Financial Knowledge and Financial Literacy at the Household Level

Alan Gustman (), Thomas L. Steinmeier and Nahid Tabatabai

No 16500, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: D31 D83 E21 H23 H55 J14 J26 J32 (search for similar items in EconPapers)
Date: 2010-10
Note: AG LS PE
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

Published as Alan L. Gustman & Thomas L. Steinmeier & Nahid Tabatabai, 2012. "Financial Knowledge and Financial Literacy at the Household Level," American Economic Review, American Economic Association, vol. 102(3), pages 309-13, May.

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Journal Article: Financial Knowledge and Financial Literacy at the Household Level (2012)
Working Paper: Financial Knowledge and Financial Literacy at the Household Level (2010)
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