Academic journal article Social Security Bulletin

Raising Household Saving: Does Financial Education Work?

Academic journal article Social Security Bulletin

Raising Household Saving: Does Financial Education Work?

Article excerpt

This article highlights the prevalence and economic outcomes of financial illiteracy among American households, and reviews previous research that examines how improving financial literacy affects household saving. Analysis of the research literature suggests that previous financial literacy efforts have yielded mixed results. Evidence suggests that interventions provided for employees in the workplace have helped increase household saving, but estimates of the magnitude of the impact vary widely. For financial education initiatives targeted to other groups, the evidence is much more ambiguous, suggesting a need for more econometrically rigorous evaluations.


In a recent consumer survey, 21 percent of respondents-including 38 percent of those with income below $25,000-reported that winning the lottery was "the most practical strategy for accumulating several hundred thousand dollars" for their own retirement. In addition, 16 percent thought that winning the lottery was the best retirement strategy for all Americans, not just themselves (CFA & FPA 2006). This is far from the only recent example of limited financial understanding among American households. From 401(k) portfolios overly invested in company stock to depleted retirement account portfolios, a growing number of compelling examples suggest that many individuals make ill-advised financial decisions about retirement.

The low level of financial literacy among American adults suggests that better financial literacy could encourage greater personal saving and improve financial and economic security in retirement (Lusardi 2008a, 2008b). Efforts to improve financial literacy are now supported by a wide array of organizations, including private employers; federal, state, and local government agencies; commercial banks; consumer groups; community service organizations; and religious organizations. As interest in financial literacy grows, however, policymakers and interested organizations must understand the relative strengths and weaknesses of prior efforts and the importance of robust evaluations of financial education programs.

This article evaluates previous efforts to raise household saving through financial literacy initiatives.1 We define financial literacy as the ability to make informed judgments and effective decisions regarding the use and management of money and wealth, as well as the ability and discipline to implement intended or desired saving behavior.2

In the background section, we summarize evidence of the extent of financial illiteracy and its financial outcomes. A significant proportion of American adults-particularly those with limited schooling, with lower income, or who are aged in their 20s or near retirement-do not understand basic financial concepts. Those individuals are more prone to making poor financial and saving choices than others, and may in effect subsidize those who understand personal finance better.

In the financial education initiatives section, we review research on the effects of traditional efforts to improve financial literacy on household saving. Findings are mixed and often are subject to a variety of potential econometric problems, notably the difficult task of disentangling the effects of a policy from the actions that a household would have taken in the policy's absence.3 This is more than a narrow statistical concern; indeed, it is central to assessing the impact of financial literacy on saving. As one example, nonexperimental research often suggests that, among households at the lower end of the saving and wealth distribution, workplace financial education has helped raise retirement plan participation, contributions, and overall household saving. By contrast, in Duflo and Saez (2003), an experimental study resolves some of the key econometric problems of nonexperimental data and suggests smaller effects of workplace financial education on saving.

The final section offers concluding remarks. …

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