Household Savings Behavior in the United States: The Role of Literacy, Information, and Financial Education Programs

Americans are increasingly in charge of their own fi nancial security after retirement. With the shift from defi ned benefi t (DB) to defi ned contribution (DC) pension plans, workers have to decide not only how much to save for retirement but also how to allocate their pension wealth. Moreover, in recent decades the complexity of fi nancial instruments has increased and individuals have to deal with new and more sophisticated fi nancial products. How well-equipped are Americans to make their own saving decisions? Do they possess adequate fi nancial literacy? Are they informed about the most important components of saving plans? Do they even plan for retirement? This paper shows that a large percentage of U.S. workers has not thought about saving for their retirement—even when this retirement is only fi ve to ten years away. Consistent with the evidence on a lack of planning , half of older workers know little about their pension plans and the rules governing Social Security benefi ts. Moreover, most individuals lack an adequate knowledge of basic fi nancial concepts, such as how interest compounding works, the difference between nominal and real values, and the basics of risk diversifi cation. Financial illiteracy is widespread among the general population, and is particularly acute among specifi c demographic groups such as women, African-Americans, Hispanics, and those with low levels of education. Notwithstanding the low levels of fi nancial literacy that many individuals display, very few rely on the help of experts or fi nancial advisers to make saving and investment decisions. Low fi nancial literacy and a lack of information affect one's ability to save and to secure a comfortable retirement; ignorance about basic