The Challenges with More Choice: Cognition and Late Life Financial Literacy

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1 The Challenges with More Choice: Cognition and Late Life Financial Literacy P A M E L A H E R D U N I V E R S I T Y O F W I S C O N S I N, M A D I S O N W I T H SUPPORT FROM THE NATIONAL I N S T I T U T E S F O R A G I N G, P A G

2 The research reported herein was performed pursuant to a grant from the U.S. Social Security Administration (SSA) funded as part of the Financial Literacy Research Consortium. The opinions and conclusions expressed are solely those of the author(s) and do not represent the opinions or policy of SSA or any agency of the Federal Government or of the of the University of Wisconsin System, including the Center for Financial Security.

3 The Retirement Income Stool: More Choice! The Old Stool The New Stool Savings Social Security Savings Social Security Defined Benefit Defined Contribution

4 Medicare: More Choice Medicare Advantage Part D Draft: Not for Dissemination. SSA FLFC 19-F , University of Wisconsin

5 Cognitive Change in Old Age Among those 60 and older incidence of cognitive impairment ranges from 10-50%. Those promoting these larger structural changes (move from DB to DC pensions, privatizing Social Security, increased individualization of retirement income), have generally the unique issues facing those in late life.

6 Financial Literacy The ability to use knowledge and skills to manage financial resources effectively for a lifetime of financial wellbeing. President s Advisory Council on Financial Literacy Area of growing research, in large part because of the growing complexity of the retirement landscape. But this literature has generally ignored the unique issues facing those in late life.

7 Financial Literacy Existing measures include: Knowledge (ability to calculate compound interest) Behavior based measures (i.e. debt levels, participation in retirement plans) Knowledge of individual financial resources Captures both knowledge and behavior Usefulness may vary based on age of respondents

8 Research Question How do cognitive measures correlate with knowledge of individual financial resources in late life?

9 Data: The Wisconsin Longitudinal Study 9 Draft: Not for Dissemination. SSA FLFC 19-F , University of Wisconsin

10 The Happy Days cohort

11 The Happy Days cohort

12 Sample Selection One Out of Three Original Sample Size = 10,317

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14 Data: Wisconsin Longitudinal Study 1 in 3 Wisconsin high school graduates from the class of 1957 We employ the 1957 and 2004 data.

15 Data: Wisconsin Longitudinal Study Outcome Measures (2004): Ability to answer values on all asset questions (percent of assets held for which amount was given). Ability to provide value of retirement accounts that accumulate a balance including IRAs, 401-ks, etc.

16 Data: Wisconsin Longitudinal Study Cognition Measures: Henmon Nelson (3 splines) (1957)-general cognition Category Fluency (2004)-executive retrieval Digit Ordering (2004)-working memory Delayed Recall (2004)-verbal memory

17 Data: Descriptives Median Range Median Men 47% Married 79% Women 53% Median Age College 28% No College 72% Fluency Score (0-47) 20 Median Income Digit Score (0-12) 7 $27,958 Recall (0-10) 4

18 Findings Cognition Matters. But it mostly only matters for those without college degrees. Draft: Not for Dissemination. SSA FLFC 19-F , University of Wisconsin

19 Results: Private Pension For those without a college degree, 1957 Cognition, category fluency (2004), digit ordering (2004), and delayed recall (2004) are all associated with private pension knowledge.

20 Results: Private Pensions

21 Results: Private Pensions

22 Results: Private Pensions

23 Results: Assets Summary 1957 Cognition, category fluency (2004), and digit ordering (2004) are all associated with asset knowledge, while delayed recall (2004) is not. These effects are confined to those without college degrees.

24 Results: Assets Summary

25 Results: Assets Summary

26 Results: Assets

27 Discussion: Implications for Research Researchers need to more carefully consider the role that cognition plays in not only planning and wealth accumulation in preparation for retirement, but also decision-making IN retirement, especially in later years. What roles do family and friends play? Fund new questions in existing surveys or funding for secondary analysis of existing studies. There s a wealth of data that can shed light on these questions

28 Full contact info: Pamela Herd, 1080 Observatory Drive, Madison, WI 53706,

29 Data: Wisconsin Longitudinal Study Cognition Measures: IQ (3 splines) ( ) Cognitive Similarities (gi101re)-verbal comprehension Letter Fluency (gi210rec)-executive retrieval Category Fluency (gi310rec)-executive retrieval Digit Ordering (gi503re)-working memory Immediate Word Recall (gi413re)-verbal memory Delayed Word Recall (gi457re)-verbal memory

30 Data: Wisconsin Longitudinal Study Confounding Covariate Measures: Sex Age Parental SES (1957) Educational Attainment ( ) Coursework (English, Algebra, Trig/Physics) (1957) Henmon Nelson (Cognition) (3 splines) ( ) High School Rank ( ) Health (2004) Marital Status (2004) Income (2004)