A recent study on financial literacy conducted by economist Annamaria Lusardi has identified a need for better financial education. A definition of financial literacy can be seen in the short video attachment to this post.
The Italian economist recognised that changes in economies and the way we are expected to manage our finances in developed countries over the past few decades has resulted in a situation where people are lacking the necessary knowledge to properly plan for their own futures.
Jeremy Cole, Red Rose co-founder – has worked in the financial sector for several decades. With a focus in recent years on the humanitarian and non-profit sectors, Jerry Cole has helped some of the poorest people in the world to manage their finances.
Pension Changes
One of the key findings that promoted Lusardi to conduct her research study was the increase in personal responsibility for pension planning and provision in developed countries.
In the US, where the study was based, Lusardi noted that retirement financial needs were met by a combination of the state and employers until relatively recently. In the 1980s, only around 40% of workers had pension plans that were defined contribution, meaning the total size of their eventual pension pot depended on how much money they themselves added to the pot over their working years.
By the year 2000, defined contribution pensions made up 90% of all pension plans. Workers in the developed world are now required to take personal responsibility for their own retirement funds on a scale never before seen.
More information about defined contribution pensions can be found in the PDF attachment.
Understanding Complex Finances
This vast increase in personal responsibility for financial stability both now and in the future has not been paralleled by an increase in financial education. The result is a generation of people who are attempting to manage something they have little to no understanding of.
Financial literacy is essential in the modern age, yet few consumers truly understand key factors such as how credit works. This has resulted in many people struggling with activities such as saving and investing for the future.
Lusardi found that the older generation, those most likely to have savings or personal wealth, were patchy at best when it came to answering questions about basic financial management. The younger generation were even worse, with few having the knowledge to be able to effectively manage their own incomes.
The infographic attachment looks at some statistics for financial literacy around the world.