18 July 2017 FINANCIAL LITERACY, INSIGHTS
Extract from the research by Annamaria Lusardi and Noemi Oggero of GFLEC, provided by Global Thinking Foundation.
The Italian Perspective
Among the major advanced economies, Italy is the country with the lowest percentage of financially literate people. Only 37 percent of Italians are able to correctly answer at least three out of four basic financial concepts. Not only does Italy have the lowest level of financial literacy among major developed countries, it also performs worse than some emerging economies such as South Africa and the Russian Federation, whose financial literacy rates are 42 percent and 38 percent, respectively.
Young adults generally have a lower level of financial literacy than middle-age respondents in major advanced economies, while young adults have the highest level of financial literacy in major emerging economies. Strikingly, in Italy Millennials have the highest levels of financial literacy (Figure 15). Similar to the major developing countries, financial literacy rates in Italy decline with age: 47 percent of people age 15–34 can be considered financially literate versus 39 percent of people age 35–54 and 35 percent of people age 55 and above.
Low levels of financial literacy in Italy are confirmed by data from the 2012 PISA financial literacy assessment. The average performance of Italian 15-year-olds in financial literacy ranked second to last. Moreover, in most countries and economies that participated in the PISA study, there were no gender differences in the average scores in financial literacy. Italy was the sole exception, with boys performing better than girls on average. Thus, financial literacy is not only low among Millennials in Italy, but is also low among high school students, showing that the generation on the cusp of adulthood may not fare any better than current young adults.
The Global Perspective
In recent decades, governments and employers have increasingly transferred the responsibility for saving and investing onto individuals. For example, the reduction of state-supported pensions in some countries means individuals must save in order to provide for their own financial security after retirement. Decreasing generosity of welfare systems and increasing life expectancy have contributed to an environment in which it is more difficult to achieve financial security in retirement. Life expectancy is high and continues to increase, meaning that young people today will need to be able to support themselves for much longer than did past generations.
Financial ignorance carries significant costs. Consumers who fail to understand the concept of interest compounding incur more transaction fees, run up bigger debts, and engage in loans with higher interest rates.
33 percent of adults worldwide are financially literate (S&P Global FinLit Survey).
In other words, roughly 3.5 billion adults globally, most of them in developing economies, lack an understanding of basic financial concepts (S&P Global FinLit Survey). One in three adults has adequate financial literacy.
Developed Countries: On average, 55 percent of adults in the major advanced economies—Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States—are financially literate (Figure 3). Yet even among these countries, financial literacy rates range widely, from 37 percent in Italy to 68 percent in Canada.
Developed Countries (differences by age): On average, 56 percent of adults age 35 or younger are financially literate, compared with 63 percent of those age 36 to 50. Financial literacy rates are even lower for adults older than 50, and rates are lowest among those older than 65.
BRICS (Brazil, the Russian Federation, India, China, and South Africa) — on average, 28 percent of adults are financially literate. Disparities exist among these countries, too, with rates ranging from 24 percent in India to 42 percent in South Africa.
BRICS (differences by age): individuals age 15–35 have the highest financial literacy rates (32 percent), and adults age 65 plus have the lowest financial literacy rates (17 percent) of any age group.
Financial Literacy and Income (GDP per capita): financial literacy rates tend to be highest in the higher income economies. However, the relationship only holds when looking at the richest 50 percent of economies. In these economies, about 38 percent of the variation in financial literacy rates can be explained by differences in income across countries.
PISA: Financial Literacy and Income (GDP per capita): Overall, per capita GDP only explains 16 percent of the variation in mean financial literacy scores among the 16 countries participating in the PISA financial literacy assessment.
Financial Education and Bank Accounts: there is a strong correlation between financial literacy among Millennials and the percentage of people age 15 and above who have their own or a joint account at a bank, or another type of formal financial institution. The association between performance in financial literacy and holding a bank account is related, in part, to socio-economic status. The positive relationship between financial literacy and holding a financial product may be interpreted in different ways. On the one hand, having greater financial knowledge and skills may motivate the young to become engaged with formal financial products. On the other hand, it may be that using a bank account is one way for Millennials to learn about money.
Financial Literacy and Internet Usage: financial literacy rates age 15–34 increase as the percentage of individuals who have used the Internet in the last 12 months rises.
Financial Literacy and Credit: Financial knowledge is also correlated with the use of credit from formal institutions or informal networks of family and friends. The use of informal networks decreases with financial literacy: Countries with higher financial literacy among the young have a lower percentage of people who took loans from family or friends in the past year
Financial Education and Financial Fragility: being more financially knowledgeable is associated with a higher probability of being able to handle an unexpected expense. Financial literacy has an independent effect on reducing financial fragility, above and beyond the impact of education.
Millennials lack the basic skills needed to make savvy financial decisions suggest that there is a great need to promote financial capability among the young. Programs aimed at improving financial literacy could help Millennials minimize the costs incurred in managing their financial products, improve their financial safety net in the event of emergencies, and strengthen their financial security.
Research has found that financially savvy adults are, in general, less likely to have problems with debt and more likely to save for retirement and other reasons. As a result, policy makers should consider stepping up the effort for financial education.