Financial education: Does it work?

As additional evidence that financial illiteracy is considered a severe impediment to saving, both the government and employers have promoted financial education programs. Most large firms, particularly those with DC pensions, offer some form of education program. The evidence on the effectiveness of these programs is so far very mixed. Only a few studies find that those who attend a retirement seminar are much more likely to save and contribute to pensions. Clearly, those who attend seminars are not necessarily a random group of workers. Because attendance is voluntary, it is likely that those who attend have a proclivity to save and it is hard to disentangle whether it is seminars, per se, or simply the characteristics of seminar attendees that explain the higher savings of attendees shown in the empirical estimates. However, a study by Bernheim and Garrett published in 2003 argue that seminars are often remedial, i.e., offered in firms where workers do little or no saving. Thus, the effects of seminars may have been underestimated.

My own work uses data from the Health and Retirement Study and confirms the findings of Bernheim and Garrett. Consistent with the fact that seminars are remedial, she finds that the effect of seminars is particularly strong for those at the bottom of the wealth distribution and those with low education. Retirement seminars are found to have a positive effect mainly in the lower half of the wealth distribution and particularly for those with low education. Estimated effects are sizable, particularly for the least wealthy, for whom attending seminars appears to increase financial wealth (a measure of retirement savings that excludes housing and business equity) by approximately 18 percent. Note also that seminars affect not only private wealth but also measures of wealth that include pensions and Social Security wealth, perhaps because seminars provide information about pensions and encourage workers to participate and contribute. This can be important because workers are often uninformed about their pensions.

In a series of papers, Robert Clark and Madeleine D’Ambrosio have examined the effects of seminars offered by TIAA-CREF to a variety of institutions. The objective of the seminars is to provide financial information that would assist individuals in the retirement planning process. Their empirical analysis is based on information obtained in three surveys: participants completed a first survey prior to the start of the seminar, a second survey at the end of the seminar, and a third survey several months later. Respondents were asked whether they had changed their retirement age goals or revised their desired level of retirement income after the seminar. After attending the seminar, several participants stated they intended to change their retirement goals and many revised their desired level of retirement income. Thus, the information provided in the seminars does have some effect on behavior. However, it was only a minority of participants who were affected by the seminars. Just 12% of seminar attendees reported changes in retirement age goals, and close to 30% reported changes in retirement income goals. Moreover, intentions did not translate into actions. When interviewed several months later, many of those who had intended to make changes had not implemented them yet.

Other papers find more modest effects of education programs. Duflo and Saez, in a paper published in 2003, investigate the effects of exposing employees of a large not-for-profit institution to a benefit fair. This study is notable for its rigorous methodology; a randomly chosen group of employees were given incentives to participate in a benefit fair, and their behavior was compared with that of a similar group in which individuals were not offered any incentives to attend the fair. This methodology overcomes the problem mentioned before that those who attend education programs may already be inclined to save. This is clearly important, and findings from this study show that benefit fair attendance induced participants to increase participation in pensions, but the effect on saving was almost negligible. Perhaps the most notable result of this study is how pervasive peer effects are: not only benefit fair attendees but also their colleagues who did not attend were affected by it, providing further evidence that individuals rely on the behaviors of those around them to make financial decisions.

Given the extent of financial illiteracy, it is not surprising that exposing individuals to a benefit fair or offering workers one hour of financial education does little to improve saving. To be effective, programs have to be tailored to the size of the problem they are trying to solve. While it is not possible to transform low literacy individuals into financial wizards, it is feasible to emphasize simple rules and good financial behavior, such as diversification, exploitation of the power of interest compounding, and taking advantage of tax incentives and employers’ pension matches. Another potential role of financial education is to help individuals assess their abilities to make saving and investment decisions and perhaps make them appreciate the value of financial advice or equip them with tools to deal effectively with advisors and financial intermediaries.

So, my answer is : yes, financial education works, but we can make it more effective.