Financially speaking, the world has appeared in a simple, innocent place. Savers can put money in bank accounts and earn a reasonable interest rate, and eventually build their nest egg. Workers in developed countries would get tired of knowing that pensioners and the state provide for their needs, with the pension they retire.
Ever since American Italian economist Annamaria Lusardi, a world expert on financial literacy and professor at George Washington University, began devoting her career to studying financial literacy, these reassuring certainties have melted away. The average modern worker in a rich country now has to take full responsibility for ensuring that they have enough resources to get through the age.
In the U.S. in 1980, about 40 percent of all retirement plans were defined contributionThis means that its value depends on how much money a worker has invested in their careers. By the beginning of the millennium, it had increased to 90 percent. For most millennial workers, the idea that their employer will finance their retirement is nothing more than a beautiful 20th-century relic.
At the same time, the financial decisions people have to make to save for retirement have become much more complicated. Near-zero interest rates mean that savers can no longer hide their money in a boring bank account and expect it to survive the devastation of inflation over time. Looking for higher returns, more and more they have turned to the stock market as a sensible long-term savings tool, but it offers many opportunities to make disastrous mistakes.
“Younger people are facing a much more complicated financial situation than their parents had,” says Lusardi. ‘My parents’ generation lived in a time of inflation canceling their debts, they had very good pensions and their investments in financial markets were very simple. Young people face great challenges. The pension must be at least partially private. And the current demographics around the world mean that governments can not sustain the pensions given to previous generations. ”
For Lusardi, it all means that the need for widespread education on how to save and manage money is greater than ever. But when she and her colleagues began measuring 20 years ago how much Americans know about personal finances, they realized that this was not a topic that was taken very seriously by the general economy.
‘When we started discussing financial literacy in academic circles, people thought: why are you working on such an irrelevant topic? she says. ‘Economists think that financial knowledge matters, but they assume that when someone faces a very important financial decision, a way is found to make the right, rational choice, whatever it is. But we have seen that this is not true. People make bad decisions. ”
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Lusardi found ways to measure the basic financial literacy of Americans, but soon discovered that minimal data existed. However, she and her colleagues discovered that the 2004 Health and Retirement Study, a survey of more than 50s, contained questions that measured basic numbers and financial literacy. Using the answers to these questions, they sought to map out the basic level of financial education in this important section of the American population. The results were not encouraging.
Only about half of the Baby Boomer respondents (51-56 years old), with the largest amount of savings, financial assets and gained financial experience, were able to answer a question that divided $ 2 million into five. The respondents were better at answering the question: ‘If the chance of getting a disease is 10 percent, how many people out of 1,000 would get the disease?’ with about 80 percent giving the correct answer. But when it comes to a question based on calculating the composition of interest on a bank account over two years, less than 20 percent could do so.
Lusardi’s work also found that if financial literacy among older and richer people is weak, it is even worse among the young. At the same time, the explosion of online day trading and speculation about cryptocurrency has made young people more vulnerable to ending up with their savings or even in trade-related debt, than ever before.
“My research shows that young people have a very low financial knowledge, compared to other ages, which is clear in a sense, as young people have little experience,” she says.
‘I was at a conference in the Austrian Alps recently, and I found out how much the young people are interested in crypto. During the pandemic is a time when people have to set aside more savings, and at the same time we are worried that people will chase higher returns without realizing that they are taking a lot of risk. Everyone is a genius when the market rises, but the most important thing is what happens when the market falls.
Her work has also shown that being richer and earning a large amount of money in a short period of time does not always isolate people from making financial mistakes.
One study Lusardi collaborated on was a study of the financial habits of NFL athletes, who earn millions of dollars before their income collapses as soon as they retire at a very young age compared to the larger population. The article found that despite earning more than average, the number of drafted NFL players has a similar or greater chance of bankruptcy than the average young college-educated person.
Another interesting, if counter-intuitive, finding of Lusardi’s work is that highly educated people, those with postgraduate qualifications, are also prone to lack of basic financial knowledge and to make disastrous decisions with their money.
“Medical doctors are probably one of the worst offenders,” she says. “They are rich, but they are not always sophisticated with their money, and they can often run the risk of getting scams.”
Given this evidence of poor overall savings literacy, Lusardi has increasingly applied her research to the expansion of financial education in schools around the world, an area that many national curricula still ignore. She was appointed as an advisor to the Italian government on financial education in 2017, and also worked at the office of financial education at the US Treasury.
Lusardi started working on an educational project in 2019 in Paglieta, a small town in the Abruzzo region of Italy, where she and other experts talked to a local school about financial literacy topics in the town hall for children, parents and grandparents.
At the local school, Lusardi’s initiative involved students discussing business ideas and making detailed financial plans for their prospective projects. Some older students started growing vegetables and selling them on the local market to better understand how to run a real business. Last year, some of the students, with the help of the school, took out a loan from a local bank to finance the purchase of land to grow their crops.
Stella Marchionno, one of the local organizers in Paglieta, said the children at school would learn about small, seemingly harmless financial products they would probably have to buy later in life, such as insurance policies. They would separate into pairs and one child would take on the role of salesman, explain the product, and the other would ask them questions.
“This is very, very important for the children, as they usually do not learn anything about these things in ordinary school,” says Marchionno. “They were very enthusiastic and came up with their own ideas and also studied a lot on their own.”
Lusardi says she now believes that educating children in financial literacy is critical. Growing up in Italy, her father – an entrepreneur – regularly took her to business meetings. This, she says, has meant that she has had conversations about money since she was a child.
‘I’ve always had the exposure. Discussions about economics and finance is something I have always had in my home. I then did not realize how important it was to sit there and be exposed to the ideas. ”
According to her, not all children are so happy – which means that widespread education in schools is the only way to equip people with the right tools to manage their own money effectively.
“It is critical to have financial education in schools,” she says. ‘Not all parents will talk to their children about these topics. And many parents themselves are not very financially literate. If you do not have this knowledge, it is difficult to achieve it, and [you] decides ‘this is not for me’.
Lusardi’s research has also shown that there is often a big difference in the level of financial education between men and women, including in her country of birth.
‘I’m a woman, and I’m an Italian woman, and the statistics on gender differences in financial literacy show a huge difference between men and women, not just in Italy, but all over the world. Money can be a topic that people talk about uncomfortably, it can cause a lot of anxiety. This is why people need to talk to their children about money, and especially to their daughters. We need to make this topic something you talk about. ”
But, since even highly educated people still do stupid things with their money, will widespread financial literacy programs in schools be enough?
‘The analogy I give is road safety. We built great roads, set up traffic lights and set speed limits. But we are also going to ask people to have a driving license, ”she says. ‘Currently, people without training are thrown on the road. Yes, if we do not have good regulation, people also make bad mistakes. If there are bad financial products, the regulator should prevent them. ”
Allowing children to enter the world without financial education is the same as allowing people to run around without a driver’s license. “People need to know the road rules. Does that mean we have no traffic accidents? No. But think what would happen if we had no driving tests? She says.
‘We need people to know the ABC of finance, otherwise we’ll have so many accidents. Not everyone will always make good decisions, but at least they have the basic tools they need. ”