Advisory Center for Affordable Settlements & Housing

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Document Type General
Publish Date 28/05/2011
Author Working is in progress in ACASH
Published By NATIONAL BUREAU OF ECONOMIC RESEARCH, Cambridge,
Edited By Tabassum Rahmani
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The Outlook For Financial Literacy

As the world becomes more financially integrated and complex, average individuals and their families are increasingly faced with making highly sophisticated and all-too-often irreversible financial decisions. Nowhere is this more evident than with regard to retirement decision-making. Indeed, the global financial crisis suggests that poor financial decision-making can have substantial costs not only for individuals but also society at large. This paper focuses on key lessons for financial decision-making in the wake of that crisis, exploring how financial literacy can enhance peoples’ skills and abilities to make more informed economic choices. As the world becomes more financially integrated and complex, average individuals and their families are increasingly faced with making highly sophisticated and all-too-often irreversible financial decisions. Nowhere is this more evident than with regard to retirement decision-making. A half-century ago, traditional defined benefit (DB) pension schemes were the norm in the United States, Japan, Australia and much of Europe, but these have now been largely been replaced with defined contribution (DC) pensions. In the process, employer and government judgment regarding how much to save and where to invest has been replaced by individuals having to make these choices on their own (or helped by advisers they select on their own). Additionally, participants in DC plans must also decide how to spend down their pension assets and determine whether to annuitize or take their benefits in a single lump sum. The trend toward disintermediation and financial complexity extends into other realms of life as well, for example regarding decisions over credit cards, adjustable rate mortgages, and when to claim retirement benefits (Campbell 2006; Ferguson 2010).

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