michaud pierre-carl - 2014 symposium to advance financial literacy
DESCRIPTION
This presentation by …. was made at the first session of the 2nd OECD-GFLEC Global Research Symposium to Advance Financial Literacy on 6 November 2014, which addressed cutting-edge policy issues and research ideas to advance the global financial literacy agenda. Find out more at http://www.oecd.org/daf/fin/financial-education/oecd-infe-gflecsymposiumfinancialliteracy.htmTRANSCRIPT
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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
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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)
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Income Inequality
Source: OECD (2014) Income Inequality Update
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Wealth Inequality
OECD/GFLEC Symposium
Source: Saez and Zucman (2014, NBER)
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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
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Challenges
S Financial knowledge is low worldwide
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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)
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Challenges
S Financial knowledge is low worldwide
S It is unequally distributed
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Financial Knowledge
by Age and Education
Source: Lusardi, Michaud and Mitchell (2013, NBER)
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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
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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
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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?
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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
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Mechanics
Incentives to save raise the rate of return on
saving trough financial knowledge
accumulation
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Knowledge and
Wealth Inequality
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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?
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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
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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
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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
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Do Not Underestimate
Inequality
“An imbalance between rich and poor is
the oldest and most fatal ailment of all
republics.”
Plutarch
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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
www.cedia.ca