Financial Literacy Implications for Retirement Security and the Financial Marketplace

As financial markets grow ever more complex and integrated, households must make increasingly sophisticated and all-too-often irreversible economic decisions. This is particularly evident in retirement decision-making. Traditional defined benefit pension schemes are being replaced with defined contribution pensions; employer and government judgment regarding how much to save and where to invest has been replaced by employees having to make these choices on their own (sometimes assisted by advisers); and retirees have become responsible for managing their own pension assets. This volume explores how financial literacy can enhance peoples' ability to make informed economic choices. It proposes that financial literacy determines how well people make and execute saving, investing, borrowing, and planning decisions. It examines causality using controlled settings to disentangle whether financial literacy causes saving or vice versa, and demonstrates that financial education programs do indeed enhance financial decision-making and asset accumulation.

Olivia S. Mitchell is International Foundation of Employee Benefit Plans Professor and the Chair of the Department of Insurance and Risk Management Executive Director of the Pension Research Council, and Director of the Boettner Center on Pensions and Retirement Research at the Wharton School of the University of Pennsylvania. Annamaria Lusardi is Professor of Accountancy and Economics at the George Washington University and a Research Associate at the National Bureau of Economic Research.