michaud pierre-carl - 2014 symposium to advance financial literacy
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S
Income and Wealth Inequality
The Importance of Financial
Knowledge
Pierre-Carl Michaud,
ESG - Université de Québec à Montréal, Canada
Professor of Economics
Industrielle Alliance Chair in the Economics of Demographic Change
OECD/GFLEC Symposium
Paris, November 6, 2014
Motivation
S What we know
S Income inequality has risen, driven in large part by labor income (wages and salaries)
S New evidence points also to widening wealth inequality
S Why policymakers (should) care?
S Growing fraction of retirement income financed from savings (adequacy of retirement income)
Income Inequality
Source: OECD (2014) Income Inequality Update
Wealth Inequality
OECD/GFLEC Symposium
Source: Saez and Zucman (2014, NBER)
Changing Pension Landscape
S Many countries have moved from Defined Benefit (DB) to
Defined Contribution (DC) in their mandatory pension
schemes
S Private pensions are increasingly of the DC type
S Pressure from aging populations may further limit public
pension generosity
S Responsability to save is being transferred to individuals
Challenges
S Financial knowledge is low worldwide
Financial Knowledge
Respondents with correct answers (%, weighted)
0%
20%
40%
60%
80%
100%
Interest Inflation Diversification
U.S.. (2009) Japan (2010)
Canada (2012) Germany (2009)
Netherlands (2010)
Source: Lusardi and Mitchell (2011, JPEF), Boisclair, Lusardi and Michaud (2014, NBER)
Challenges
S Financial knowledge is low worldwide
S It is unequally distributed
Financial Knowledge
by Age and Education
Source: Lusardi, Michaud and Mitchell (2013, NBER)
Challenges
S Financial knowledge is low worldwide
S It is unequally distributed
S It is linked to behavior, such retirement planning, wealth,
and returns to savings
Rates of Returns Vary with Financial
Knowledge
S Those who have higher financial knowledge earn a higher (risk-adjusted) rate of return on their investments (Clark, Lusardi and Mitchell, 2014 NBER), + 130 basis points.
S Data is from administrative records from a large finance firm
S Differences in savings rate matter (Dynan, Skinner and Zeldes, 2004 JPE), but also differences in rates of return
Financial Knowledge as Form
of Human Capital
S Delavande, Rohwedder and Willis (2008): Financial
knowledge is a stock.
S Jappelli and Padula (2013): Social Security may reduce
the incentive of individuals to invest in financial
knowledge
S Lusardi, Michaud and Mitchell (2013): What are the
implications for wealth inequality?
Predictions from the Standard
Approach
S Consumers accumulate the same amount of wealth in
proportion of their lifetime income
S Cannot explain level of wealth inequality we observe
Mechanics
Incentives to save raise the rate of return on
saving trough financial knowledge
accumulation
Knowledge and
Wealth Inequality
Summary of Findings
S Many reasons to save but the most important engine of
wealth inequality may be financial knowledge
S More than 40% of wealth inequality can be attributed to
financial knowledge
S Very important to start equal at the beginning of working
life: Add financial literacy in school?
Use Framework to Study
Effects of Adding Finlit in
Schools
S Increase the endowment of financial knowledge for
everyone
S We find large welfare benefits: High school dropouts
would need 82% more initial wealth to make them as well
off as with higher starting values of financial literacy
Other Insights from Research
S Changes in policy (for example fin education programs) do not lead to a change in behavior for everyone; some are too constrained to make changes or their behavior was optimal.
S It is wrong to predict 100% behavior change. If some people do not change behavior, it does not mean policy is ineffective
S For some financial knowledge decays. This is optimal behavior, not evidence in favor of ‘just in time’ education
Final Considerations
S Income and wealth inequality have risen
S Financial knowledge is an important mechanism in the
transmission of income to wealth inequality
S Financial education provides welfare benefits, particularly
in a world where responsability for retirement savings is
shifted to workers
Do Not Underestimate
Inequality
“An imbalance between rich and poor is
the oldest and most fatal ailment of all
republics.”
Plutarch
Thank you and Contact Info
Pierre-Carl Michaud
Professor of Economics
Industrielle Alliance Chair in the Economics of Demographic
Change
ESG, Université du Québec à Montréal
Montréal, Canada
Tel: 514-987-3000, extension 5019
michaud.pierre_carl@uqam.ca
www.cedia.ca
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