Financial Literacy: Evidence and Implications for Financial Education

May 2009

Are individuals are well equipped to make financial decisions, i.e., do they possess enough financial literacy to function effectively in today’s complex marketplace? This report shows that financial literacy cannot be taken for granted in the United States, nor in many other developed nations around the globe. New evidence finds that financial illiteracy in the population is widespread, particularly among vulnerable demographic groups such as the least educated, women, and minorities. This finding has serious implications for saving, retirement planning, retirement well-being, mortgage holdings, and more, and it identifies a role for policymakers working to boost financial literacy and education. The paper discusses financial literacy in the United States in the context of retirement planning. Due to the long-term shift away from defined benefit to defined contribution pensions, it is important to examine whether workers are adequately equipped to manage the resultant increased responsibility for planning their retirement. Given that financial literacy is an important predictor of retirement planning and other important financial decisions, widespread illiteracy is a serious cause for concern. Implications for policymakers as they consider financial education programs include the importance of targeting specific groups, simplifying financial decision-making, and providing specific steps and guidance to the least financially knowledgeable.