MICHAUD Pierre-Carl - 2014 Symposium to Advance Financial Literacy

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This presentation by …. was made at the first session of the 2nd OECD-GFLEC Global Research Symposium to Advance Financial Literacy on 6 November 2014, which addressed cutting-edge policy issues and research ideas to advance the global financial literacy agenda. Find out more at http://www.oecd.org/daf/fin/financial-education/oecd-infe-gflecsymposiumfinancialliteracy.htm

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MICHAUD Pierre-Carl - 2014 Symposium to Advance Financial Literacy

  1. 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. 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)
  3. 3. Income Inequality Source: OECD (2014) Income Inequality Update
  4. 4. Wealth Inequality OECD/GFLEC Symposium Source: Saez and Zucman (2014, NBER)
  5. 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
  6. 6. Challenges SFinancial knowledge is low worldwide
  7. 7. Financial Knowledge Respondents with correct answers (%, weighted) 0% 20% 40% 60% 80% 100% Interest Inflation Diversification U.S.. (2009) Japan (2010) Canada (2012) Germany (2009) Netherlands (2010) Source: Lusardi and Mitchell (2011, JPEF), Boisclair, Lusardi and Michaud (2014, NBER)
  8. 8. Challenges SFinancial knowledge is low worldwide SIt is unequally distributed
  9. 9. Financial Knowledge by Age and Education Source: Lusardi, Michaud and Mitchell (2013, NBER)
  10. 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. 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. 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. 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. 14. Mechanics Incentives to save raise the rate of return on saving trough financial knowledge accumulation
  15. 15. Knowledge and Wealth Inequality
  16. 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. 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. 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. 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. 20. Do Not Underestimate Inequality “An imbalance between rich and poor is the oldest and most fatal ailment of all republics.” Plutarch
  21. 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

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