by Rob Alessie, Maarten van Rooij and Annamaria Lusardi; CeRP WP N. 110/11
The paper has been realized for the Netspar Theme grant project “Financial Literacy: Evidence and Implications for Retirement Planning, Saving Behavior, and Financial Education Programs”, and presented at the CeRP workshop “Financial Literacy around the World” (FLat World) (Collegio Carlo Alberto, 20-21 December 2010).
We present new evidence on financial literacy and retirement preparation in the Netherlands based on two surveys conducted before and after the onset of the financial crisis. We document that while financial knowledge did not increase from 2005 to 2010, significantly more individuals planned for their retirement in 2010. At the same time, employees’ expectations about the level of their pension income are high compared to what retirement plans may realistically provide. However, financially knowledgeable employees report lower expected replacement rates and acknowledge higher levels of uncertainty. Moreover using instrumental variation for financial conditions and financial knowledge of relatives, we find a positive effect of financial literacy on retirement preparation. Employing the panel feature of our dataset, we show that financial knowledge has a causal impact on retirement planning. Our findings suggest that the formation of pension expectations might be an important mechanism contributing to the impact of financial literacy on planning.
Published: March 2011