NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Financial Knowledge and Financial Literacy at the Household Level

Alan L. Gustman, Thomas L. Steinmeier, Nahid Tabatabai

NBER Working Paper No. 16500
Issued in October 2010
NBER Program(s):   AG   LS   PE

This paper uses data from the Health and Retirement Study to explore the mechanism that underlies the robust relation found in the literature between cognitive ability, and in particular numeracy, and wealth, income constant. We have a number of findings. First, the more valuable the pension, the more knowledgeable are covered workers about their pensions. We suggest that causality is more likely to run from pension wealth to pension knowledge, rather than the other way around. Second, most measures of cognitive ability, including numeracy, are not significant determinants of pension and Social Security knowledge. Third, standardizing for incomes and other factors, a pension of higher value does not substitute for other forms of wealth. Rather, counting pensions in total wealth, those with more valuable pensions save more for retirement, other things the same. Fourth, there is no evidence that wealth held outside of pensions is influenced by knowledge of pensions.

In sum, numeracy does not influence wealth in whole or in part by affecting financial knowledge of one's pension plan, where financial knowledge of the pension then influences other decisions about retirement saving.

These findings raise questions about the mechanism that underlies the relation between cognition, especially numeracy, and wealth. From a policy perspective, they suggest that the numeracy-wealth relation should not be taken as evidence that increasing financial literacy will increase the wealth of households as they enter into retirement.

download in pdf format
   (261 K)

email paper

The NBER Bulletin on Aging and Health provides summaries of publications like this.  You can sign up to receive the NBER Bulletin on Aging and Health by email.

This paper is available as PDF (261 K) or via email.

Acknowledgments

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w16500

Published: Alan L. Gustman & Thomas L. Steinmeier & Nahid Tabatabai, 2012. "Financial Knowledge and Financial Literacy at the Household Level," American Economic Review, American Economic Association, vol. 102(3), pages 309-13, May.

Users who downloaded this paper also downloaded these:
Lusardi and Mitchell w17078 Financial Literacy and Planning: Implications for Retirement Wellbeing
Lusardi and Mitchell w17107 Financial Literacy around the World: An Overview
Behrman, Mitchell, Soo, and Bravo w16452 Financial Literacy, Schooling, and Wealth Accumulation
Lusardi w13824 Household Saving Behavior: The Role of Financial Literacy, Information, and Financial Education Programs
van Rooij, Lusardi, and Alessie w13565 Financial Literacy and Stock Market Participation
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us