Effect of household's financial literacy on pension decision making: evidence from China's new rural pension program

Abstract

PurposeChina's New Rural Pension Program (NRPP) has been implemented for a decade, but the factors that facilitate rural residents' participation have received little attention. This study aims to investigate whether financial literacy has an influence on rural residents' behavior of participation in the NRPP. In particular, this study further verifies if high financial literacy is important and whether financial education can enhance the impact of financial literacy on current, long-term and dynamic pension decisions of rural households.Design/methodology/approachThis study investigates the impact of financial literacy on rural residents' participation in China's NRPP using the China Household Financial Survey (CHFS) Data of 2015 and 2017. This study constructs an analytical framework for current, long-term and dynamic impacts and comprehensively analyzes the value of financial literacy in the decision making of the NRPP. This study uses the instrumental variable method to solve the possible endogeneity problem. In addition, the authors also demonstrate the positive role of high financial literacy in household pension decisions. Further analysis reveals gender and regional heterogeneity in the impact of financial literacy on pension decisions. The moderating effect model explores whether financial education has a significant moderating effect on financial literacy and pension decision making of the NRPP.FindingsFinancial literacy can improve the participation behavior of households in rural areas (dynamic effect) and promote their current and long-term participation in the NRPP, choosing a higher pension contribution level in the NRPP. However, financial literacy has no significant effect on the change in the contribution amount of the NRPP. Further research finds that high financial literacy has comparative advantages in household pension decision making in rural areas. There are gender and regional differences in the impact of financial literacy on pension decisions. In addition, effective financial literacy education enhances the current, long-term and dynamic impacts of residents' financial literacy on NRPP participation and pension contributions.Practical implicationsThis study comprehensively considers the impact of financial literacy on pension decision making behavior from three aspects: current, long-term and dynamic, making up for the dearth in the existing literature that only focuses on the impact of financial literacy on current financial behaviors and bridging the gap between the theoretical framework and experimental results. Our study proposes new policy implications: (1) Governments and financial institutions should pay attention to financial literacy and education levels in rural areas and carry out financial education and training programs to increase social welfare levels by increasing rural residents' participation and pension contribution. (2) The community can strengthen the policy advocacy of the NRPP and make people develop a stronger sense of trust toward it. The government can also subsidize individual accounts through financial support.Originality/valueThis study comprehensively considers the impact of financial literacy on pension decision-making behavior from three aspects: current, long-term and dynamic, making up for the dearth in the existing literature that only focuses on the impact of financial literacy on current financial behaviors and bridging the gap between the theoretical framework and experimental results. Our study proposes new policy implications: (1) Governments and financial institutions should pay attention to financial literacy and education levels in rural areas and carry out financial education and training programs to increase social welfare levels by increasing rural residents' participation and pension contribution. (2) The community can strengthen the policy advocacy of the NRPP and make people develop a stronger sense of trust toward it. The government can also subsidize individual accounts through financial support.

Are financially illiterate individuals all the same? A study on incorrect and “do not know” answers to financial knowledge questions

“…The level of FK in fact alters people's ability to apply this knowledge in financial decision making (Santini et al, 2019). For example, previous studies show that in both developed and developing countries (Hasler and Lusardi, 2017), individuals with higher objective FK are less indebted (Lusardi and Tufano, 2015), are better able to save and to build assets (Letkiewicz and Fox, 2014), choose low-interest mortgages (Moore, 2003), plan for their retirement Mitchell, 2007a, b, 2011;Bongini and Cucinelli, 2019;Xu et al, 2022;Gallego-Losada et al, 2022), are less financially fragile (Chhatwani and Mishra, 2021) and show greater financial well-being (Tahir et al, 2021). Some recent studies show that during the COVID-19 pandemic consumers with higher objective FK were also less likely to delay their mortgage repayments (Chhatwani, 2022).…”

Generasi Sandwich: Penyebab Stres Dan Pengaruhnya Terhadap Keputusan Keuangan

“…Kemudian, hipotesis kedua, yaitu literasi keuangan berpengaruh positif terhadap dana pensiun terbukti diterima. Hipotesis kedua ini juga didukung oleh penelitian yang menyatakan semakin baik literasi keuangan individu, maka individu cenderung akan mempersiapkan dana pension (Xu, Ali, Yang, dan Li, 2022). Penelitian ini dilakukan di China yang terdapat sebuah program dana pensiun bernama China's New Rural Pension Program (NRPP) yang kemudian pada tahun 2022 diteliti tingkat partisipasinya dengan literasi keuangan, gender, dan agama sebagai variabel independen.…”

Risk attitudes and household consumption behavior: Evidence from China

“…In the consumption category, digital amounts show a clear positive correlation between finance and food, clothing, home maintenance, medical care, and education and entertainment. Amongst households with fewer assets, lower income, and lower financial literacy and households in small- and medium-sized cities, digital inclusion has a greater effect on consumption ( 41 ). Although residents' income and consumption habits will affect residents' consumption behavior, food, cash, housing, and energy will remain the key consumption areas ( 42 ).…”