INCOME AND WEALTH OVER THE LIFE CYCLE EVIDENCE FROM PANEL DATA

In this paper we examine household wealth and income in the Netherlands using data from the Socio Economic Panel (SEP) in the period 1987–89. We provide an evaluation of the quality of the data and some simple statistics which describe the behavior of wealth, saving, and income over the life cycle. We find there is substantial heterogeneity in the behavior of households, and wealth holdings vary substantially even among the same age group. By exploiting the panel feature of the SEP, we derive saving from first differencing wealth. We find that a sizeable fraction of households do not dissave when old and we find some evidence in favor of the bequest motive.     

Financial Literacy Skills for the 21st Century: Evidence from PISA

I am delighted to be asked to give the Colston Warne Lecture at the American Council on Consumer Interests annual conference. What I want to cover in this lecture is what I consider to be one of the most important topics for consumers: financial literacy. This topic is particularly important for the young, and in this lecture, I will describe the findings from the first international survey on financial literacy among high school students: the Programme for International Student Assessment (PISA). I am honored to chair the financial literacy expert group that designed the financial literacy assessment in PISA. Our journey to design that assessment included meetings in many countries and lasted for several years. It is one of the works I have enjoyed the most. I hope the findings from PISA will be a catalyst for changes in education policies, including adding financial literacy to school curricula.     

Financial literacy and its consequences: Evidence from Russia during the financial crisis

The ability of consumers to make informed financial decisions improves their ability to develop sound personal finance. This paper uses a panel data set from Russia, an economy in which household debt has grown at an astounding rate, to examine the importance of financial literacy and its effects on behavior. The paper studies both the financial and real consequences of financial illiteracy. Even though consumer borrowing increased very rapidly in Russia, only 41% of respondents demonstrate an understanding of interest compounding and only 46% can answer a simple question about inflation. Financial literacy is positively related to participation in financial markets and negatively related to the use of informal sources of borrowing. Moreover, individuals with higher financial literacy are significantly less likely to report experiencing a negative income shock during 2009 and have greater availability of unspent income and higher spending capacity. The relationship between financial literacy and availability of unspent income is higher in 2009, suggesting that financial literacy may better equip individuals to deal with macroeconomic shocks.     

Financial literacy and financial resilience: Evidence from around the world

We measure financial literacy using questions assessing basic knowledge of four fundamental concepts in financial decision making: knowledge of interest rates, interest compounding, inflation, and risk diversification. Worldwide, just one in three adults are financially literate—that is, they know at least three out of the four financial concepts. Women, poor adults, and lower educated respondents are more likely to suffer from gaps in financial knowledge. This is true not only in developing countries but also in countries with well-developed financial markets. Relatively low financial literacy levels exacerbate consumer and financial market risks as increasingly complex financial instruments enter the market. Credit products, many of which carry high interest rates and complex terms and conditions, are becoming more readily available. Yet only around half of adults in major emerging countries who use a credit card or borrow from a financial institution are financially literate. We discuss policies to protect borrowers against risks and encourage account holders to save.     

Explaining the wealth holdings of different cohorts: Productivity growth and Social Security

In this paper, we explore the reasons why different generations accumulate different amounts of wealth. We use basic economic theory to propose two indicators of the economic conditions under which households accumulate wealth. The first one represents productivity differences across cohorts: The aggregate level of gross national product per capita around the time the head of the household entered the labor market. The second measure summarizes the changes in Social Security during the head of household's working life. Using panel data from the Dutch Socio-Economic Panel, we show that productivity growth can explain all the cohort effects present in income data, while productivity growth and the generosity of Social Security can explain all the cohort effects present in household net worth. We also find a limited offset of Social Security on wealth holdings.     

Credit market constraints and labor market decisions

In this paper, we examine whether imperfections in credit markets spill over to other markets, particularly the labor market. We take the case of Italy, a country that experienced changes in the mortgage market brought about by the 1992 European unification and other institutional shifts. These events make Italy a good laboratory to study the effects of financial markets on the labor market. Using household data from the Bank of Italy between 1989 and 1993, we estimate the relationship between female participation and mortgage use. We find a significant impact of mortgages on women's participation in the labor market.     

Financial literacy and stock market participation

We have devised two special modules for De Nederlandsche Bank (DNB) Household Survey to measure financial literacy and study its relationship to stock market participation. We find that the majority of respondents display basic financial knowledge and have some grasp of concepts such as interest compounding, inflation, and the time value of money. However, very few go beyond these basic concepts; many respondents do not know the difference between bonds and stocks, the relationship between bond prices and interest rates, and the basics of risk diversification. Most importantly, we find that financial literacy affects financial decision-making: Those with low literacy are much less likely to invest in stocks.     

Baby Boomer retirement security: The roles of planning, financial literacy, and housing wealth

We compare wealth holdings across two cohorts of the Health and Retirement Study: the early Baby Boomers in 2004, and individuals in the same age group in 1992. Levels and patterns of total net worth have changed relatively little over time, though Boomers rely more on housing equity than their predecessors. Most important, planners in both cohorts arrive close to retirement with much higher wealth levels and display higher financial literacy than non-planners. Instrumental variables estimates show that planning behavior can explain the differences in savings and why some people arrive close to retirement with very little or no wealth.     

Saving puzzles and saving policies in the United States

In the past two decades the widely reported personal savingrate in the United States has dropped from double digits tobelow zero. First, we attempt to account for the decline inthe National Income and Product Accounts (NIPA) saving rate.The macroeconomic literature suggests that 40-50 per cent ofthe drop since 1988 can be attributed to households spendingstock-market capital gains. Another 30 per cent is accountingtransfers from personal saving into government and corporatesaving because of the way pensions and capital gains taxes aretreated in the NIPA. Second, while NIPA saving measures arewell suited to measuring the supply of new funds for investmentand capital accumulation, it is not clear that they should bethe target of government saving policies. Finally, we emphasizethat the NIPA saving rate is not useful in judging whether householdsare preparing for retirement or other contingencies. Many householdshave accumulated significant wealth, primarily through retirementsaving vehicles and capital gains, even as the saving rate slid.There remains a segment of the population who save little andwhose behaviour appears untouched either by the stock-marketboom or the slide in personal saving. We explore reasons andpolicy options for their puzzling low saving rate.