Wharton Pension Research Council Working Papers

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Working Paper

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Evidence suggests only a minority of American households feels “confident” about retirement saving adequacy. Little is known about why people fail to plan for retirement, and whether planning and information costs might affect retirement saving patterns. To better understand these issues, we devised and fielded a purpose-built module on planning and financial literacy for the 2004 Health and Retirement Study (HRS). This module measures how workers make their saving decisions, how they collect the information for making these decisions, and whether they possess the financial literacy needed to make these decisions. Our analysis shows that financial illiteracy is widespread among older Americans: only half of the age 50+ respondents could correctly answer two simple questions regarding interest compounding and inflation, and only one-third understood these as well as stock market risk. Women, minorities, and those without a college degree were particularly at risk of displaying low financial knowledge. We also evaluate whether people tried to figure out how much they need to save for retirement, whether they devised a plan, and whether they succeeded at the plan. In fact, these calculations prove to be difficult: fewer than one-third of our age 50+ respondents ever tried to devise a retirement plan, and only two-thirds of those who tried, actually claim to have succeeded. Overall, fewer than one-fifth of the respondents believed that they engaged in successful retirement planning. We also find that financial knowledge and planning are clearly interrelated: those who displayed financial knowledge were more likely to plan and to succeed in their planning. Moreover, those who did plan were more likely to rely on formal planning methods such as retirement calculators, retirement seminars, and financial experts, and less likely to rely on family/relatives or co-workers.

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Copyright 2006 © Pension Research Council of the Wharton School of the University of Pennsylvania. All rights reserved.


The research reported herein was pursuant to a grant from the US Social Security Administration (SSA) funded as part of the Retirement Research Consortium (RRC) and the Pension Research Council at the Wharton School. Without implicating them, we are grateful for comments provided by Rob Alessie, Maristella Botticini, Andrew Caplin, Gary Engelhardt, Alan Gustman, Mike Hurd, Arie Kapteyn, Mauro Mastrogiacomo, Mary Beth Ofstedal, William Rodgers, Chris Snyder, Maarten van Rooij, Arthur van Soest, Steve Utkus; and seminar participants at Dartmouth, Rand, the NBER Macroeconomics and Individual Decision Making Conference, the 7th Annual Joint Conference of the Retirement Research Consortium, Washington, D.C., the conference on “Individual Behavior with Respect to Retirement Saving,” Turin, Italy, the 8th Annual Research Conference on “Pensions in an Ageing Society,” Dutch Central Bank, The Netherlands, the conference on “Increasing the Effectiveness of Financial Education: Lessons from Economics and Psychology,” Dartmouth College. Mark Christman and Jason Beeler provided excellent research assistance. Opinions and errors are solely those of the authors and not of the institutions with whom the authors are affiliated. The findings and conclusions do not represent the views of the SSA, any agency of the Federal Government, or the RRC. All findings, interpretations, and conclusions of this paper represent the views of the author(s) and not those of the Wharton School or the Pension Research Council.

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Date Posted: 28 August 2019