financial literacy and the need for financial education educa… · •caring for others and the...

Annamaria LusardiThe George Washington University School of Business and GFLEC Italian Financial Education Committee

October 23, 2019 `

Financial literacy and the need for financial education

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Three topics

Financial literacy

Financial literacy matters

The need for financial education

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Changing landscape for financial security/consumer choice

Changes in pension systems• More individual and private accounts

Changes in financial markets• Greater complexity• More opportunities to borrow & in large amounts

Changes in labor markets• Workers change job often• Wage differential according to skills/education

Changes in education• Higher cost of education • Other reasons to plan and save for the future

Changes in technology (fintech)• Money is invisible• Apps for decision-making

3

Some questions we all ask

What will my work be tomorrow?• Investing in skills and education

How can I grow my saving?• Investing and portfolio choice

Will my pension be enough?• Saving for the future

How can I help others?• Children and parents• Caring for others and the environment

And much more…

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To get started

A number:

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1/3• How many people in the US know the basics before

age 50

• How many people are financially literate around the world

To get started

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These numbers are not our destiny

• Changing the statistics• Building our future• A new ecosystem

Changing the statistics

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Financial literacy: the ABC of personal finance The Big Three

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 account if you left the money to grow?”

2. “Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, with the money in this account, would you be able to buy…”

3. “Do you think the following statement is true or false? Buying a single company stock usually provides a safer return than a stock mutual fund.”

More than $102 Exactly $102 Less than $102 Don’t know Refuse to answer

More than today Exactly the same

as today Less than today Don’t know Refuse to answer

True False Don’t know Refuse to answer

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Collecting data: The US National Financial Capability Study (NFCS), from 2009 to 2018

We collaborated with the FINRA Foundation to design questions on financial literacy and capability.

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Financial literacy increases slowly with age/cohort (2018 NFCS)

Source: US 2018 NFCS

About 1/3 of Americans know these 3 basic concepts by age 50 even though many financial decisions are made well before that age

13% 13%18%

22%

29%32%

36% 38%41%

45%49%

45%

0%

10%

20%

30%

40%

50%

60%

18-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75+

% o

f res

pond

ents

Age/Cohort

Percentage answering the Big 3 questions correctly

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The S&P Global FinLit Survey

• The largest, most comprehensive, global measure of financial literacy

• Interviewed more than 150,000 adults age 15+ in more than 140 countries

• The measure has to be applicable to every country, irrespective of economic structure and financial market development

• The survey covers four topics:

• Numeracy • Interest compounding • Inflation• Risk diversification

Being financially literate: Able to answer 3 out of these 4 topics correctly

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Financial Literacy Across the Globe

Only 1 in 3 adults worldwide responded correctly to three out of four topics

% of financially literate adults

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How countries score Country% who are financially

literateNorway 71%

‐‐‐‐‐ -----Australia 64%

‐‐‐‐‐ ‐‐‐‐USA 57%------ -----

RussianFed. 38%

------ ------Italy 37%‐‐‐‐‐ -----

Philippines 25%‐‐‐‐‐ ‐‐‐‐‐‐‐‐‐

Vietnam 24%

Norway, Denmark, and Sweden lead the list with 71% of adults being financially literate.

In the US, 57% of adults are financially literate

In Italy, 37% of adults are financially literate

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Gender gap in financial literacy around the world

In most economies around the world, men have a better understanding of basic financial concepts than women

Source: Global FinLit Survey

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Turning to the young: OECD Programme for International Student Assessment (PISA)

Since 2000, every three years the OECD Programme for International Student Assessment (PISA) answers these questions and more. It assesses to what extent students near the end of compulsory education have acquired some of the knowledge and skills essential for full participation in society.

Are students well prepared for future challenges? Can they analyze, reason and communicate effectively? Do they have the capacity to continue learning throughout life?

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B-S-J-G (China)

Belgium (Flemish) Canadian

provinces

Russian Federation NetherlandsAustralia

United StatesPolandItaly

Spain

LithuaniaSlovak Republic

Chile

PeruBrazil

380

400

420

440

460

480

500

520

540

560

580Mean scoreStrong performance in

financial literacy

Low performance in financial literacy

Average performance

of 15-year-olds in financial literacy in

2015 PISA

Average performance of 15-year-olds in financial literacy (2015 PISA)

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Looking deeper into financial literacy

• Financial knowledge strongly related to the socio-economic background of their family

• Gender differences start early in life, e.g. Italy

Large diff. among students

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Building an ecosystem

We need many components

• Financial literacy is an essential one

• It is the foundation (like water)

• Financial inclusion and financial regulation work better with financial literacy

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Topic 2

Financial literacy matters

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Financial literacy and wealth inequality

• Consider a life cycle model of saving with financial literacy

• Financial literacy affects the return on savings

• Financial literacy is an important determinant of wealth and wealth inequality

• Important finding: 30-40% of U.S. retirement wealth inequality can be attributed to difference in financial knowledge

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Financial literacy and fintech

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The role of financial literacy

• Only 40% of Millennial mobile payments users are able to answer the Big Three financial literacy questions correctly.

• A basic level of financial literacy is negatively associated with using mobile payments. Respondents with a basic level of financial literacy are less likely to use mobile payments.

40%53%

Users Non-users

Spend more than they save

Occasionally overdraws 

checkingaccount

Used at least one form of 

AFS

Uses m‐payments

Basic financial literacy

Financially literate mobile payment users

• Financial literacy is negatively associated with each of the three financial behaviors.

• Respondents who use mobile payments and are financially literate are much less likely to engage in each of these behaviors.

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Citations to the term “financial literacy” over time: New meta-analysis shows that financial education does work

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Topic 3

The need for financial education

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Where to focus

Large and scalable programs

• Financial education in school• Financial wellness programs in the workplace• Financial education in the community (libraries, museums,

theaters, other places where people go to learn)

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Fast Lane initiative: Promote financial education in high school

• Provides research-based guidance and support for (1) students, (2) teachers, (3) school administrators, (4) parents/guardians, (5) policy makers, and (6) community members

• Making sure young people are on the fast lane to financial prosperity

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Museums for financial education

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A Museum of Saving in Italy

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An International Federation of Finance Museums (IFFM)

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In July 2017, I was appointed by Italy’s Minister of Economy and Finance as director of the new Financial Education Committee

The Committee is in charge of designing the national strategy and implementation program for financial literacy

Follow our work on www.Quellocheconta.gov.it

Policy work: Italy

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Policy work: National strategies for financial literacy

About 70 countries have done or are doing a national strategy for financial literacy

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Advice for public policy : Toward a new ecosystem

Building a financial resilient society

• Add financial literacy among indicators for policy

• Toward a more inclusive society

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Concluding remarks

Financial literacy is like reading and writing: it is an essential skill to thrive in the 21st century

• Everyone deals with finance, and finance is sufficiently complex that we cannot leave it to the individual to learn by himself/herself

• It is very important to be financially literate as early as possible

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Looking ahead

Short definition of financial literacy: A vision for the future

The question is: Which future do we want to build?

Thank you!