# Interview with Annamaria Lusardi on Financial Literacy

## Interview with Annamaria Lusardi on Financial Literacy

21/03/2023

David A. Price interviews Annamaria Lusardi “on financial literacy, seniors versus scammers, and learning from the mistakes of NFL players” (Econ Focus: Federal Reserve Bank of Richmond, First Quarter 2023, pp. 24-28).

Lusardi notes:

[W]e have witnessed a highly important change in the United States and around the world, which is that more and more, we have shifted the responsibility to save for retirement from the employer to workers. I am talking about the shift from defined benefit pensions to defined contribution pensions, such as individual retirement accounts and 401(k) plans. In the past, it was the employer who had to manage the pension of the employees; the wealth was managed by a CFO or by other financial experts. Now we ask individuals to make these decisions about their wealth. So even more than when I was an assistant professor, there’s the question of whether people have the skill to manage their money.

Lusardi and Olivia Mitchell have designed a 28-question test to measure financial literacy, which has become a widely used research tool. For a flavor of the kinds of questions, consider what they call the “Big Three.” In their early work, an advantage of having just three questions is that it was practical to add three questions to piggyback on pre-existing surveys.

THE “BIG THREE” FINANCIAL LITERACY SURVEY QUESTIONS

1. Suppose you had \$100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow?

• More than \$102
• Exactly \$102
• Less than \$102
• Do not know/Refuse to answer

2. Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, how much would you be able to buy with the money in this account?

• More than today
• Exactly the same
• Less than today
• Do not know/Refuse to answer

3. Please tell me whether this statement is true or false. “Buying a single company’s stock usually provides a safer return than a stock mutual fund.”

• True
• False
• Do not know/Refuse to answer

NOTE: Correct answers are (1) “More than \$102,” (2) “Less than today,” and (3) False.

SOURCE: Annamaria Lusardi and Olivia S. Mitchell

The ongoing research in this area suggests both that financial literacy is low.

Together with a team at the World Bank, I eventually designed questions similar to the big three that were applied to a sample of more than 140 countries. I would say there are several interesting findings. One is that even though the U.S. is the country with the most advanced financial markets, it actually doesn’t score very high in terms of financial literacy. And this has been true in other surveys, as well. The second thing is that overall financial literacy is not high in other countries, either. Overall, the level of financial literacy globally is really low; only one-third of people around the world are financially literate. …

[W]hat we did recently — and it took us a good many years to do this project — is a meta-analysis of financial education programs. … Because the literature was so extensive, we then decided to concentrate on the most rigorous evaluations. So we looked at only the randomized control trials. … So you expose a group to financial education; you don’t expose the other, similar group; and then you compare what happened to the group you treated. What we found, looking at the evidence in as many as 33 countries, is that financial education works and works well — meaning it does translate into higher knowledge and also better behavior in savings and managing credit and in other areas, including insurance and money transfers. And we also found that it is cost effective. This is due to the fact that many educational programs do not cost very much.

This work has implications reaching in a number of directions. Prominent examples include professional athletes who, even in a relatively short career, might earn as much as the average college-educated person will earn in a lifetime. But these athletes are young adults, their financial literacy is no greater than average, and they are easy targets for financial “advisers” and “planners” who charge high fees for high-risk options. A less prominent but much larger group are the elderly near retirement age, at a stage when they probably have the highest level of assets for their lifetime, but again, their financial literacy is no greater than average, and at they can often find themselves to be targets for high-fee and high-risk “advisers” and “planners.” Indeed, Lusardi’s work has found that the current elderly are often taking more debt into their retirement than previous generations.

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