Financial Knowledge and Financial Literacy at the Household Level

51 Pages Posted: 1 Nov 2010 Last revised: 8 Nov 2010

See all articles by Alan L. Gustman

Alan L. Gustman

Dartmouth College - Department of Economics; National Bureau of Economic Research (NBER)

Thomas L. Steinmeier

Texas Tech University - Department of Economics and Geography

Nahid Tabatabai

Dartmouth College - Department of Economics

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Date Written: October 2010

Abstract

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.

Suggested Citation

Gustman, Alan L. and Steinmeier, Thomas L. and Tabatabai, Nahid, Financial Knowledge and Financial Literacy at the Household Level (October 2010). NBER Working Paper No. w16500, Available at SSRN: https://ssrn.com/abstract=1699580

Alan L. Gustman (Contact Author)

Dartmouth College - Department of Economics ( email )

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Thomas L. Steinmeier

Texas Tech University - Department of Economics and Geography ( email )

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United States
806-742-2201 (Phone)

Nahid Tabatabai

Dartmouth College - Department of Economics ( email )

Hanover, NH 03755
United States

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