Financial Literacy, Evidence from the Cusp of Retirement

Jason S. Seligman, John Glenn School of Public Affairs, Ohio State University
Jason S. Seligman, John Glenn School of Public Affairs, Ohio State University

Jason Seligman presented this paper at the Family Financial Security Symposium in April, 2010.

Following a survey of employees estimated to be one year from retirement Seligman analyzed responses to a twelve item financial literacy quiz relating scores to evidence of planning exercises, self-assessed proficiency with economics, education, wealth, IRA ownership and a battery of demographic controls.  He find evidence of difficulty self-assessing understanding of economics and concepts related to financial literacy.

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Measures of satisfaction with finances and with health are each better predictors of score than self-assessed ability. Remarkably, higher level wealth & education groups show evidence of being least self-aware, and are remarkably overconfident when considering the distance between their self assessed proficiency and actual performance on the quiz. Based on evidence I conclude that reported self-assessment is of limited use. I find exercises related to compound interest are important building blocks for understanding financial decisions regarding lump-sums. Because some of those who might benefit the most from education may not be aware of their needs, and because evidence of a strong cluster of this type is observed to exist among the most well off, as well as making informed decisions on their own, surveyed participants are likely to benefit from educational tools that help them engage and assess work with financial managers.