Wealth, Savings and Credit Compliance: Does Economic (and financial) Literacy Matter? Celeste Varum and Alla Kolyban Universidade de aveiro Universidade de Aveiro, 16 de julho de 2014 5. Conferência Internacional de ed. Financeira.
The study has been conducted under Research project Economicando (PTDC/EGE-ECO/100923/2008), financed by FEDER funds through the Programa Operacional Fatores de Competitividade - COMPETE and by national funds through the FCT - Fundação para a Ciência e Tecnologia.
1. INTRODUCTION 2. ECONOMIC LITERACY - Economic/financial literacy and financial behaviour of individuals - The Importance of Economic/Financial knowledge 3. DATA - The Survey design; - The Sample. 4. WHO IS ECONOMICALLY/FINANCIALLY LITERATE? 3
4. ECONOMIC/FINANCIAL LITERACY AND OVER-INDEBTEDNESS - Model - Descriptive findings; - Empirical results. 5. ECONOMIC /FINANCIAL LITERACY AND RETIREMENT SAVING - Model - Descriptive findings; - Empirical results. 6. ECONOMIC /FINANCIAL LITERACY AND ABILITY TO SAVE - Model - Descriptive findings - Empirical results 7. CONCLUSION 4
Motivation The rapid growth in household debt, low propensity to save and their link to the current financial crisis have emphasized insufficient economic & financial knowledge of consumers that casts serious doubts on their abilities to make financial decisions. Individuals are increasingly being asked to take responsibility for their financial wellbeing over their life cycle, Indebtedness Saving Retirement Wealth
Motivation But.scarce literature about link between : economic & financial literacy and - individuals over-indebtedness, - household wealth, - retirement savings and ability to save.
Purpose & Contribution Measuring Economic literacy, including financial matters; Measuring individuals perception of over-indebtedness and saving behaviour; Assessment of interaction between economic literacy and over-indebtedness, retirement planning, saving ability, and, eventually, household wealth, exploring the case of Portugal.
Economic/financial literacy and financial behaviour Over indebtedness Money management Savings Retirement savings Stock market participation Financial results Household wealth management Lusardi and Tufano (2009); Moore (2003). Hilgert, Hogarth and Beverly (2003). Bernheim (1995); Lusardi (2004). Lusardi and Mitchell (2009, 2011); Bucher-Koenen (2009). Christelis, Jappelli and Padula (2010); Yoong (2011); van Rooij, Lusardi and Alessie (2011). Smith, McArdle and Willis (2010); Banks (2010). Lusardi and Mitchell (2007); Bateman et al. (2011); van Rooij, Lusardi and Alessie (2012); etc.).
Economic/financial literacy and financial behaviour Adequate economic knowledge A long-term perspective when making financial decisions; The ability to understand, communicate, manage, plan, evaluate and accurately decide and forecast the financial issues; Reduces the cost of collecting and treating information; Individuals control of their spending, saving, budgeting and planning for the future; Household wealth accumulation and higher income. Insufficient economic knowledge A short-term perspective when making financial decisions - low savings; Costly mortgage defaults and financial mistakes, debt loads; High-cost transactions (high borrowing rates, extra fees or excessive interest rates on credit card debt, etc.); High cost pension management; Lower household wealth accumulation and income.
Survey Design Data Demographic and socioeconomic characteristics (e.g. age, gender, nationality, marital status, level of education, employment status, number of family members, mathematical skills, etc). Individuals judgments about their indebtedness, saving ability, and actual saving behavior. Self-reported information on household income category. Questionnaire
Data Questionnaire on economic and financial knowledge - 29 multiple-choice questions - 22 on economics - 7 on financial aspects
Sample (618 respondents) Gender Female 70.9 Male 28.4 Nationality Portuguese 93.2 Other 6.6 Age 26-35 14.9 36-45 67.7 46-55 15.5 56-67 1.5 Education level From 0 to 9th grade 15.8 12th grade 24.4 Higher education 58.6 <1,000 19.4 1,001-2,000 30.5 Income 2,001-6,000 37.3 6,001-10,000 0.8 >10,001 0.3 Not sure 11.6 Marital status Married 79 Single 21 Self employed 11 Employment status Employed 77 Retired 1 %
Sample (618 respondents) % Number of family members 3.7 Mathematical skills Good mathematical skills 11 Insufficient mathematical skills 89 Attended some kind of training in Economics/Finance Yes 26.3 No 62.4 No answer 11.3
Sample (618 respondents) Are you able to save some money? Yes 53 No 47 Retirement 37 Spending (holidays) 16 Saving preferences Purchase durable goods 51 Education of children 89 Unforeseen expenditure 88 % Can you assess your capacity to pay the debt? I can meet my commitments 66.1 I cannot meet my commitments 20.2 I don t have credits 12.0 No answer 1.8
Who is economically/financially literate? % correct answers on economic literacy Gender Female 72.4 Male 83.3 Nationality Portuguese 76.9 Other 56.9 Age 26-35 61.7 36-45 78.7 46-55 75.8 56-67 73.9 Education level From 0 to 9th grade 46.8 12th grade 72.8 Higher education 84.0 <1,000 61.5 1,001-2,000 77.4 Income 2,001-6,000 86.3 6,001-10,000 94.0 >10,001 95.0 Self-employed 80.80 Employment status Employee 77.24 Retired 63.64 Unemployed 63.37
Who is economically/financially literate? % correct answers on economic literacy % correct answers on financial literacy Gender Female 72.4 60.7 Male 83.3 71.3 Nationality Portuguese 76.9 65.7 Other 56.9 36.6 Age 26-35 61.7 52.0 36-45 78.7 67.0 46-55 75.8 61.8 56-67 73.9 59.4 Education level From 0 to 9th grade 46.8 44.5 12th grade 72.8 60.5 Higher education 84.0 70.5 Income Employment status <1,000 61.5 50.2 1,001-2,000 77.4 65.7 2,001-6,000 86.3 74.7 6,001-10,000 94.0 84.5 >10,001 95.0 74.5 Self-employed 80.80 66.62 Employee 77.24 64.92 Retired 63.64 55.10 Unemployed 63.37 53.45
1º Question Is there a relationship between Economic and financial literacy and Overindebtedness?
1 st MODEL: Variables Description Dependent MEET CREDIT 1= Meet credits; 0= over indebted (Probit model) Explanatory EF_TOTAL_PERC Percentage of correct answers (X*100/29) E_TOTAL_PERC Percentage of correct answers in economics (X_E*100/22) F_TOTAL_PERC Percentage of correct answers (X_F*100/7) INCOME 1 to 5, from lower levels of income to higher levels of income AGE Age in years AGE2 Age in years squared GENDER 1=male; 0=female NATIONALITY 1=Portuguese; 0= other EDC1 From 0 to 9 years schooling: 1 yes; 0 no EDC2 12 years schooling: 1 yes; 0 no EDC3 Higher education: 1 yes; 0 no ECON Attended some kind of training in Economics/ finance: 1 yes; 0 no CNP 1 to 9: 1 corresponds to the activities corresponding to the highest level of qualifications and 9 to the lowest FOLLOW Frequently follows economic matters in the media: 1 yes; 0 no SAVE Saves: 1 yes; 0 no AQGOODS Saves to acquire durable goods: 1 yes; 0 no RETIREMENT Saves for retirement: 1 yes; 0no IMPORT Degree of importance of economic knowledge to several
DESCRIPTIVE FINDINGS Bivariate analysis (Indebtedness and literacy scores) Economic and/or financial literacy among borrowers % correct answers on economic/financial literacy % correct answers on economic literacy % correct answers on financial literacy Meet credits 77.99 80.82 69.07 Over indebted 65.30 68.47 55.31 F test 50.54 44.70 39.25 p-value 0.00 0.00 0.00
Empirical results: Dependent variable: Meet /Does not Meet credit (Probit Model) Explanatory variables Model 1 Coefficients (z-statistic) Model 2 Coefficients (z-statistic) Model 3 Coefficients (z-statistic) C -1.652(-0.476) -1.832(-0.532) -1.463(-0.415) EF_TOTAL_PERC 0.012***(1.698) E_TOTAL_PERC 0.009(1.252) F_TOTAL_PERC 0.011**(2.096) AGE -0.031(-0.203) -0.023(-0.151) -0.033(-0.210) AGE2-8.38E-05(-0.046) -0.0002(-0.094) -7.04E-05(-0.038) GEN 0.310(1.412) 0.334(1.527) 0.315(1.438) NAC -0.372(-0.657) -0.292(-0.525) -0.433(-0.767) EDC2 0.934**(2.346) 0.941**(2.362) 1.002**(2.517) EDC3 0.871**(1.979) 0.891**(2.025) 0.922**(2.100) ECON -0.266(-1.229) -0.253(-1.166) -0.237(-1.106) CNP -0.047(0.709) 0.045(0.682) 0.040(0.597) INCOME 0.536*(3.193) 0.549*(3.285) 0.535*(3.191) FOLLOW 0.154(0.735) 0.157(0.752) 0.140(0.667) AQGOODS 0.336(1.396) 0.340(1.412) 0.375(1.562) RETIREMENT 0.020(0.083) 0.018(0.074) 0.051(0.209) SAVE 1.161*(5.570) 1.151*(5.540) 1.188*(5.681) IMPORT 0.019(0.702) 0.023(0.859) 0.021(0.768) Total obs 357 357 357 McFadden R-Squared 0.34090 0.33721 0.34526 LR statistic 121.4201 120.1074 122.9730 Prob(LR statistic) 0.00000 0.00000 0.00000 Hosmer-Lemeshow chi2(8) 11.72/ p-value 0.16 8.15/ p-value 0.45 12.90/ p-value 0.12
2º Question Is there a relationship between Economic and financial literacy and Wealth
Dependent variable: Income (OLS) Coefficients (t-statistic) Explanatory variables Model 1 Model 2 Model 3 Coefficients (t-statistic) Coefficients (t-statistic) Coefficients (t-statistic) C -3.114*(-2.750) -3.183*(-2.804) -3.178*(-2.800) EF_TOTAL_PERC 0.008*(3.269) E_TOTAL_PERC 0.006*(2.858) F_TOTAL_PERC 0.005*(2.875) AGE 0.129**(2.512) 0.132**(2.561) 0.138*(2.708) AGE2-0.001**(-2.115) -0.001**(-2.159) -0.001**(-2.298) GEN 0.004(0.062) 0.016(0.246) 0.011(0.176) NAC 0.757*(4.725) 0.792*(4.975) 0.763*(4.736) EDC2 0.281**(2.172) 0.286**(2.199) 0.310**(2.403) EDC3 0.822*(5.977) 0.836*(6.066) 0.856*(6.270) ECON -0.066(-1.014) -0.065(-0.989) -0.043(-0.672) CNP 0.005(0.222) 0.005(0.218) -0.003(-0.121) FOLLOW 0.026(0.387) 0.033(0.498) 0.021(0.317) AQGOODS 0.053(0.748) 0.050(0.694) 0.082(1.145) RETIREMENT -0.009(-0.126) -0.012(-0.156) 0.006(0.082) SAVE 0.399*(6.608) 0.397*(6.530) 0.421*(6.984) IMPORT 0.007(0.816) 0.009(0.953) 0.010(1.151) Total obs 394 394 394 R-Squared 0.48551 0.48216 0.48229 Adjusted R-squared 0.46650 0.46303 0.46316 F- statistic 25.5461 25.2060 25.2191 Prob(F-statistic) 0.00000 0.00000 0.00000 Breusch-Pagan chi2(1) 0.26 0.32 0.10 Prob > chi2 0.6068 0.5700 0.7542
3º Question Is there a relationship between Economic and financial literacy and Saving for retirement?
2 nd MODEL: Description RETIREMENT EF_PERC E_PERC F_PERC AGE (26-35) AGE (36-45) AGE (46-55) AGE (56-67) First School Middle School High School University GENDER Marital status Family Self employed Employee Retired Unemployed Household shock Income Spending Purchase Education Unfor_expend 1= Save for retirement; 0 = Do not Percentage of correct answers (X*100/29) Percentage of correct answers in economics (X_E*100/22) Percentage of correct answers (X_F*100/7) 0 1 dummy variables, individual s age take place within mentioned age category 4 years of schooling: 1 yes; 0 no 9 years of schooling: 1 yes; 0 no 12 years of schooling: 1 yes; 0 no Higher education: 1 yes; 0 no 1 = male; 0 = female 1= Married/living together; 0 = Single/divorced/widow Number of family members living with household 0 1 dummy variables, individual s employment status takes place within mentioned status categor 1 = No difficulties to pay credits ; 0 = otherwise. 1 = monthly household income > 6,000 and excellent financial situation; 0 otherwise 1= Save for irregular spending; 0 = Do not 1= Save for purchase durable goods; 0 = Do not 1= Save for education of children; 0 = Do not 1= Save for unforeseen expenditure; 0 = Do not
DESCRIPTIVE FINDINGS Bivariate analysis (Retirement saving and literacy scores) Economic and/or financial literacy among retirement savers % correct answers on economic/financial literacy % correct answers on economic literacy % correct answers on financial literacy Savers 76.33 79.15 67.48 No savers 72.93 75.99 63.31 F test 4.61 3.76 4.73 p-value 0.03 0.05 0.03
Empirical results: Dependent variable: Save for retirement / Do not (Multivariate OLS) Explanatory variables Model 1 Coefficients (t-statistic) Model 2 Coefficients (t-statistic) Model 3 Coefficients (t-statistic) C 1.01* (4.82) 1.01* (4.81) 1.09* (5.17) EF_TOTAL_PERC 0.004* (4.18) E_TOTAL_PERC 0.004* (4.02) F_TOTAL_PERC 0.002* (3.13) AGE (26-35) -0.16 (-0.88) -0.156 (-0.88) -0.15 (-0.84) AGE (36-45) -0.128 (-0.75) -0.128 (-0.75) -0.105 (-0.61) AGE (46-55) -0.12 (-0.69) -0.12 (-0.69) -0.099 (-0.56) Middle School 0.12 (1.31) 0.12 (1.33) 0.13 (1.44) High School 0.12 (1.31) 0.13 (1.42) 0.17*** (1.99) University 0.08 (0.91) 0.08 (0.91) 0.139 (1.62) GENDER -0.03 (-0.89) -0.03 (-0.80) -0.2 (-0.54) Marital status -0.004 (-0.11) -0.003 (-0.07) -0.005 (-0.12) Number of family members -0.006 (-0.34) -0.006 (-0.33) -0.005 (-0.29) Self employed 0.21* (3.20) 0.20* (3.13) 0.23* (3.51) Employee 0.12** (2.43) 0.12** (2.38) 0.14** (2.76) Retired 0.26 (0.95) 0.26 (0.97) 0.26 (0.94) Household shock -0.005 (-0.13) -0.002 (-0.04) -0.003 (-0.07) Income 0.21* (3.23) 0.22* (3.28) 0.19* (2.91) Spending - 0.53* (-11.78) - 0.53* (-11.76) - 0.54* (-11.85) Purchase - 0.63* (-20.73) - 0.63* (-20.72) - 0.62* (-20.39) Education - 0.38* (-7.09) - 0.37* (-6.99) - 0.39* (-7.19) Unfor_expend - 0.29* (-6.08) - 0.29* (-6.06) - 0.29* (-5.96)
Reverse causality Possible reverse causality between economic and/or financial knowledge and retirement planning. Household could acquire knowledge: developing a retirement plan (Van Rooij, Lusardi & Alessie 2012); discussing retirement plans with others (Van Rooij, Lusardi & Alessie 2011b); investing in financial education (e.g. retirement seminars) to understand retirement plan (Lusardi & Mitchell 2011b). We employ mathematical skills and motivation towards Economics as instruments for the literacy measures. Instrumental variables MAT MOTIV_E Definition Good mathematical skills: 1 yes; 0 no Degree of importance of economic knowledge to several situations: 0 to 25
(Multivariate IV OLS): Dependent variable: Save for retirement / Do not (instr: MAT; MOTIV_E) Explanatory variables Model 1 Coefficients (t-statistic) Model 2 Coefficients (t-statistic) Model 3 Coefficients (t-statistic) C 0.71** (2.44) 0.64** (2.06) 0.87* (3.27) EF_TOTAL_PERC 0.02* (3.00) E_TOTAL_PERC 0.02* (2.93) F_TOTAL_PERC 0.013* (2.84) AGE (26-35) -0.19 (-1.31) -0.20 (-1.36) -0.17 (-1.16) AGE (36-45) -0.25*** (-1.67) -0.268*** (-1.77) -0.20 (-1.34) AGE (46-55) -0.21 (-1.40) -0.23 (-1.51) -0.15 (-1.03) Middle School 0.06 (0.47) 0.05 (0.37) 0.8 (0.70) High School -0.08 (-0.60) -0.12 (-0.84) 0.4 (0.34) University -0.21 (-1.44) -0.27 (-1.56) -0.08 (-0.71) GENDER -0.12** (-2.46) -0.12** (-2.44) -0.11** (-2.10) Marital status -0.015 (-0.33) -0.01 (-0.24) -0.023 (0.47) Number of family members -0.013 (-0.64) -0.01 (-0.60) -0.01 (-0.65) Self employed 0.145*** (1.73) 0.112 (1.21) 0.23* (2.86) Employee 0.061 (0.78) 0.04 (0.45) 0.12 (1.65) Retired 0.20 (0.49) 0.21 (0.51) 0.18 (0.46) Household shock -0.03 (-0.55) -0.02 (-0.44) -0.5 (-0.73) Income 0.27* (3.54) 0.30* (3.37) 0.20* (3.14) Spending - 0.51* (-8.57) - 0.51* (-8.10) - 0.53* (-8.86) Purchase - 0.65* (-17.46) - 0.66* (-17.36) - 0.63* (-15.81) Education - 0.41* (-4.52) - 0.39* (-4.19) - 0.46* (-4.93) Unfor_expend - 0.31* (-3.83) - 0.32* (-3.87) - 0.31* (-3.55)
4º Question Is there a relationship between Economic and financial literacy and Saving?
3 rd MODEL: Description Ability to save EF_PERC E_PERC F_PERC AGE (26-35) AGE (36-45) AGE (46-55) AGE (56-67) First School Middle School High School University GENDER Marital status Family Self employed Employee Retired Unemployed Household shock Income Mathematical skills Training in Economics and 1= Able to save 0 = not Percentage of correct answers (X*100/29) Percentage of correct answers in economics (X_E*100/22) Percentage of correct answers (X_F*100/7) 0 1 dummy variables, individual s age take place within mentioned age category 4 years of schooling: 1 yes; 0 no 9 years of schooling: 1 yes; 0 no 12 years of schooling: 1 yes; 0 no Higher education: 1 yes; 0 no 1 = male; 0 = female 1= Married/living together; 0 = Single/divorced/widow Number of family members living with household 0 1 dummy variables, individual s employment status takes place within mentioned status categor 1 = No difficulties to pay credits ; 0 = otherwise. 1 to 4, from lower levels of income to higher levels of income Good mathematical skills: 1 yes; 0 no Attended some kind of training in Economics/ Finance: 1 yes; 0 no
DESCRIPTIVE FINDINGS Bivariate analysis (Ability to save and literacies scores) Economic and/or financial literacy score depending on ability to save % correct answers on economic/financial literacy % correct answers on economic literacy % correct answers on financial literacy Able to save 79 82 69 Unable 67 70 59 F test 59.81 62.52 29.84 p-value 0.00 0.00 0.00
Empirical results: Dependent variable: Ability to save (Multivariate OLS) Explanatory variables Model 1 Coefficients (t-statistic) Model 2 Coefficients (t-statistic) Model 3 Coefficients (t-statistic) C -0.22 (-0.83) -0.26 (-0.99) -0.10 (-0.39) EF_PERC 0.003** (1.99) E_PERC 0.003* (2.66) F_PERC -0.0003 (-0.29) Mathematical skills 0.05 (0.89) 0.05 (0.86) 0.06 (1.04) Age (26-35 years) -0.19 (-0.86) -0.18 (-0.81) -0.11 (-0.52) Age (36-45 years) -0.11 (-0.49) -0.10 (-0.47) -0.192 (-0.87) Age (46-55 years) -0.18 (-0.81) -0.17 (-0.79) -0.19 (-0.87) Middle School 0.12 (1.03) 0.11 (0.97) 0.15 (1.27) High School 0.06 (0.54) 0.04 (0.37) 0.11 (1.03) University 0.12 (1.03) 0.09 (0.84) 0.18 (1.59) Gender -0.02 (-0.39) -0.02 (-0.45) -0.001 (-0.03) Marital status 0.17* (3.09) 0.17* (3.13) 0.16* (2.98) Number of family members -0.0004 (-0.02) -0.0003 (-0.01) -0.0007 (-0.03) Self-employed 0.011 (0.13) 0.002 (0.02) 0.03 (0.32) Employed -0.06 (-0.88) -0.06 (-0.97) -0.05 (-0.77) Retired -0.12 (-0.38) -0.12 (-0.38) -0.12 (-0.40) Household credit 0.42* (8.45) 0.42*(8.49) 0.42* (8.50) management Income 0.07* (3.04) 0.07* (2.93) 0.09* (3.86) Training in Economics and 0.08***(1.87) 0.08***(1.77) 0.09**(2.19) Finance Total obs 541 541 541
Conclusion The lower the level of economic and financial literacy among individuals the more likely they are to report problems in paying their debts. Individuals with higher economic and/or financial literacy are more likely to save for retirement. Economic and/or financial literacy influences pension saving behaviour rather than the other way around.
Conclusion There is strong positive correlation between economic literacy and ability to save. Previous training in Economics/Finance positively influences household ability to save. Therefore, economic/financial education becoming essential for the average household trying to decide how to balance its budget, buy a home, fund the children s education and ensure an income when the parents retire, etc.
Implications Indeed, widespread lack of economic and financial knowledge is a reasonable cause for concern. Consequently, more work is clearly needed to develop ways of measuring the success of financial education programmes, and governments need to invest time and money in evaluating them. Complementary role of additional research on economic and financial literacy.
Limitations and further work Small sample. For future research: Separate the impact of economic education on economic/financial ability and knowledge from other channels.
References Varum, C., Costa, J., & Kolyban, A. (2013) Economic literacy: Does it matter for over-indebtedness? Working paper in Economics No. 64/2013, University of Aveiro. Varum and Kolyban (2013) Wealth and Credit Compliance: Does Economic Literacy Matter? Financial Services Review. Submitted. Varum and Kolyban (2013) Economic and Financial Literacy and Retirement Savings Journal of Pension Economics and Finance. Submitted. Varum, Kolyban and Madaleno (2013) Ability to save and economic and/or financial literacy. Journal of Counseling and Planning. To be Submitted.
Obrigada! Celeste Amorim Varum (camorim@ua.pt)