In an increasingly risky and globalized marketplace, people must be able to make well-informed financial decisions. New international research demonstrates that financial illiteracy is widespread in both well-developed and rapidly changing markets. Women are less financially literate than men,the young and the old are less financially literate than the middle-aged, and more educated people are more financially knowledgeable. Most importantly, the financially literate are more likely to plan for retirement. Instrumental variables estimates show that the effects of financial literacy on retirement planning tend to be underestimated. In sum, around the world, financial literacy is critical to retirement security.

We analyze a national sample of Americans with respect to their debt literacy, financial experiences, and their judgments about the extent of their indebtedness. Debt literacy is a component of broader financial understanding that measures knowledge about debt and self-assessed financial knowledge. Financial experiences are the participants’ reported experiences with traditional borrowing, alternative borrowing, and investing. Overindebtedness is a self-reported measure. Debt literacy is low, with only about one-third of the population grasping the basics of interest compounding. Even after controlling for demographics, we find a relationship between debt literacy and both financial experiences and debt loads. Individuals with lower levels of debt literacy tend to transact in high-cost manners, incurring higher fees and using high-cost borrowing. We provide a rough estimate of the national implications of debt ignorance on credit card costs by consumers. Less knowledgeable individuals also report that their debt loads are excessive or that they are unable to judge their debt position.

We examine financial literacy in the US using the new National Financial Capability Study, wherein we demonstrate that financial literacy is particularly low among the young, women, and the less-educated. Moreover, Hispanics and African-Americans score the least well on financial literacy concepts. Interestingly, all groups rate themselves as rather well-informed about financial matters, notwithstanding their actual performance on the key literacy questions. Finally, we show that people who score higher on the financial literacy questions are much more likely to plan for retirement, which is likely to leave them better positioned for old age. Our results will inform those seeking to target financial literacy programmes to those in most need.

We examine financial literacy in Germany using data from the SAVE survey. We find that knowledge of basic financial concepts is lacking among women, the less educated, and those living in East Germany. In particular, those with low education and low income in East Germany have low financial literacy compared to their West German counterparts. Interestingly, there is no gender disparity in financial knowledge in the East. In order to investigate the nexus of causality between financial literacy and retirement planning, we develop an instrumental variables strategy by making use of regional variation in the financial knowledge of peers. We find a positive impact of financial knowledge on retirement planning.

Recent pension reforms in Italy require individuals to decide whether to participate in pension funds, how much to contribute, and how to invest their wealth, raising concerns about their ability to deal with financial matters. Using the Bank of Italy's Survey on Household Income and Wealth (SHIW), our empirical analysis shows that most individuals lack knowledge of basic concepts such as interest rates and inflation. Men, the more educated, and residents in the Centre–North possess higher financial literacy. We also find that financial literacy has a positive and significant impact on the probability of pension plan participation.

We present new evidence on financial literacy and retirement preparation in the Netherlands based on two surveys conducted before and after the onset of the financial crisis. We document that while financial knowledge did not increase from 2005 to 2010, in 2010 significantly more individuals report having thought about their retirement. Using information on financial conditions and financial knowledge of relatives, we find a positive causal effect of financial literacy on retirement preparation. Employing the panel feature of our dataset, we show that the effect of financial knowledge on retirement planning is bound to be positive.

We examine the relationship between financial literacy and retirement planning in Russia, a country with a relatively old and rapidly ageing population, large regional disparities, and emerging financial markets. We find that only 36% of respondents in our sample understand interest compounding and only half can answer a simple question about inflation. In a country with widespread public pension provisions, we find that financial literacy is significantly and positively related to retirement planning involving private pension funds. Thus, along with encouraging the availability of private retirement plans, efforts to improve financial literacy can be pivotal to the expansion of the use of such funds.

The level of financial literacy is not high in Japan. Although a majority of respondents were able to correctly answer a simple question about interest rates, more than half were not able to correctly answer a question about risk diversification. Many respondents stated they did not know the answer to the financial literacy questions, which might indicate that Japanese are very cautious and only answer when confident in their response. Women, the young, and those with lower incomes and lower educational attainment have the lowest levels of financial literacy, and financial literacy increases the probability of having a retirement savings plan.

We use data from the Swedish Financial Supervisory 2010 consumer survey to look at levels of financial literacy and retirement planning in the Swedish population. The results indicate that many adults have low financial literacy. In general, financial literacy levels are lower among the young, the old, women and those with low income or low educational attainment. People who report having tried to plan for retirement have higher levels of financial literacy. In particular, an understanding of risk diversification is strongly correlated with planning for retirement. We relate our findings to features of the Swedish pension system.

The OECD International Network on Financial Education has addressed the demand for an internationally comparable measure of financial literacy by developing a financial literacy questionnaire that can be used across a diverse range of countries. This questionnaire takes into account knowledge, behaviours, and attitudes related to personal finance and is designed to identify similarities and differences in levels of financial literacy around the world. It is currently being piloted in 12 countries, with the expectation that the final survey instrument will become a useful tool for policy-makers, academics, and financial education programme designers seeking to identify robust questions to assess financial literacy.

Using a special-purpose module implemented in the Health and Retirement Study, we evaluate financial sophistication in the American population over the age of 50. We combine several financial literacy questions into an overall index to highlight which questions best capture financial sophistication and examine the sensitivity of financial literacy responses to framing effects. Results show that many older respondents are not financially sophisticated: they fail to grasp essential aspects of risk diversification, asset valuation, portfolio choice, and investment fees. Subgroups with notable deficits include women, the least educated, non-Whites, and those age 75+. In view of the fact that retirees increasingly must take on responsibility for their own retirement security, such meager levels of knowledge have potentially serious and negative implications.

In this paper, we draw on internationally comparable survey evidence on financial literacy and retirement planning in Canada to investigate how financially literate Canadians are and how financial literacy is linked to retirement planning. We find that 42% of respondents are able to correctly answer three simple questions measuring knowledge of interest compounding, inflation, and risk diversification. This is consistent with evidence from other countries, and Canadians perform relatively well in comparison with Americans but worse than individuals in other countries, such as Germany. Among Canadian respondents, the young and the old, women, minorities, and those with lower educational attainment do worse, a pattern that has been consistently found in other countries as well. Retirement planning is strongly associated with financial literacy; those who responded correctly to all three financial literacy questions are 10 percentage points more likely to have retirement savings.

Annuities provide insurance against outliving one's wealth. Previous studies have indicated that, for many households, the value of the longevity insurance should outweigh the actuarial unfairness of prices in the voluntary annuity market. Nonetheless, voluntary annuitization rates are extremely low.

Previous research on the value of annuitization has compared an optimal decumulation of unannuitized wealth with the alternative of annuitizing all unannuitized wealth at age 65. We relax these assumptions, allowing households to annuitize any part of their unannuitized wealth at any age and to return to the annuity market as many times as they wish.

Using numerical optimization techniques, assuming the levels of actuarial unfairness of annuities calculated in previous research, and retaining the assumption made in previous research that one half of household wealth is pre-annuitized, we conclude that it is optimal for couples to delay annuitization until they are aged 73–82, and in some cases never to annuitize. It is usually optimal for single men and women to annuitize at substantially younger ages, between 65 and 70. Households that annuitize will generally wish to annuitize only part of their unannuitized wealth.

Using data from the Asset and Health Dynamics Among the Oldest Old and Health and Retirement Study panels, we show that much of the failure of the average currently retired household to annuitize can be attributed to the exceptionally high proportions of the wealth of these cohorts that is pre-annuitized. We expect younger cohorts to have smaller proportions of pre-annuitized wealth and project increasing demand for annuitization as successive cohorts age.

Is intergenerational risk sharing desirable and feasible in funded pension schemes? Using a multi-period OLG model, we study risk sharing between generations for a variety of realistic collective funded pension schemes, where pension benefits and contributions may depend on the funding ratio and the asset returns. We find that well-structured intergenerational risk sharing via collective schemes can be welfare-enhancing vis-à-vis the optimal individual benchmark. Moreover, from an ex ante perspective the expected welfare gain of the current entry cohort is not at the cost of the older and future cohorts.

Administrative and investment costs per participant appear to vary widely across pension funds. These costs are important because they reduce the rate of return on the investments of pension funds and consequently raise the cost of retirement security. This article examines the impact of determinants of these costs, such as the size, governance, pension plan design and outsourcing decisions, using data on all Dutch pension funds across the 1992–2004 period, including more than 10,000 observations. We find that economies of scale dominate the strong dispersion in both administrative and investment costs across pension funds. Industry-wide pension funds are significantly more efficient than company funds and other funds. The operating costs of pension funds' defined contribution plans are lower than those of defined benefit plans. Higher shares of pensioners make funds more costly, whereas the reverse is true when relatively many participants are inactive.

Two competing explanations for why consumers have trouble with financial decisions are gaining momentum. One is that people are financially illiterate since they lack understanding of simple economic concepts and cannot carry out computations such as computing compound interest, which could cause them to make suboptimal financial decisions. A second is that impatience or present-bias might explain suboptimal financial decisions. That is, some people persistently choose immediate gratification instead of taking advantage of larger long-term payoffs. We use experimental evidence from Chile to explore how these factors appear related to poor financial decisions. Our results show that our measure of impatience is a strong predictor of wealth and investment in health. Financial literacy is also correlated with wealth though it appears to be a weaker predictor of sensitivity to framing in investment decisions. Policymakers interested in enhancing retirement well-being would do well to consider the importance of both factors.

The article presents a method for calculating the cross-section internal rate of return on contributions to pension systems financed according to the pay-as-you-go principle. The method entails a procedure for valuing the contribution flow of pay-as-you-go financing, and identifies the complete set of factors that determine the cross-section internal rate of return. The procedure makes it possible to apply the algorithm of double-entry bookkeeping in analyzing and presenting the financial position and development of pay-as-you-go pension systems.

We developed and experimentally evaluated four novel educational programs delivered online: an informational brochure, a visual interactive tool, a written narrative, and a video narrative. The programs were designed to inform people about risk diversification, an essential concept for financial decision-making. The effectiveness of these programs was evaluated using the American Life Panel. Participants were exposed to one of the programs, and then asked to answer questions measuring financial literacy – in particular, risk literacy – and self-efficacy. All of the programs were found to be effective at increasing self-efficacy, and several improved financial literacy, providing new evidence for the value of programs designed to improve financial decision-making.

We present an intertemporal portfolio choice model where individuals invest in financial literacy, save, allocate their wealth between a safe and a risky asset, and receive a pension when they retire. Financial literacy affects the excess return from and cost of stock-market participation. Investors simultaneously choose how much to save, their portfolio allocation, and the optimal investment in financial literacy. The model implies that one should observe a positive correlation between stock-market participation (and risky asset share, conditional on participation) and financial literacy, and a negative correlation between the generosity of the social security system and financial literacy. The model also implies that financial literacy accumulated early in life is positively correlated with the individual's wealth and portfolio allocations in later life. Using microeconomic cross-country data, we find support for these predictions.

Many retirees hope to continue earning capital market rewards on their saving while avoiding outliving their funds during retirement. We model a dynamic utility maximizing investor who seeks to benefit from holding both equity and longevity insurance. She is free to adjust her portfolio allocation of her financial wealth as well as of the annuity over time, and she can purchase variable payout annuities any time and incrementally. In this setting, we show that the retiree will not fully annuitize even without bequests; rather, she will combine variable annuities with withdrawals from her liquid financial wealth so as to match her desired consumption profile. Optimal stock exposures decrease over time, both within the variable annuity and the withdrawal plan. Welfare gains from this strategy can amount to 40% of financial wealth, depending on risk parameters and other resources; additionally, many retirees will do almost as well as the fully optimized outcome if they hold variable annuities invested 60/40 in stocks/bonds.