Optimal Financial Literacy and Saving for Retirement

41 Pages Posted: 3 Jan 2012

See all articles by Annamaria Lusardi

Annamaria Lusardi

George Washington University - Department of Accountancy; National Bureau of Economic Research (NBER)

Pierre-Carl Michaud

RAND Corporation; IZA Institute of Labor Economics

Olivia S. Mitchell

University of Pennsylvania - The Wharton School; University of Pennsylvania - The Wharton School, Pension Research Council; National Bureau of Economic Research (NBER)

Date Written: September 3, 2011

Abstract

Recent studies show that financial literacy is strongly positively related to household wealth, but there is also substantial cross-sectional variation in both financial literacy and wealth levels. To explore these patterns, the authors develop a calibrated stochastic life cycle model which features endogeneous financial literacy accumulation. Their model generates substantial wealth inequality, over and above what standard lifecycle models produce. This is due to the fact that higher earners typically have more hump-shaped labor income profiles and lower retirement benefits which, when interacted with the precautionary saving motive, boosts their need for private wealth accumulation and thus financial literacy. They show that the fraction of the population which is rationally "financially ignorant" depends on the level of labor income uncertainty as well as the generosity of the retirement system.

Suggested Citation

Lusardi, Annamaria and Michaud, Pierre-Carl and Mitchell, Olivia S., Optimal Financial Literacy and Saving for Retirement (September 3, 2011). RAND Working Paper Series No. WR-905-SSA, Available at SSRN: https://ssrn.com/abstract=1978960 or http://dx.doi.org/10.2139/ssrn.1978960

Annamaria Lusardi (Contact Author)

George Washington University - Department of Accountancy ( email )

George Washington University School of Business
Washington, DC 20052
United States

HOME PAGE: http://business.gwu.edu/profiles/annamaria-lusardi/

National Bureau of Economic Research (NBER)

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Pierre-Carl Michaud

RAND Corporation ( email )

1776 Main Street
Santa Monica, CA 90407-2138
United States

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Olivia S. Mitchell

University of Pennsylvania - The Wharton School ( email )

Philadelphia, PA 19104-6365
United States

University of Pennsylvania - The Wharton School, Pension Research Council ( email )

3302 Steinberg Hall-Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104-6302
United States

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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