowledge of risk diversification. Here, we note the Student Assessment (PISA) correlates with performance prevalence of “do not know” answers. While “do not on the Big Three and, specifically, on the question relat- know” responses hover around 15% on the topic of ing to interest rates. Similarly, respondents in Sweden, interest rates and 18% for inflation, about 30% of re- which has experienced pension privatization, performed spondents—in some countries even more—are likely to better on the risk diversification question (at 68%), than respond “do not know” to the risk diversification ques- did respondents in Russia and East Germany, where tion. In Switzerland, 74% answered the risk diversifica- people have had less exposure to the stock market. For tion question correctly and 13% reported not knowing researchers studying financial knowledge and its effects, the answer (compared to 3% and 4% responding “do these findings hint to the fact that financial literacy not know” for the interest rates and inflation questions, could be the result of choice and not an exogenous respectively). variable. These findings are supported by many other surveys. To summarize, financial literacy is low across the For example, the 2014 Standard & Poor’s Global Finan- world and higher national income levels do not equate cial Literacy Survey shows that, around the world, to a more financially literate population. The design of people know the least about risk and risk diversification the Big Three questions enables a global comparison (Klapper, Lusardi, and Van Oudheusden, 2015). Simi- and allows for a deeper understanding of financial liter- larly, results from the 2016 Allianz survey, which col- acy. This enhances the measure’s utility because it helps lected evidence from ten European countries on money, to identify general and specific vulnerabilities across financial literacy, and risk in the digital age, show very countries and within population subgroups, as will be low-risk literacy in all countries covered by the survey. explained in the next section. In Austria, Germany, and Switzerland, which are the three top-performing nations in term of financial know- 2.3 Who knows the least? ledge, less than 20% of respondents can answer three Low financial literacy on average is exacerbated by pat- questions related to knowledge of risk and risk diversifi- terns of vulnerability among specific population sub- cation (Allianz, 2017). groups. For instance, as reported in Lusardi and Mitchell Lusardi Swiss Journal of Economics and Statistics (2019) 155:1 Page 4 of 8 (2014), even though educational attainment is positively across demographics and other characteristics can con- correlated with financial literacy, it is not sufficient. Even sult Lusardi and Mitchell (2011c, 2014). well-educated people are not necessarily savvy about money. Financial literacy is also low among the young. 3 Does financial literacy matter? In the USA, less than 30% of respondents can correctly A growing number of financial instruments have gained answer the Big Three by age 40, even though many con- importance, including alternative financial services such sequential financial decisions are made well before that as payday loans, pawnshops, and rent to own stores that age (see Fig. 1). Similarly, in Switzerland, only 45% of charge very high interest rates. Simultaneously, in the those aged 35 or younger are able to correctly answer changing economic landscape, people are increasingly the Big Three questions. And if people may learn from responsible for personal financial planning and for making financial decisions, that learning seems limited. investing and spending their resources throughout their As shown in Fig. 1, many older individuals, who have lifetime. We have witnessed changes not only in the already made decisions, cannot answer three basic finan- asset side of household balance sheets but also in the li- cial literacy questions. ability side. For example, in the USA, many people arrive A gender gap in financial literacy is also present across close to retirement carrying a lot more debt than previ- countries. Women are less likely than men to answer ous generations did (Lusardi, Mitchell, and Oggero, questions correctly. The gap is present not only on the 2018). Overall, individuals are making substantially more overall scale but also within each topic, across countries financial decisions over their lifetime, living longer, and of different income levels, and at different ages. Women gaining access to a range of new financial products. are also disproportionately more likely to indicate that These trends, combined with low financial literacy levels they do not know the answer to specific questions around the world and, particularly, among vulnerable (Fig. 2), highlighting overconfidence among men and population groups, indicate that elevating financial liter- awareness of lack of knowledge among women. Even in acy must become a priority for policy makers. Finland, which is a relatively equal society in terms of There is ample evidence of the impact of financial lit- gender, 44% of men compared to 27% of women answer eracy on people’s decisions and financial behavior. For all three questions correctly and 18% of women give at example, financial literacy has been proven to affect both least one “do not know” response versus less than 10% saving and investment behavior and debt management of men (Kalmi and Ruuskanen, 2017). These figures fur- and borrowing practices. Empirically, financially savvy ther reflect the universality of the Big Three questions. people are more likely to accumulate wealth (Lusardi As reported in Fig. 2, “do not know” responses among and Mitchell, 2014). There are several explanations for women are prevalent not only in European countries, why higher financial literacy translates into greater for example, Switzerland, but also in North America wealth. Several studies have documented that those who (represented in the figure by the USA, though similar have higher financial literacy are more likely to plan for findings are reported in Canada) and in Asia (repre- retirement, probably because they are more likely to ap- sented in the figure by Japan). Those interested in learn- preciate the power of interest compounding and are bet- ing more about the differences in financial literacy ter able to do calculations. According to the findings of Fig. 1 Financial literacy across age in the USA. This figure shows the percentage of respondents who answered correctly all Big Three questions by age group (year 2015). Source: 2015 US National Financial Capability Study Lusardi Swiss Journal of Economics and Statistics (2019) 155:1 Page 5 of 8 Fig. 2 Gender differences in the responses to the Big Three questions. Sources: USA—Lusardi and Mitchell, 2011c; Japan—Sekita, 2011; Switzerland—Brown and Graf, 2013 the FLat World project, answering one additional finan- against their 401(k) plans, and are less likely to use cial question correctly is associated with a 3–4 percent- high-cost borrowing methods, e.g., payday loans, pawn age point greater probability of planning for retirement; shops, auto title loans, and refund anticipation loans this finding is seen in Germany, the USA, Japan, and (Lusardi and de Bassa Scheresberg, 2013). Sweden. Financial literacy is found to have the strongest Several studies have documented poor debt behavior impact in the Netherlands, where knowing the right an- and its link to financial literacy. Moore (2003)reported swer to one additional financial literacy question is asso- that the least financially literate are also more likely to ciated with a 10 percentage point higher probability of have costly mortgages. Lusardi and Tufano (2015)showed planning (Mitchell and Lusardi, 2015). Empirically, plan- that the least financially savvy incurred high transaction ning is a very strong predictor of wealth; those who plan costs, paying higher fees and using high-cost borrowing arrive close to retirement with two to three times the methods. In their study, the less knowledgeable also re- amount of wealth as those who do not plan (Lusardi and ported excessive debt loads and an inability to judge their Mitchell, 2011b). debt positions. Similarly, Mottola (2013) found that those Financial literacy is also associated with higher returns with low financial literacy were more likely to engage in on investments and investment in more complex assets, costly credit card behavior, and Utkus and Young (2011) such as stocks, which normally offer higher rates of re- concluded that the least literate were more likely to bor- turn. This finding has important consequences for wealth; row against their 401(k) and pension accounts. according to the simulation by Lusardi, Michaud, and Young people also struggle with debt, in particular Mitchell (2017), in the context of a life-cycle model of sav- with student loans. According to Lusardi, de Bassa ing with many sources of uncertainty, from 30 to 40% of Scheresberg, and Oggero (2016), Millennials know little US retirement wealth inequality can be accounted for by about their student loans and many do not attempt to differences in financial knowledge. These results show that calculate the payment amounts that will later be associ- financial literacy is not a sideshow, but it plays a critical ated with the loans they take. When asked what they role in saving and wealth accumulation. would do, if given the chance to revisit their student Financial literacy is also strongly correlated with a loan borrowing decisions, about half of Millennials indi- greater ability to cope with emergency expenses and cate that they would make a different decision. weather income shocks. Those who are financially liter- Finally, a recent report on Millennials in the USA (18- ate are more likely to report that they can come up with to 34-year-olds) noted the impact of financial technology $2000 in 30 days or that they are able to cover an emer- (fintech) on the financial behavior of young individuals. gency expense of $400 with cash or savings (Hasler, New and rapidly expanding mobile payment options Lusardi, and Oggero, 2018). have made transactions easier, quicker, and more con- With regard to debt behavior, those who are more finan- venient. The average user of mobile payments apps and cially literate are less likely to have credit card debt and technology in the USA is a high-income, well-educated more likely to pay the full balance of their credit card each male who works full time and is likely to belong to an month rather than just paying the minimum due (Lusardi ethnic minority group. Overall, users of mobile pay- and Tufano, 2009, 2015). Individuals with higher financial ments are busy individuals who are financially active literacy levels also are more likely to refinance their mort- (holding more assets and incurring more debt). How- gages when it makes sense to do so, tend not to borrow ever, mobile payment users display expensive financial Lusardi Swiss Journal of Economics and Statistics (2019) 155:1 Page 6 of 8 behaviors, such as spending more than they earn, using is that when it comes to providing financial education, alternative financial services, and occasionally overdraw- one size does not fit all. In addition to the potential for ing their checking accounts. Additionally, mobile pay- large-scale implementation, the main components of any ment users display lower levels of financial literacy financial literacy program should be tailored content, (Lusardi, de Bassa Scheresberg, and Avery, 2018). The targeted at specific audiences. An effective financial edu- rapid growth in fintech around the world juxtaposed cation program efficiently identifies the needs of its with expensive financial behavior means that more at- audience, accurately targets vulnerable groups, has clear tention must be paid to the impact of mobile payment objectives, and relies on rigorous evaluation metrics. use on financial behavior. Fintech is not a substitute for Using measures like the Big Three questions, it is im- financial literacy. perative to recognize vulnerable groups and their spe- cific needs in program designs. Upon identification, the 4 The way forward for financial literacy and what next step is to incorporate this knowledge into financial works education programs and solutions. Overall, financial literacy affects everything from School-based education can be transformational by day-to-day to long-term financial decisions, and this has preparing young people for important financial deci- implications for both individuals and society. Low levels sions. The OECD’s Programme for International Student of financial literacy across countries are correlated with Assessment (PISA), in both 2012 and 2015, found that, ineffective spending and financial planning, and expen- on average, only 10% of 15-year-olds achieved maximum sive borrowing and debt management. These low levels proficiency on a five-point financial literacy scale. As of of financial literacy worldwide and their widespread im- 2015, about one in five of students did not have even plications necessitate urgent efforts. Results from various basic financial skills (see OECD, 2017). Rigorous finan- surveys and research show that the Big Three questions cial education programs, coupled with teacher training are useful not only in assessing aggregate financial liter- and high school financial education requirements, are acy but also in identifying vulnerable population sub- found to be correlated with fewer defaults and higher groups and areas of financial decision-making that need credit scores among young adults in the USA (Urban, improvement. Thus, these findings are relevant for pol- Schmeiser, Collins, and Brown, 2018). It is important to icy makers and practitioners. Financial illiteracy has im- target students and young adults in schools and colleges plications not only for the decisions that people make to provide them with the necessary tools to make sound for themselves but also for society. The rapid spread of financial decisions as they graduate and take on respon- mobile payment technology and alternative financial ser- sibilities, such as buying cars and houses, or starting re- vices combined with lack of financial literacy can exacer- tirement accounts. Given the rising cost of education bate wealth inequality. and student loan debt and the need of young people to To be effective, financial literacy initiatives need to be start contributing as early as possible to retirement ac- large and scalable. Schools, workplaces, and community counts, the importance of financial education in school platforms provide unique opportunities to deliver finan- cannot be overstated. cial education to large and often diverse segments of the There are three compelling reasons for having finan- population. Furthermore, stark vulnerabilities across cial education in school. First, it is important to expose countries make it clear that specific subgroups, such as young people to the basic concepts underlying financial women and young people, are ideal targets for financial decision-making before they make important and conse- literacy programs. Given women’s awareness of their quential financial decisions. As noted in Fig. 1, financial lack of financial knowledge, as indicated via their “do literacy is very low among the young and it does not not know” responses to the Big Three questions, they seem to increase a lot with age/generations. Second, are likely to be more receptive to financial education. school provides access to financial literacy to groups The near-crisis levels of financial illiteracy, the adverse who may not be exposed to it (or may not be equally ex- impact that it has on financial behavior, and the vulner- posed to it), for example, women. Third, it is important abilities of certain groups speak of the need for and im- to reduce the costs of acquiring financial literacy, if we portance of financial education. Financial education is a want to promote higher financial literacy both among crucial foundation for raising financial literacy and individuals and among society. informing the next generations of consumers, workers, There are compelling reasons to have personal finance and citizens. Many countries have seen efforts in recent courses in college as well. In the same way in which col- years to implement and provide financial education in leges and university offer courses in corporate finance to schools, colleges, and workplaces. However, the continu- teach how to manage the finances of firms, so today in- ously low levels of financial literacy across the world in- dividuals need the knowledge to manage their own fi- dicate that a piece of the puzzle is missing. A key lesson nances over the lifetime, which in present discounted Lusardi Swiss Journal of Economics and Statistics (2019) 155:1 Page 7 of 8 value often amount to large values and are made larger solutions. It is important to continue making strides in by private pension accounts. promoting financial literacy, by achieving scale and effi- Financial education can also be efficiently provided in ciency in future programs as well. workplaces. An effective financial education program In August 2017, I was appointed Director of the Italian targeted to adults recognizes the socioeconomic context Financial Education Committee, tasked with designing of employees and offers interventions tailored to their and implementing the national strategy for financial lit- specific needs. A case study conducted in 2013 with em- eracy. I will be able to apply my research to policy and ployees of the US Federal Reserve System showed that program initiatives in Italy to promote financial literacy: completing a financial literacy learning module led to it is an essential skill in the twenty-first century, one that significant changes in retirement planning behavior and individuals need if they are to thrive economically in to- better-performing investment portfolios (Clark, Lusardi, day’s society. As the research discussed in this paper well and Mitchell, 2017). It is also important to note the de- documents, financial literacy is like a global passport livery method of these programs, especially when tar- that allows individuals to make the most of the plethora geted to adults. For instance, video formats have a of financial products available in the market and to make significantly higher impact on financial behavior than sound financial decisions. Financial literacy should be simple narratives, and instruction is most effective when seen as a fundamental right and universal need, rather it is kept brief and relevant (Heinberg et al., 2014). than the privilege of the relatively few consumers who The Big Three also show that it is particularly import- have special access to financial knowledge or financial ant to make people familiar with the concepts of risk advice. In today’s world, financial literacy should be con- and risk diversification. Programs devoted to teaching sidered as important as basic literacy, i.e., the ability to risk via, for example, visual tools have shown great read and write. Without it, individuals and societies can- promise (Lusardi et al., 2017). The complexity of some not reach their full potential. of these concepts and the costs of providing education in the workplace, coupled with the fact that many older 6 Endnotes individuals may not work or work in firms that do not See Brown and Graf (2013). offer such education, provide other reasons why finan- Abbreviations cial education in school is so important. DB: Defined benefit (refers to pension plan); DC: Defined contribution (refers Finally, it is important to provide financial education to pension plan); FLat World: Financial Literacy around the World; NFCS: National Financial Capability Study; OECD: Organisation for Economic in the community, in places where people go to learn. A Co-operation and Development; PISA: Programme for International Student recent example is the International Federation of Fi- Assessment; SCF: Survey of Consumer Finances; SHED: Survey of Household nance Museums, an innovative global collaboration that Economics and Financial Decisionmaking promotes financial knowledge through museum exhibits Acknowledgements and the exchange of resources. Museums can be places This paper represents a summary of the keynote address I gave to the 2018 where to provide financial literacy both among the Annual Meeting of the Swiss Society of Economics and Statistics. I would like to thank Monika Butler, Rafael Lalive, anonymous reviewers, and participants young and the old. of the Annual Meeting for useful discussions and comments, and Raveesha There are a variety of other ways in which financial Gupta for editorial support. All errors are my responsibility. education can be offered and also targeted to specific Funding groups. However, there are few evaluations of the effect- Not applicable iveness of such initiatives and this is an area where more research is urgently needed, given the statistics reported Availability of data and materials Not applicable in the first part of this paper. Author’s contributions 5 Concluding remarks The author read and approved the final manuscript. The lack of financial literacy, even in some of the world’s Competing interests most well-developed financial markets, is of acute con- The author declares that she has no competing interests. cern and needs immediate attention. The Big Three questions that were designed to measure financial liter- Publisher’sNote acy go a long way in identifying aggregate differences in Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. financial knowledge and highlighting vulnerabilities within populations and across topics of interest, thereby Received: 22 October 2018 Accepted: 7 January 2019 facilitating the development of tailored programs. Many such programs to provide financial education in schools References and colleges, workplaces, and the larger community have Aegon Center for Longevity and Retirement. (2018). The New Social Contract: a taken existing evidence into account to create rigorous blueprint for retirement in the 21st century. The Aegon Retirement Readiness Lusardi Swiss Journal of Economics and Statistics (2019) 155:1 Page 8 of 8 Survey 2018. Retrieved from https://www.aegon.com/en/Home/Research/ Mitchell, O. S., & Lusardi, A. (2015). 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Financial literacy and the need for financial education: evidence and implications

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Springer Journals
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Copyright © 2019 by The Author(s)
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Economics; Economics, general; Statistics, general
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Abstract

Lusardi Swiss Journal of Economics and Statistics (2019) 155:1 Swiss Journal of https://doi.org/10.1186/s41937-019-0027-5 Economics and Statistics CONFERENCE KEY NOTE Open Access Financial literacy and the need for financial education: evidence and implications Annamaria Lusardi 1 Introduction financial behavior, and this paper will analyze research Throughout their lifetime, individuals today are more re- on both topics. sponsible for their personal finances than ever before. With As I describe in more detail below, findings around the life expectancies rising, pension and social welfare systems world are sobering. Financial literacy is low even in ad- are being strained. In many countries, employer-sponsored vanced economies with well-developed financial markets. defined benefit (DB) pension plans are swiftly giving way On average, about one third of the global population has to private defined contribution (DC) plans, shifting the re- familiarity with the basic concepts that underlie everyday sponsibility for retirement saving and investing from em- financial decisions (Lusardi and Mitchell, 2011c). The ployers to employees. Individuals have also experienced average hides gaping vulnerabilities of certain population changes in labor markets. Skills are becoming more critical, subgroups and even lower knowledge of specific financial leading to divergence in wages between those with a col- topics. Furthermore, there is evidence of a lack of confi- lege education, or higher, and those with lower levels of dence, particularly among women, and this has implica- education. Simultaneously, financial markets are rapidly tions for how people approach and make financial changing, with developments in technology and new and decisions. In the following sections, I describe how we more complex financial products. From student loans to measure financial literacy, the levels of literacy we find mortgages, credit cards, mutual funds, and annuities, the around the world, the implications of those findings for fi- range of financial products people have to choose from is nancial decision-making, and how we can improve finan- very different from what it was in the past, and decisions cial literacy. relating to these financial products have implications for individual well-being. Moreover, the exponential growth in 2 How financially literate are people? financial technology (fintech) is revolutionizing the way 2.1 Measuring financial literacy: the Big Three people make payments, decide about their financial invest- In the context of rapid changes and constant develop- ments, and seek financial advice. In this context, it is im- ments in the financial sector and the broader economy, portant to understand how financially knowledgeable it is important to understand whether people are people are and to what extent their knowledge of finance equipped to effectively navigate the maze of financial de- affects their financial decision-making. cisions that they face every day. To provide the tools for An essential indicator of people’s ability to make finan- better financial decision-making, one must assess not cial decisions is their level of financial literacy. The Or- only what people know but also what they need to know, ganisation for Economic Co-operation and Development and then evaluate the gap between those things. There (OECD) aptly defines financial literacy as not only the are a few fundamental concepts at the basis of most fi- knowledge and understanding of financial concepts and nancial decision-making. These concepts are universal, risks but also the skills, motivation, and confidence to applying to every context and economic environment. apply such knowledge and understanding in order to Three such concepts are (1) numeracy as it relates to make effective decisions across a range of financial con- the capacity to do interest rate calculations and under- texts, to improve the financial well-being of individuals stand interest compounding; (2) understanding of infla- and society, and to enable participation in economic life. tion; and (3) understanding of risk diversification. Thus, financial literacy refers to both knowledge and Translating these concepts into easily measured financial literacy metrics is difficult, but Lusardi and Mitchell Correspondence: alusardi@gwu.edu (2008, 2011b, 2011c) have designed a standard set of The George Washington University School of Business Global Financial questions around these concepts and implemented them Literacy Excellence Center and Italian Committee for Financial Education, Washington, D.C., USA in numerous surveys in the USA and around the world. © The Author(s). 2019 Open Access This article is distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license, and indicate if changes were made. Lusardi Swiss Journal of Economics and Statistics (2019) 155:1 Page 2 of 8 Four principles informed the design of these questions, Table 1 The “Big Three” financial literacy questions as described in detail by Lusardi and Mitchell (2014). 1) 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 first is simplicity: the questions should measure the account if you left the money to grow? knowledge of the building blocks fundamental to More than $102** decision-making in an intertemporal setting. The second Exactly $102 is relevance: the questions should relate to concepts per- tinent to peoples’ day-to-day financial decisions over the Less than $102 life cycle; moreover, they must capture general rather Do not know than context-specific ideas. Third is brevity: the number Refuse to answer of questions must be few enough to secure widespread 2) Imagine that the interest rate on your savings account was 1% per adoption; and fourth is capacity to differentiate, meaning year and inflation was 2% per year. After 1 year, how much would you that questions should differentiate financial knowledge be able to buy with the money in this account? in such a way as to permit comparisons across people. More than today Each of these principles is important in the context of Exactly the same face-to-face, telephone, and online surveys. Less than today** Three basic questions (since dubbed the “Big Three”)to Do not know measure financial literacy have been fielded in many sur- Refuse to answer veys in the USA, including the National Financial Capabil- ity Study (NFCS) and, more recently, the Survey of 3) Please tell me whether this statement is true or false. “Buying a single company’s stock usually provides a safer return than a stock mutual Consumer Finances (SCF), and in many national surveys fund.” around the world. They have also become the standard True way to measure financial literacy in surveys used by the False** private sector. For example, the Aegon Center for Longev- ity and Retirement included the Big Three questions in Do not know the 2018 Aegon Retirement Readiness Survey, covering Refuse to answer around 16,000 people in 15 countries. Both ING and Alli- Source: Lusardi and Mitchell (2011b) anz, but also investment funds, and pension funds have **Correct answers used the Big Three to measure financial literacy. The exact wording of the questions is provided in Table 1. Findings from the FLat World project, which so far in- cludes data from 15 countries, including Switzerland, 2.2 Cross-country comparison highlight the urgent need to improve financial literacy The first examination of financial literacy using the Big (see Table 2). Across countries, financial literacy is at a Three was possible due to a special module on financial crisis level, with the average rate of financial literacy, as literacy and retirement planning that Lusardi and Mitch- measured by those answering correctly all three ques- ell designed for the 2004 Health and Retirement Study tions, at around 30%. Moreover, only around 50% of re- (HRS), which is a survey of Americans over age 50. As- spondents in most countries are able to correctly answer tonishingly, the data showed that only half of older the two financial literacy questions on interest rates and Americans—who presumably had made many financial inflation correctly. A noteworthy point is that most decisions in their lives—could answer the two basic countries included in the FLat World project have questions measuring understanding of interest rates and well-developed financial markets, which further high- inflation (Lusardi and Mitchell, 2011b). And just one lights the cause for alarm over the demonstrated lack of third demonstrated understanding of these two concepts the financial literacy. The fact that levels of financial lit- and answered the third question, measuring understand- eracy are so similar across countries with varying levels ing of risk diversification, correctly. It is sobering that re- of economic development—indicating that in terms of fi- cent US surveys, such as the 2015 NFCS, the 2016 SCF, nancial knowledge, the world is indeed flat—shows that and the 2017 Survey of Household Economics and Fi- income levels or ubiquity of complex financial products nancial Decisionmaking (SHED), show that financial do not by themselves equate to a more financially liter- knowledge has remained stubbornly low over time. ate population. Over time, the Big Three have been added to other na- Other noteworthy findings emerge in Table 2. For in- tional surveys across countries and Lusardi and Mitchell stance, as expected, understanding of the effects of infla- have coordinated a project called Financial Literacy tion (i.e., of real versus nominal values) among survey around the World (FLat World), which is an inter- respondents is low in countries that have experienced de- national comparison of financial literacy (Lusardi and flation rather than inflation: in Japan, understanding of in- Mitchell, 2011c). flation is at 59%; in other countries, such as Germany, it is Lusardi Swiss Journal of Economics and Statistics (2019) 155:1 Page 3 of 8 Table 2 Findings from the FLat World project across 15 countries Authors Country Year of Interest rate Q Inflation Q Risk divers. Q All 3 At least N data correct 1 do not Correct DK Correct DK (%) Correct (%) DK (%) (%) know (%) (%) (%) (%) Lusardi and Mitchell (2011c) USA 2009 64.9 13.5 64.3 14.2 51.8 33.7 30.2 42.4 1488 Van Rooij, Lusardi, and Alessie (2011) Netherlands 2010 84.8 8.9 76.9 13.5 51.9 33.2 44.8 37.6 1665 Bucher-Koenen and Lusardi (2011) Germany 2009 82.4 11.0 78.4 17.0 61.8 32.3 53.2 37.0 1059 Sekita (2011) Japan 2010 70.5 12.5 58.8 28.6 39.5 56.1 27.0 61.5 5268 Agnew, Bateman, and Thorp (2013) Australia 2012 83.1 6.4 69.3 13.0 54.7 37.6 42.7 41.3 1024 Crossan, Feslier, and Hurnard (2011) New Zealand 2009 86.0 4.0 81.0 5.0 49.0 2.0 24.0 7.0 850 Brown and Graf (2013) Switzerland 2011 79.3 2.8* 78.4 4.2* 73.5* 13.0* 50.1* 16.9* 1500 Fornero and Monticone (2011) Italy 2007 40.0* 28.2* 59.3* 30.7* 52.2* 33.7* 24.9* 44.9* 3992 Almenberg and Säve-Söderbergh (2011) Sweden 2010 35.2* 15.6* 59.5 16.5 68.4 18.4 21.4* 34.7* 1302 Arrondel, Debbich, and Savignac France 2011 48.0* 11.5* 61.2 21.3 66.8* 14.6* 30.9* 33.4* 3616 (2013) Klapper and Panos (2011) Russia 2009 36.3* 32.9* 50.8* 26.1* 12.8* 35.4* 3.7* 53.7* 1366 Beckmann (2013) Romania 2011 41.3 34.4 31.8* 40.4* 14.7 63.5 3.8* 75.5* 1030 Moure (2016) Chile 2009 47.4 32.1 17.7 20.9 40.6* N/A* 7.7 53.1 14,463 Boisclair, Lusardi, and Michaud (2017) Canada 2012 77.9 8.8 66.18 16.13 9.36 31.29 42.5 37.23 6805 Kalmi and Ruuskanen (2017) Finland 2014 58.1 6.1 76.5 6.4 65.8 10.25 35.6 14 1477 *Questions that have slightly different wording than the baseline financial literacy questions listed in the text at 78% and, in the Netherlands, it is at 77%. Across Other surveys show that the findings about financial countries, individuals have the lowest level of know- literacy correlate in an expected way with other data. ledge around the concept of risk, and the percentage of For example, performance on the mathematics and sci- correct answers is particularly low when looking at ence sections of the OECD Program for International knowledge of risk diversification. Here, we note the Student Assessment (PISA) correlates with performance prevalence of “do not know” answers. While “do not on the Big Three and, specifically, on the question relat- know” responses hover around 15% on the topic of ing to interest rates. Similarly, respondents in Sweden, interest rates and 18% for inflation, about 30% of re- which has experienced pension privatization, performed spondents—in some countries even more—are likely to better on the risk diversification question (at 68%), than respond “do not know” to the risk diversification ques- did respondents in Russia and East Germany, where tion. In Switzerland, 74% answered the risk diversifica- people have had less exposure to the stock market. For tion question correctly and 13% reported not knowing researchers studying financial knowledge and its effects, the answer (compared to 3% and 4% responding “do these findings hint to the fact that financial literacy not know” for the interest rates and inflation questions, could be the result of choice and not an exogenous respectively). variable. These findings are supported by many other surveys. To summarize, financial literacy is low across the For example, the 2014 Standard & Poor’s Global Finan- world and higher national income levels do not equate cial Literacy Survey shows that, around the world, to a more financially literate population. The design of people know the least about risk and risk diversification the Big Three questions enables a global comparison (Klapper, Lusardi, and Van Oudheusden, 2015). Simi- and allows for a deeper understanding of financial liter- larly, results from the 2016 Allianz survey, which col- acy. This enhances the measure’s utility because it helps lected evidence from ten European countries on money, to identify general and specific vulnerabilities across financial literacy, and risk in the digital age, show very countries and within population subgroups, as will be low-risk literacy in all countries covered by the survey. explained in the next section. In Austria, Germany, and Switzerland, which are the three top-performing nations in term of financial know- 2.3 Who knows the least? ledge, less than 20% of respondents can answer three Low financial literacy on average is exacerbated by pat- questions related to knowledge of risk and risk diversifi- terns of vulnerability among specific population sub- cation (Allianz, 2017). groups. For instance, as reported in Lusardi and Mitchell Lusardi Swiss Journal of Economics and Statistics (2019) 155:1 Page 4 of 8 (2014), even though educational attainment is positively across demographics and other characteristics can con- correlated with financial literacy, it is not sufficient. Even sult Lusardi and Mitchell (2011c, 2014). well-educated people are not necessarily savvy about money. Financial literacy is also low among the young. 3 Does financial literacy matter? In the USA, less than 30% of respondents can correctly A growing number of financial instruments have gained answer the Big Three by age 40, even though many con- importance, including alternative financial services such sequential financial decisions are made well before that as payday loans, pawnshops, and rent to own stores that age (see Fig. 1). Similarly, in Switzerland, only 45% of charge very high interest rates. Simultaneously, in the those aged 35 or younger are able to correctly answer changing economic landscape, people are increasingly the Big Three questions. And if people may learn from responsible for personal financial planning and for making financial decisions, that learning seems limited. investing and spending their resources throughout their As shown in Fig. 1, many older individuals, who have lifetime. We have witnessed changes not only in the already made decisions, cannot answer three basic finan- asset side of household balance sheets but also in the li- cial literacy questions. ability side. For example, in the USA, many people arrive A gender gap in financial literacy is also present across close to retirement carrying a lot more debt than previ- countries. Women are less likely than men to answer ous generations did (Lusardi, Mitchell, and Oggero, questions correctly. The gap is present not only on the 2018). Overall, individuals are making substantially more overall scale but also within each topic, across countries financial decisions over their lifetime, living longer, and of different income levels, and at different ages. Women gaining access to a range of new financial products. are also disproportionately more likely to indicate that These trends, combined with low financial literacy levels they do not know the answer to specific questions around the world and, particularly, among vulnerable (Fig. 2), highlighting overconfidence among men and population groups, indicate that elevating financial liter- awareness of lack of knowledge among women. Even in acy must become a priority for policy makers. Finland, which is a relatively equal society in terms of There is ample evidence of the impact of financial lit- gender, 44% of men compared to 27% of women answer eracy on people’s decisions and financial behavior. For all three questions correctly and 18% of women give at example, financial literacy has been proven to affect both least one “do not know” response versus less than 10% saving and investment behavior and debt management of men (Kalmi and Ruuskanen, 2017). These figures fur- and borrowing practices. Empirically, financially savvy ther reflect the universality of the Big Three questions. people are more likely to accumulate wealth (Lusardi As reported in Fig. 2, “do not know” responses among and Mitchell, 2014). There are several explanations for women are prevalent not only in European countries, why higher financial literacy translates into greater for example, Switzerland, but also in North America wealth. Several studies have documented that those who (represented in the figure by the USA, though similar have higher financial literacy are more likely to plan for findings are reported in Canada) and in Asia (repre- retirement, probably because they are more likely to ap- sented in the figure by Japan). Those interested in learn- preciate the power of interest compounding and are bet- ing more about the differences in financial literacy ter able to do calculations. According to the findings of Fig. 1 Financial literacy across age in the USA. This figure shows the percentage of respondents who answered correctly all Big Three questions by age group (year 2015). Source: 2015 US National Financial Capability Study Lusardi Swiss Journal of Economics and Statistics (2019) 155:1 Page 5 of 8 Fig. 2 Gender differences in the responses to the Big Three questions. Sources: USA—Lusardi and Mitchell, 2011c; Japan—Sekita, 2011; Switzerland—Brown and Graf, 2013 the FLat World project, answering one additional finan- against their 401(k) plans, and are less likely to use cial question correctly is associated with a 3–4 percent- high-cost borrowing methods, e.g., payday loans, pawn age point greater probability of planning for retirement; shops, auto title loans, and refund anticipation loans this finding is seen in Germany, the USA, Japan, and (Lusardi and de Bassa Scheresberg, 2013). Sweden. Financial literacy is found to have the strongest Several studies have documented poor debt behavior impact in the Netherlands, where knowing the right an- and its link to financial literacy. Moore (2003)reported swer to one additional financial literacy question is asso- that the least financially literate are also more likely to ciated with a 10 percentage point higher probability of have costly mortgages. Lusardi and Tufano (2015)showed planning (Mitchell and Lusardi, 2015). Empirically, plan- that the least financially savvy incurred high transaction ning is a very strong predictor of wealth; those who plan costs, paying higher fees and using high-cost borrowing arrive close to retirement with two to three times the methods. In their study, the less knowledgeable also re- amount of wealth as those who do not plan (Lusardi and ported excessive debt loads and an inability to judge their Mitchell, 2011b). debt positions. Similarly, Mottola (2013) found that those Financial literacy is also associated with higher returns with low financial literacy were more likely to engage in on investments and investment in more complex assets, costly credit card behavior, and Utkus and Young (2011) such as stocks, which normally offer higher rates of re- concluded that the least literate were more likely to bor- turn. This finding has important consequences for wealth; row against their 401(k) and pension accounts. according to the simulation by Lusardi, Michaud, and Young people also struggle with debt, in particular Mitchell (2017), in the context of a life-cycle model of sav- with student loans. According to Lusardi, de Bassa ing with many sources of uncertainty, from 30 to 40% of Scheresberg, and Oggero (2016), Millennials know little US retirement wealth inequality can be accounted for by about their student loans and many do not attempt to differences in financial knowledge. These results show that calculate the payment amounts that will later be associ- financial literacy is not a sideshow, but it plays a critical ated with the loans they take. When asked what they role in saving and wealth accumulation. would do, if given the chance to revisit their student Financial literacy is also strongly correlated with a loan borrowing decisions, about half of Millennials indi- greater ability to cope with emergency expenses and cate that they would make a different decision. weather income shocks. Those who are financially liter- Finally, a recent report on Millennials in the USA (18- ate are more likely to report that they can come up with to 34-year-olds) noted the impact of financial technology $2000 in 30 days or that they are able to cover an emer- (fintech) on the financial behavior of young individuals. gency expense of $400 with cash or savings (Hasler, New and rapidly expanding mobile payment options Lusardi, and Oggero, 2018). have made transactions easier, quicker, and more con- With regard to debt behavior, those who are more finan- venient. The average user of mobile payments apps and cially literate are less likely to have credit card debt and technology in the USA is a high-income, well-educated more likely to pay the full balance of their credit card each male who works full time and is likely to belong to an month rather than just paying the minimum due (Lusardi ethnic minority group. Overall, users of mobile pay- and Tufano, 2009, 2015). Individuals with higher financial ments are busy individuals who are financially active literacy levels also are more likely to refinance their mort- (holding more assets and incurring more debt). How- gages when it makes sense to do so, tend not to borrow ever, mobile payment users display expensive financial Lusardi Swiss Journal of Economics and Statistics (2019) 155:1 Page 6 of 8 behaviors, such as spending more than they earn, using is that when it comes to providing financial education, alternative financial services, and occasionally overdraw- one size does not fit all. In addition to the potential for ing their checking accounts. Additionally, mobile pay- large-scale implementation, the main components of any ment users display lower levels of financial literacy financial literacy program should be tailored content, (Lusardi, de Bassa Scheresberg, and Avery, 2018). The targeted at specific audiences. An effective financial edu- rapid growth in fintech around the world juxtaposed cation program efficiently identifies the needs of its with expensive financial behavior means that more at- audience, accurately targets vulnerable groups, has clear tention must be paid to the impact of mobile payment objectives, and relies on rigorous evaluation metrics. use on financial behavior. Fintech is not a substitute for Using measures like the Big Three questions, it is im- financial literacy. perative to recognize vulnerable groups and their spe- cific needs in program designs. Upon identification, the 4 The way forward for financial literacy and what next step is to incorporate this knowledge into financial works education programs and solutions. Overall, financial literacy affects everything from School-based education can be transformational by day-to-day to long-term financial decisions, and this has preparing young people for important financial deci- implications for both individuals and society. Low levels sions. The OECD’s Programme for International Student of financial literacy across countries are correlated with Assessment (PISA), in both 2012 and 2015, found that, ineffective spending and financial planning, and expen- on average, only 10% of 15-year-olds achieved maximum sive borrowing and debt management. These low levels proficiency on a five-point financial literacy scale. As of of financial literacy worldwide and their widespread im- 2015, about one in five of students did not have even plications necessitate urgent efforts. Results from various basic financial skills (see OECD, 2017). Rigorous finan- surveys and research show that the Big Three questions cial education programs, coupled with teacher training are useful not only in assessing aggregate financial liter- and high school financial education requirements, are acy but also in identifying vulnerable population sub- found to be correlated with fewer defaults and higher groups and areas of financial decision-making that need credit scores among young adults in the USA (Urban, improvement. Thus, these findings are relevant for pol- Schmeiser, Collins, and Brown, 2018). It is important to icy makers and practitioners. Financial illiteracy has im- target students and young adults in schools and colleges plications not only for the decisions that people make to provide them with the necessary tools to make sound for themselves but also for society. The rapid spread of financial decisions as they graduate and take on respon- mobile payment technology and alternative financial ser- sibilities, such as buying cars and houses, or starting re- vices combined with lack of financial literacy can exacer- tirement accounts. Given the rising cost of education bate wealth inequality. and student loan debt and the need of young people to To be effective, financial literacy initiatives need to be start contributing as early as possible to retirement ac- large and scalable. Schools, workplaces, and community counts, the importance of financial education in school platforms provide unique opportunities to deliver finan- cannot be overstated. cial education to large and often diverse segments of the There are three compelling reasons for having finan- population. Furthermore, stark vulnerabilities across cial education in school. First, it is important to expose countries make it clear that specific subgroups, such as young people to the basic concepts underlying financial women and young people, are ideal targets for financial decision-making before they make important and conse- literacy programs. Given women’s awareness of their quential financial decisions. As noted in Fig. 1, financial lack of financial knowledge, as indicated via their “do literacy is very low among the young and it does not not know” responses to the Big Three questions, they seem to increase a lot with age/generations. Second, are likely to be more receptive to financial education. school provides access to financial literacy to groups The near-crisis levels of financial illiteracy, the adverse who may not be exposed to it (or may not be equally ex- impact that it has on financial behavior, and the vulner- posed to it), for example, women. Third, it is important abilities of certain groups speak of the need for and im- to reduce the costs of acquiring financial literacy, if we portance of financial education. Financial education is a want to promote higher financial literacy both among crucial foundation for raising financial literacy and individuals and among society. informing the next generations of consumers, workers, There are compelling reasons to have personal finance and citizens. Many countries have seen efforts in recent courses in college as well. In the same way in which col- years to implement and provide financial education in leges and university offer courses in corporate finance to schools, colleges, and workplaces. However, the continu- teach how to manage the finances of firms, so today in- ously low levels of financial literacy across the world in- dividuals need the knowledge to manage their own fi- dicate that a piece of the puzzle is missing. A key lesson nances over the lifetime, which in present discounted Lusardi Swiss Journal of Economics and Statistics (2019) 155:1 Page 7 of 8 value often amount to large values and are made larger solutions. It is important to continue making strides in by private pension accounts. promoting financial literacy, by achieving scale and effi- Financial education can also be efficiently provided in ciency in future programs as well. workplaces. An effective financial education program In August 2017, I was appointed Director of the Italian targeted to adults recognizes the socioeconomic context Financial Education Committee, tasked with designing of employees and offers interventions tailored to their and implementing the national strategy for financial lit- specific needs. A case study conducted in 2013 with em- eracy. I will be able to apply my research to policy and ployees of the US Federal Reserve System showed that program initiatives in Italy to promote financial literacy: completing a financial literacy learning module led to it is an essential skill in the twenty-first century, one that significant changes in retirement planning behavior and individuals need if they are to thrive economically in to- better-performing investment portfolios (Clark, Lusardi, day’s society. As the research discussed in this paper well and Mitchell, 2017). It is also important to note the de- documents, financial literacy is like a global passport livery method of these programs, especially when tar- that allows individuals to make the most of the plethora geted to adults. For instance, video formats have a of financial products available in the market and to make significantly higher impact on financial behavior than sound financial decisions. Financial literacy should be simple narratives, and instruction is most effective when seen as a fundamental right and universal need, rather it is kept brief and relevant (Heinberg et al., 2014). than the privilege of the relatively few consumers who The Big Three also show that it is particularly import- have special access to financial knowledge or financial ant to make people familiar with the concepts of risk advice. In today’s world, financial literacy should be con- and risk diversification. Programs devoted to teaching sidered as important as basic literacy, i.e., the ability to risk via, for example, visual tools have shown great read and write. Without it, individuals and societies can- promise (Lusardi et al., 2017). The complexity of some not reach their full potential. of these concepts and the costs of providing education in the workplace, coupled with the fact that many older 6 Endnotes individuals may not work or work in firms that do not See Brown and Graf (2013). offer such education, provide other reasons why finan- Abbreviations cial education in school is so important. DB: Defined benefit (refers to pension plan); DC: Defined contribution (refers Finally, it is important to provide financial education to pension plan); FLat World: Financial Literacy around the World; NFCS: National Financial Capability Study; OECD: Organisation for Economic in the community, in places where people go to learn. A Co-operation and Development; PISA: Programme for International Student recent example is the International Federation of Fi- Assessment; SCF: Survey of Consumer Finances; SHED: Survey of Household nance Museums, an innovative global collaboration that Economics and Financial Decisionmaking promotes financial knowledge through museum exhibits Acknowledgements and the exchange of resources. Museums can be places This paper represents a summary of the keynote address I gave to the 2018 where to provide financial literacy both among the Annual Meeting of the Swiss Society of Economics and Statistics. I would like to thank Monika Butler, Rafael Lalive, anonymous reviewers, and participants young and the old. of the Annual Meeting for useful discussions and comments, and Raveesha There are a variety of other ways in which financial Gupta for editorial support. All errors are my responsibility. education can be offered and also targeted to specific Funding groups. However, there are few evaluations of the effect- Not applicable iveness of such initiatives and this is an area where more research is urgently needed, given the statistics reported Availability of data and materials Not applicable in the first part of this paper. Author’s contributions 5 Concluding remarks The author read and approved the final manuscript. The lack of financial literacy, even in some of the world’s Competing interests most well-developed financial markets, is of acute con- The author declares that she has no competing interests. cern and needs immediate attention. The Big Three questions that were designed to measure financial liter- Publisher’sNote acy go a long way in identifying aggregate differences in Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. financial knowledge and highlighting vulnerabilities within populations and across topics of interest, thereby Received: 22 October 2018 Accepted: 7 January 2019 facilitating the development of tailored programs. Many such programs to provide financial education in schools References and colleges, workplaces, and the larger community have Aegon Center for Longevity and Retirement. (2018). The New Social Contract: a taken existing evidence into account to create rigorous blueprint for retirement in the 21st century. The Aegon Retirement Readiness Lusardi Swiss Journal of Economics and Statistics (2019) 155:1 Page 8 of 8 Survey 2018. Retrieved from https://www.aegon.com/en/Home/Research/ Mitchell, O. S., & Lusardi, A. (2015). 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