People are shouldering enormous levels of personal financial responsibility, more so than ever before. At the same time, financial products have both proliferated and become much more complex. Financial Literacy matters at many levels. From a social welfare perspective, it obviously matters greatly whether people are able to provide for their families, live within their means, save money for the future, and survive economic shocks. But the benefits of financial literacy extend well beyond stronger household balance sheets to the promotion of a more resilient financial system and, ultimately, to the more efficient allocation of resources within the real economy
Now, is it reasonable in such a system to expect people to succeed? A new study Financial Literacy Around the World released last week from the Standard & Poor’s Ratings Services, would say no.
For the survey, interviews of more than 150,000 adults across over 140 countries were conducted. Individuals were tested on their knowledge of four basic financial concepts: numeracy, risk diversification, inflation, and compound interest (savings and debt). A person was defined as financially literate when she correctly answered at least three out of the four concepts. The results say just 1-in-3 adults show an understanding of basic financial concepts
George Washington University economics professor Annamaria Lusardi in her studies has documented the gaps in financial knowledge among different demographic groups. “Globally, those who are more financially literate are found to accumulate higher wealth, save more, and borrow at lower cost. The survey we have done around the world shows that the levels of financial literacy are at a crisis level, not just in developing countries but also in advanced economies”.
Fifty-five percent of adults in the major advanced economies, Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States, are financially literate. But even across these countries, financial literacy rates range widely, from 37 percent in Italy to 68 percent in Canada. And high school students do no better: the Programme for International Student Assessment (PISA) reported that most students do not reach the baseline level of proficiency in financial literacy. Moreover, Millennials don’t learn much about financial literacy after they leave high school. The one exception appears to be young adults in emerging economies, a group that scored relatively well.
It is worth reminding that financial inclusion is increasingly recognized as a critical part of the global agenda to reduce poverty and boost prosperity. The World Bank and partners issued commitments to advance financial inclusion and achieve “Universal Financial Access” by 2020. Although financial literacy is higher among the wealthy, well educated, and those who use financial services, billions of people are unprepared to deal with rapid changes in the financial landscape.
“The most vulnerable groups are young adults, the elderly, women, and low-income households. As a result, differences in financial literacy exacerbates economic and wealth inequality" Lusardi said. Worldwide, 35 percent of men are financially literate, compared with 30 percent of women. This gender gap is found in both advanced economies and emerging economies. The report also says that of adults living in the richest 60 percent of households in the major emerging economies, 31 percent are financially literate, against 23 percent of adults who live in the poorest 40 percent of households.
The size of the income gap is similar in the major advanced economies, but some suffer from even deeper inequality. For example, in Italy, 44 percent of adults who live in the richest 60 percent of households are financially literate compared with 27 percent of their counterparts who are poor.
But what can government, non-profits and employers do to improve financial well-being of individuals around the world? According to Lusardi, helping young people understand financial issues should be a priority, as younger generations are likely to have to bear more financial risks in adulthood than their parents, especially in saving, planning for retirement and covering their healthcare needs. ”One important step is to add financial literacy into school curricula, financial literacy is a life skill that is needed to succeed in today's society. Financial education can also be integrated into the workplace and in general in the places where people go to learn (libraries, museums, webpages)”.
Cover Photo: Photo by Justin Sullivan/Getty Images)