The world, financially speaking, once seemed a simple and innocent place. Savers could deposit money in bank accounts and earn a reasonable interest rate, building their savings over time. Workers in developed countries would work hard knowing that when they retire, their needs will be met by employer- and state-backed pensions.
Since the Italian economist Annamaria Lusardi, a global expert in financial education and a professor at George Washington University, based in the United States, began to dedicate her career to the study of financial education, these reassuring certainties have faded. The average modern worker in a rich country must now take full responsibility for making sure they have enough resources to pay their way into old age.
In the US in 1980, about 40 percent of all pension plans were defined contribution, meaning that their value depended on the amount of money a worker invested in their careers. By the turn of the millennium, this had increased to 90 percent. For most millennial workers, the idea that their employer will fund their retirement is little more than a quaint relic of the 20th century.
At the same time, the financial decisions people must make to save for retirement have become much more complicated. Interest rates close to zero mean that savers can no longer keep their money in a boring bank account and expect it to survive the ravages of inflation over time. In search of higher returns, more and more people are turning to the stock market as a sensible vehicle for long-term savings, but one that presents many opportunities for disastrous mistakes.
“Younger people face a much more difficult financial situation than their parents,” says Lusardi. “My parents’ generation lived through a time of inflation that paid off their debts, they had very good pensions and their investments in the financial markets were very simple. Young people face great challenges. The pension must be, at least in part, private. And the current demographics around the world mean that governments will not be able to maintain the pensions that were given to previous generations. “
Annamaria Lusardi: ‘The youngest face a much more complicated financial situation than their parents had’ © Carla Cioffi / FT
For Lusardi, all of this means that the need for widespread education on saving and managing money is greater than ever. But when she and her colleagues began 20 years ago trying to gauge how much Americans knew about personal finance, they realized that it was not a topic that mainstream economics would have taken particularly seriously.
“When we started talking about financial literacy in academic circles, people thought: why are you working on such an irrelevant topic?” she says. “Economists think that financial knowledge is important, but they assume that when someone is faced with a really important financial decision, they find a way to make the right and rational decision no matter how. But we have seen that this is not true. People make bad decisions. “
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Lusardi tried to find ways to measure the basic financial literacy of Americans, but soon discovered that minimal data existed. However, she and her colleagues found that the 2004 US Health and Retirement Study, a survey of those over 50, contained questions that measured basic numeracy and financial literacy. Using the answers to these questions, they attempted to map the basic level of financial literacy in this important part of the American population. The results were not encouraging.
Only about half of the baby boom respondents (those ages 51 to 56), with the most savings, financial assets, and accumulated financial experience, were able to answer a question that involved dividing $ 2 million by five. Respondents best answered the question: “If the probability of contracting a disease is 10 percent, how many people out of 1,000 are expected to contract the disease?” with about 80 percent giving the correct answer. But when it came to a question based on calculating the capitalization of interest on a bank account over two years, less than 20 percent were able to do so.
Lusardi’s work has also found that if financial literacy among the oldest and richest is patchy, it is even worse among the young. At the same time, the explosion of daily online trading and cryptocurrency speculation has made young people more vulnerable than ever to sacrificing their savings or even incurring trade-related debt.Play to pay: Italian schoolchildren learn the value of money © Francesco Pistilli / FT
“My research shows that young people have a very low level of financial literacy, compared to other ages, which is obvious in a sense, since young people have little experience,” he says.
“I was recently at a conference in the Austrian Alps and I was amazed at how much young people were interested in cryptocurrencies. During the pandemic, it is a time when people will have to save more and, at the same time, we are concerned that people will seek higher returns without realizing that they are taking a lot of risks. Everyone is a genius when the market goes up, but the important thing is what happens when the market goes down. “
His work has also shown that being richer and making a great deal of money in a short period of time doesn’t always protect people from making financial mistakes.
One piece of research that Lusardi collaborated on was a study of the financial habits of NFL athletes, who earn millions of dollars before their income collapses once they retire at a very young age compared to the General population. The article found that despite earning much more than average, the number of NFL players recruited had a similar or greater probability of bankruptcy than the average young person with a college education.
Another interesting, if counterintuitive, finding from Lusardi’s work is that highly educated people, those with graduate degrees, are equally prone to lacking basic financial literacy and making disastrous decisions with their money.
“Doctors are probably some of the worst offenders,” he says. “They are rich, but they are not always sophisticated with their money and they can often be at risk of being scammed.”
Given this evidence of poor overall savings literacy, Lusardi has increasingly applied her research to promote the expansion of financial literacy in schools around the world, an area many national curricula still ignore. She was appointed an advisor to the Italian government on financial education in 2017 and has also worked in the US Treasury Office of Financial Education.
Lusardi began working in 2019 on an educational project in Paglieta, a small town in the Italian region of Abruzzo, where, together with a local school, she and other experts gave talks on financial education issues at the town hall for children, parents and grandparents.
At the local school, Lusardi’s initiative consisted of having students discuss business ideas and make detailed financial plans for their potential projects. Some older students started growing vegetables and selling them in the local market to better understand how to run a business in real life. 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 that in school children would learn about small and seemingly innocuous financial products that they would likely have to buy later in life, such as insurance policies. They were separated into pairs and one child assumed the role of salesperson, explained the product and the other asked them questions.
“It is very, very important for children, because in normal school they usually don’t learn anything about these things,” says Marchionno. “They were very enthusiastic, brought their own ideas and also studied a lot on their own.”Increasing knowledge: young people from a school in Paglieta, Italy, harvested and sold their vegetable crops © Francesco Pistilli / FT
Lusardi says she now believes that early childhood education in financial literacy is critical. When she was growing up in Italy, her father, an entrepreneur, used to take her with him to business meetings. This, he says, meant that he experienced discussions about money from a very young age.
“I always had that exposure. Discussions about economics and finance are something I always had at home. I didn’t realize then how important it was to sit there and be exposed to those ideas. “
Not all children, he says, are equally lucky, 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 essential to have financial education in schools,” he says. “Not all parents will talk to their children about these issues. And many parents are not very familiar with finances. If you do not have this knowledge, it is difficult to achieve and [you] decide ‘this is not for me’ “.
Lusardi’s research has also shown that there is often a great disparity in financial literacy levels between men and women, even in their home country.
“I am a woman, and I am an Italian woman, and the statistics on gender differences in financial education show a huge gap between men and women, not only in Italy but throughout the world. Money can be a topic that people feel uncomfortable talking about, it can generate a lot of anxiety. That is why people have to talk to their sons about money and, in particular, to their daughters. We need to make this topic something you talk about. “
But since even highly educated people continue to do stupid things with their money, will widespread financial education programs in schools be enough?
“The analogy I give is road safety. We’ve built great roads, we’ve put up traffic lights, and we’ve set speed limits. But we are also going to ask people to have a driver’s license, ”he says. “Right now people are hitting the road without any training. Yes, if we don’t have good regulation, people will also make serious mistakes. If there are bad financial products, the regulator should prevent them. “
Allowing children to go out into the world without financial education is the same as allowing people to run without a driver’s license. “People need to know the rules of the road. Will this mean that we will not have traffic accidents? No. But imagine what would happen if we didn’t have driving tests. “She says.
“We need people to know the ABCs of finance or else we will have so many accidents. Not everyone will always make good decisions, but at least they will have the basic tools they need. ”