Economists are beginning to investigate the causes and
consequences of financial illiteracy to better understand why
retirement planning is lacking and why so many households arrive
close to retirement with little or no wealth. Our review reveals
that many households are unfamiliar with even the most basic
economic concepts needed to make saving and investment decisions.
Such financial illiteracy is widespread: the young and older people
in the United States and other countries appear woefully
under-informed about basic financial concepts, with serious
implications for saving, retirement planning, mortgages, and other
decisions. In response, governments and several nonprofit
organizations have undertaken initiatives to enhance financial
literacy. The experience of other countries, including a saving
campaign in Japan as well as the Swedish pension privatization
program, offers insights into possible roles for financial literacy
and saving programs.
Workers and retirees have increasingly been asked to take on an
unprecedented degree of responsibility for their retirement and
other saving, as defined benefit pensions decline and government
programs face insolvency in one country after another. As a result,
consumers now confront a bewildering array of financial decisions
and a wide range of financial products ranging from 401(k) plans to
Roth to regular Individual Retirement Accounts, phased withdrawal
plans to annuities, and many more. This process implies that it is
becoming ever more important for households to acquire and manage
economic know-how. But in practice, there is widespread financial
illiteracy; many households are unfamiliar with even the most basic
economic concepts needed to make sensible saving and investment
decisions. This has serious implications for saving, retirement
planning, retirement, mortgage, and other decisions, and it
highlights a role for government, employers, and financial
institutions working to boost financial literacy and education in
the population. The Organization for Economic Cooperation and
Development (OECD, 2005) defines "financial education" as:
"The process by which financial consumers/investors improve their
understanding of financial products and concepts and, through
information, instruction, and/or objective advice, develop the
skills and confidence to become more aware of financial risks and
opportunities to make informed choices, to know where to go for
help, and to take other effective actions to improve their financial
well-being."
Building upon this definition, we provide a review of the current
state of financial literacy and financial education programs and
discuss whether consumers/investors appear to possess the financial
literacy necessary to process financial information and formulate
adequate saving plans. We also offer some examples of efforts to
enhance financial literacy.
