<p class="first" id="P1">In an increasingly risky and globalized marketplace, people
must be able to make well-informed
financial decisions. Yet new international research demonstrates that financial illiteracy
is widespread when financial markets are well developed as in Germany, the Netherlands,
Sweden, Japan, Italy, New Zealand, and the United States, or when they are changing
rapidly as in Russia. Further, across these countries, we show that the older population
believes itself well informed, even though it is actually less well informed than
average. Other common patterns are also evident: women are less financially literate
than men and are aware of this shortfall. More educated people are more informed,
yet education is far from a perfect proxy for literacy. There are also ethnic/racial
and regional differences: city-dwellers in Russia are better informed than their rural
counterparts, while in the U.S., African Americans and Hispanics are relatively less
financially literate than others. Moreover, the more financially knowledgeable are
also those most likely to plan for retirement. In fact, answering one additional financial
question correctly is associated with a 3–4 percentage point higher chance of planning
for retirement in countries as diverse as Germany, the U.S., Japan, and Sweden; in
the Netherlands, it boosts planning by 10 percentage points. Finally, using instrumental
variables, we show that these estimates probably underestimate the effects of financial
literacy on retirement planning. In sum, around the world, financial literacy is critical
to retirement security.
</p>