Income and wealth inequality have increased in recent decades. Financial knowledge is low worldwide and unequally distributed, and plays an important role in wealth inequality. Those with higher financial knowledge earn higher returns on investments. Increasing financial literacy in schools could significantly reduce wealth inequality and provide large welfare benefits, especially as responsibility for retirement savings shifts to individuals. While financial education programs may not change all behaviors, that does not mean such policies are ineffective.
MICHAUD Pierre-Carl - 2014 Symposium to Advance Financial Literacy
1. S
Income and Wealth Inequality The Importance of Financial Knowledge
Pierre-Carl Michaud,
ESG - Université de Québec à Montréal, Canada
Professor of Economics
Industrielle Alliance Chair in the Economics of Demographic Change
OECD/GFLEC Symposium
Paris, November 6, 2014
2. Motivation
SWhat we know
SIncome inequality has risen, driven in large part by labor income (wages and salaries)
SNew evidence points also to widening wealth inequality
SWhy policymakers (should) care?
SGrowing fraction of retirement income financed from savings (adequacy of retirement income)
5. Changing Pension Landscape
SMany countries have moved from Defined Benefit (DB) to Defined Contribution (DC) in their mandatory pension schemes
SPrivate pensions are increasingly of the DC type
SPressure from aging populations may further limit public pension generosity
SResponsability to save is being transferred to individuals
9. Financial Knowledge
by Age and Education
Source: Lusardi, Michaud and Mitchell (2013, NBER)
10. Challenges
SFinancial knowledge is low worldwide
SIt is unequally distributed
SIt is linked to behavior, such retirement planning, wealth, and returns to savings
11. Rates of Returns Vary with Financial Knowledge
SThose who have higher financial knowledge earn a higher (risk- adjusted) rate of return on their investments (Clark, Lusardi and Mitchell, 2014 NBER), + 130 basis points.
SData is from administrative records from a large finance firm
SDifferences in savings rate matter (Dynan, Skinner and Zeldes, 2004 JPE), but also differences in rates of return
12. Financial Knowledge as Form of Human Capital
SDelavande, Rohwedder and Willis (2008): Financial knowledge is a stock.
SJappelli and Padula (2013): Social Security may reduce the incentive of individuals to invest in financial knowledge
SLusardi, Michaud and Mitchell (2013): What are the implications for wealth inequality?
13. Predictions from the Standard Approach
SConsumers accumulate the same amount of wealth in proportion of their lifetime income
SCannot explain level of wealth inequality we observe
14. Mechanics
Incentives to save raise the rate of return on saving trough financial knowledge accumulation
16. Summary of Findings
SMany reasons to save but the most important engine of wealth inequality may be financial knowledge
SMore than 40% of wealth inequality can be attributed to financial knowledge
SVery important to start equal at the beginning of working life: Add financial literacy in school?
17. Use Framework to Study Effects of Adding Finlit in Schools
SIncrease the endowment of financial knowledge for everyone
SWe find large welfare benefits: High school dropouts would need 82% more initial wealth to make them as well off as with higher starting values of financial literacy
18. Other Insights from Research
SChanges in policy (for example fin education programs) do not lead to a change in behavior for everyone; some are too constrained to make changes or their behavior was optimal.
SIt is wrong to predict 100% behavior change. If some people do not change behavior, it does not mean policy is ineffective
SFor some financial knowledge decays. This is optimal behavior, not evidence in favor of ‘just in time’ education
19. Final Considerations
SIncome and wealth inequality have risen
SFinancial knowledge is an important mechanism in the transmission of income to wealth inequality
SFinancial education provides welfare benefits, particularly in a world where responsability for retirement savings is shifted to workers
20. Do Not Underestimate Inequality
“An imbalance between rich and poor is the oldest and most fatal ailment of all republics.”
Plutarch
21. Thank you and Contact Info
Pierre-Carl Michaud
Professor of Economics
Industrielle Alliance Chair in the Economics of Demographic Change
ESG, Université du Québec à Montréal
Montréal, Canada
Tel: 514-987-3000, extension 5019
michaud.pierre_carl@uqam.ca
www.cedia.ca