How financial literacy affects household wealth accumulation

• Context
• The study
• Key findings
• Points to consider
• Full report

Context

This study aims to explore the causal effects of financial literacy and schooling on wealth accumulation. It evaluates whether people who find it difficult to understand their financial environment are less likely to accumulate wealth and so whether boosting financial education would enhance household wealth accumulation.

The paper develops a measure of financial literacy which aggregates a more complete set of financial literacy questions than previously and analyses the Chilean Social Protection Survey, focusing on men aged 24-65 and women aged 24-60 surveyed in 2006. The survey provides a nationally-representative stratified random survey covering wealth, schooling, financial literacy, work history, childhood background and selected personality traits and there are 13,054 respondents.

The study

The study applies quantitative methods and analyses survey data. The survey includes a set of 12 questions on financial literacy, six of which have been used in other contexts (including three questions adopted by several international surveys) and six which are related to the Chilean retirement system. The analytical approach aims to control for random variability within the survey data.

The outcome of interest is total net wealth and its components: pension wealth, net housing wealth and other wealth (including financial investments). The possible relationship between pension wealth, financial literacy and schooling is further examined through two indicators – the proportion of time covered by pension contributions and whether the individual had attempted to calculate the money needed for retirement.

Key findings

Financial capability:

• The study finds that (consistent with previous reports) financial literacy is positively and significantly associated with total net worth and each of its components. The model estimates imply that a 0.2 standard deviation (s.d.) increase in the financial literacy score would on average raise net wealth by $13,800.
• Financial literacy enhances peoples’ likelihood of contributing to their pension saving. The same 0.2 s.d. increase in the financial literacy score is estimated to boost the density of pension contributions by on average 3% and the probability of calculating retirement monetary needs by an average of 0.5%.
• Financial literacy is more important than schooling for explaining variation in household wealth and pension contributions
• Some components of financial literacy (as detailed in United States Health and Retirement Study core questions) are particularly important – knowing the answers to these HRS ‘core’ questions increases impact by nearly 1.5 times compared to the ‘more sophisticated ‘questions

Points to consider

• Generalisability/transferability: The findings relate to financial literacy as defined by the survey questions which may limit the potential to generalise findings.
• Applicability: The authors state that “the finding that financial literacy enhances peoples’ likelihood of contributing to their pension saving suggests that this is a valuable pathway by which improved financial literacy can build household net wealth” (Behrman, Mitchell, Soo and Bravo, 2012).
• Methodological strengths or limitations: The analysis draws on a large nationally-representative household data set with questions that have been adopted by international surveys, indicating a level of validity. The results are described but data is not presented.

Full report

How financial literacy affects household wealth accumulation - full report