Financial Literacy and Retirement Planning

Financial knowledge is an important tool for making financial decisions. Our objective is threefold. First, we study financial literacy in Germany on the basis of SAVE – a panel representative of households in Germany. We are able to compare financial literacy internationally because the questions measuring financial literacy in the American HRS (Health and Retirement Study) have been added to SAVE. Second, the unique setup of German reunification allows us to compare financial literacy across two German regions with different economic structures and with households with differing experience in this regard. Third, we examine the relationship between financial literacy and retirement planning. In this section we use data from SAVE 2009 to examine financial literacy and retirement planning in Germany. In order to investigate the nexus of causality between financial literacy and financial decisions we have developed an instrumental variable (IV) strategy. Our findings indicate that knowledge of basic financial concepts (interest compounding, inflation, and risk diversification) is lacking among women, the less educated, and those living in eastern Germany. In particular, those with low education and low income in East Germany have even less financial literacy compared to their West German counterparts. Moreover, we find a positive impact of financial knowledge on retirement planning. Households with low levels of financial knowledge are less likely to plan for retirement. This project is part of an international cooperation coordinated by the Center for Pensions and Welfare Policies (CERP) in Turin, Italy. Financial Support was given by the Network for Studies on Pensions, Aging and Retirement (Netspar) through the theme grant "Financial Literacy: Evidence and Implications for Retirement Planning, Saving Behavior, and Financial Education Programs". Prof. Annamaria Lusardi, Ph.D. (George Washington University, Washington, USA) is co-author and coordinator of the theme grant. Researchers from eight countries participated in the project. The results were published in a special issue of the Journal of Pension Economics and Finance in October 2011.