1. Planning and Financial Literacy: How Do Women Fare? Annamaria Lusardi Dartmouth College & NBER Olivia S. Mitchell Univ. of Pennsylvania & NBER Presentation to the World Bank, January 24, 2008

2. Significance This paper is part of a larger research project on financial literacy and retirement security Individuals are increasingly in charge of making saving and investment decisions  Are they well-equipped to make these decisions?

3. How do women fare? Women are a particularly important group  Women live longer than men, thus savings need to last a long time  Because of shorter labor market tenures, women are less likely to have pensions or have less experience with pensions. Are women well equipped to make or continue to make financial decisions?

4. To evaluate these questions: We devised a module on Financial Literacy & Planning for the 2004 Health and Retirement Study (HRS)  Financial Literacy - Do women know basic economics/finance?  Planning - Do women calculate how much they need to save for retirement? How well do they plan?

5. 3 questions on Financial Literacy: (I) Interest Rate/Numeracy “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?” i) more than $102; ii) exactly $102; iii) less than $102; iv) don’t know (DK); v) refuse to answer.

6. Financial Literacy (II) Inflation “Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, would you be able to buy:” i) more than today with the money in this account; ii) exactly the same as; iii) less than today iv) DK; v) refuse.

7. Financial Literacy (III) Risk Diversification “Do you think the following statement is true or false? Buying a single company stock usually provides a safer return than a stock mutual fund.” i) true; ii) false; iii) DK; iv) Refuse.

8. Financial Literacy among older women (50+) (HRS module, N= 785) Responses CorrectIncorrectDKRefuse Interest rate61.9%24.7%11.6%1.8% Inflation70.6%14.5%12.8%2.1% Risk diversif.47.6%12.0%39.6%0.8%

10. Measuring Financial Literacy We have inserted these questions in: Rand American Life Panel NLSY Marketing Surveys Dutch DNB Survey We have devised a wider set of questions to measure literacy and financial sophistication. We find similar results. We have surveyed the evidence on literacy in the US and in other countries and find similar evidence of widespread illiteracy among women (Lusardi and Mitchell, Business Economics 2007).

11. 3 questions on Retirement Planning Trying to plan “Have you ever tried to figure out how much your household would need to save for retirement?” Developing a plan “Have you developed a plan for retirement saving?” Sticking to the plan “How often have you been able to stick to this plan? Would you say:” i) always; ii) mostly; iii) rarely; or iv) never?

12. What we find: Tried Have you ever tried to figure out how much your household would need to save for retirement? Yes (30.9%)No (68.2%) Developed a plan Have you developed a plan for retirement saving? Yes (58.5%) More or Less (7.3%) No (34.2%) Stuck to the plan How often have you been able to stick to the plan? Always (31.8%)Mostly (53.9%) Rarely 9.1 Never 3.2.%

13. Retirement Planners QuestionProportion Simple Planners Tried to figure out how much to save (yes) 30.9% Serious Planners Developed a plan (yes/more or less) 20.3% Committed Planners Able to stick to plan (always/mostly) 17.4%

14. Does financial literacy matter? Are the more financially literate women :  more likely to plan?  more likely to succeed in planning?

15. Probit Analysis of Simple, Serious, and Committed Planners : Accounting for Differences in Demographic Characteristics Simple Planners Serious Planners Committed Planners Correct on Interest Rate Correct on Inflation Correct on Risk Diversificat..014 (.042).065 (.045).095 (.05)*.003 (.032).029 (.036).093 (.042)** -.001 (.029).028 (.032).061 (.038)* DK Interest Rate DK Inflation DK Risk Diversification -.182 (.05)**.054 (.094) -0.056 (.055) -.122 (.043)*.021 (.078) -.037 (.045) -.100 (.038)*.050 (.079) -.045 (.040) Pseudo R 2.123.139.144

16. The relationship between literacy and planning We address reverse causality in another paper using financial literacy in the distant past as an instrument for current literacy. We find similar results in another paper: “Baby Boomer Retirement Security: The Roles of Planning, Financial Literacy and Housing Wealth” (JME, 2007) which uses different measures of planning and financial literacy.

17. More on Financial Literacy  Other papers we have written on this topic are available on our web pages:  http://www.pensionresearchcouncil.org/  http://www.dartmouth.edu/~alusardi  I edited a book “Overcoming the saving slump: How to increase the effectiveness of financial education and saving programs” for the University of Chicago Press that discusses these topics at length.