Ten years on and we still don’t know what a tracker mortgage is, despite all the financial water under the bridge, the collapse of the banking system, and the taking into receivership of the state. We are financially illiterate in large part. And nobody seems to be doing much about it.
We know this to be the case from some recent work which has thrown up some unflattering data and rankings which got almost no coverage. Rankings are funny. We find some rankings get headline news. Thus the PISA rankings, which look at science/math ability are always good for a headline on how poorly our education system serves us. With 15% of the 15y olds last examined being ‘illiterate’ in science and math, there is a problem. It is not as big as the one in the USA which had 25% but its there. Then there are the university rankings, where the failure of Irish universities to meet an arbitrarily selected and methodologically protean target is regularly decried. Again we are subjected to editorialising and sermonising on how our system fails us. The latter is an interesting issue – the treatment of the rankings suggests that the writers believe that these have some cardinality. That is they believe that they measure things, as opposed to what they are, mere ordinal measures which show ranks within a set. S
The measure was derived from a simple 4 question survey. The questions were hardly quantum mechanics – can the respondent take a % of 100, differentiate between compound and simple interest, differentiate between spreading and concentrating risk when saving and understand inflation. Getting 3 out of 4 correct deemed the respondent financially literate. The study was one conducted by the World Bank and Standard and Poors. Conducted on over 150,000 persons in 144 countries worldwide, it is a global snapshot of financial literacy.Globally 33% of persons were deemed financially literate; in Ireland it was 55%. In other words, nearly 1.6m adults in Ireland were deemed financially illiterate.
This is pretty serious stuff. If half the adult population were literally illiterate there would be a massive government and social outcry and a plan put in place to remedy it. Mind you, the latest figures are that 1/6 of the population is in serious difficulty, literacy wise. While we had a 2010 report on financial literacy, little has been done beyond that to actually improve the situation
There is a deal of research on the antecedents and consequences of financial illiteracy. While this is almost all outside Ireland, it is reasonable to infer that the findings translate.
Wealth and financial literacy, both on a national and on an individual basis, show a reasonably strong positive correlation. What is not at all clear is in what direction causality flows. I suspect they both reinforce each other. In so far as we can see financial literacy as an element of human capital, and we know that greater human capital leads, broadly, to greater wealth, we can suspect that this is the chicken, and wealth the egg. But eggs of course produce chickens later.
A further stylised fact is that financial literacy appears to be associated with earning income – it is lowest amongst the younger and older cohorts, a finding which is general across studies. Although the aged have lower actual literacy, they also display greater confidence in their knowledge, which perhaps suggests how easy it is for the elderly to fall prey to financial scams. There is a gender issue also, perhaps related, in that levels of financial literacy tend to be lower among women. Interestingly the 2012 PISA study included examination of school students financial literacy and found that at age 15 there was little gender difference. Unfortunatly this module of PISA was not administered in Ireland so again we find ourselves making policy absent evidence. In fact, the issue of earning being associated with literacy is one which comes through all stylised facts, with rural dwelling, lower education, and regional impoverishment all being associated with not just lower income outcomes but also lower financial literacy.
So does it matter? A lot of research suggests that lower financial literacy, not surprisingly, is associated with poorer financial decision making in daily life. In particular, lower financial literacy is associated with lower participation in financial products and with lower forward financial planning particularly in the area of pension provision or precautionary savings. Those who are financially less literate tend to have costlier loans and to be more prone to find themselves in financial difficulties. They take out costlier loans from costlier borrowers and do not manage these as well as they might; they underinvest and undersave. These persist regardless of earnings or education or gender – it is the literacy aspect that seems to drive them.
What might we do? There is scant evidence from an experimental perspective on the efficacy of financial literacy programs. Ideally what one would do is to have a group of persons for whom some intervention is given, and another to whom it is not. The problem is that they would then have to be followed for life to see what the outcomes might be!. 70y longitudinal studies are hard to fund. The Up Series for Finance…In any case, we probably want to know the effect sooner than later so we can actually make informed policy decisions.
We are therefore perforce left with what we have. Financial literacy programs tend to be shoehorned into second level schools, with little regard for the need to individualise and contextualise. Those done by financial institutions and advisors, typically in workplaces, are bedevilled by perceptions of them as marketing tools and tend to attract a selfselected audience who may not need them. One thing is clear – financial illiteracy is a problem and is one that is in effect being swept under the carpet.
A longer version of an Irish Examiner Column 19 December 2015.