Financial literacy, trust and retirement planning

Abstract

We study the complex relationship between financial literacy, retirement planning and trust in financial institutions, using data from the 2010 Bank of Italy Survey on Household Income and Wealth. The impact of financial literacy on retirement planning is a well-established issue in the existing empirical literature; our main contribution is proving that financial knowledge not only impacts retirement planning, but also the decisions of entering a private pension scheme (or devoting the severance pay to a private pension scheme). Adding the consideration of trust poses serious econometric concerns, since both financial literacy and trust in financial institutions are likely to be endogenous and the presence of two endogenous regressors renders the identification of causality very difficult. Our solution is to keep only financial literacy as endogenous and include in our models an exogenous regional indicator of social capital (similar to the one adopted by Guiso et al., 2004), as a proxy for the level of trust between the counterparts of a financial contract in each geographical area. Our main findings show that trust has a positive influence on both the decisions to enter a private pension scheme or to devote the severance pay to a private pension scheme

The effect of self-control upon participation in voluntary pension schemes

“…Unlike previous studies on the relationship between self-control and retirement savings, our analyses incorporate a variable capturing the individual's level of financial literacy. In this respect, a non-negligible number of empirical studies have found strong evidence of the effect of financial literacy on this financial behaviour (e.g., Ricci & Caratelli, 2017), as also confirmed by our empirical evidence. Moreover, even controlling for the individuals' financial literacy (Lusardi, 2008), the self-control variable remains statistically significant and positively related to holding retirement assets.…”

“…Moreover, the three above-mentioned papers use one or two-item scales to measure self-control, which could by a rather limited approach to capture financial self-control. Secondly, none of the three studies have considered financial literacy as a correlate, in spite of numerous studies that have proved that the individual's financial literacy affects the decision to save for retirement (Lusardi & Mitchell, 2011;Ricci & Caratelli, 2017).…”

The role of financial literacy in retirement investment choice

“…This can be interpreted that those who have acquired a higher level of basic financial literacy have a propensity for making an investment choice for retirement. This finding is confirmed and in a similar trend, in comparison with prior studies conducted by Fornero and Monticone (2011) and Ricci and Caratelli (2017). Similarly, those who have gained greater pension knowledge have a propensity to exercise retirement investment choice.…”

Financial Literacy: The Role of the Local Context

“…Finally, following Ricci and Caratelli (), we consider the number of inhabitants in the municipality of residence, assuming that larger municipalities provide easier access to banking services, information and communication technologies, and education; for these reasons, municipality of residence may have a positive effect on individual financial literacy.…”

“…We insert two dummy variables: the first is equal to 1 when the respondent is employed, 0 otherwise; the second dummy variable is equal to 1 when the respondent is not employed but is seeking a job, 0 otherwise. 3 Finally, following Ricci and Caratelli (2015), we consider the number of inhabitants in the municipality of residence, assuming that larger municipalities provide easier access to banking services, information and communication technologies, and education; for these reasons, municipality of residence may have a positive effect on individual financial literacy.…”