| Abstract: |
Growing financialization and complexity demands financial literacy to be an
integral part of the research agenda and policy design globally. It applies
particularly to developed countries, since research findings suggest that
financial literacy becomes more important with higher levels of economic
development. Financial literacy is financial education, such as basic
economics, statistics and numeracy skills combined with the ability to employ
these skills in making financial decisions. Research has shown that as people
become more financially literate, they make better saving and borrowing
decisions, are more likely to plan for retirement and hold more diverse assets
in their balance sheet. As more and more households are asked to make their
own decisions about such issues, financial illiteracy can become a serious
threat to their life-time welfare. The European Union contains in itself the
world’s best performers (Sweden, Denmark) as well as those that score below
global average (Romania, Portugal) in financial literacy rankings. The
findings for the EU echo those that are also applicable to other developed
economies, namely that low-income individuals, women, young people and less
educated people tend to consistently underperform in literacy tests. Financial
literacy matters for the EU for three reasons - 1) in the face of rapidly
ageing population, the pressure on the pension system could be mitigated
through shifting towards more occupational and personal insurance systems.
This shifts more and more responsibilities to the individual who can greatly
enhance their decision-making with higher levels of financial literacy. 2)
mortgage-debt makes up an overwhelming share of total debt of euro-area
households. Understanding the implications of indebtedness and how financial
literacy can help is especially important for young households, first-time
homeowners and those at the lower end of the income distribution. 3) financial
literacy is negatively associated with the main elements of inclusive growth
in the EU, namely poverty, inequality, social exclusion and social immobility.
Financial literacy can therefore help access the benefits of economic growth
and contribute to the inclusive growth agenda in the EU. In light of these
findings, the policy recommendations entail starting financial literacy
programmes from a young age; promoting programmes that are tailored to the
specific needs of communities, especially young people, women and low-income
groups; providing targeted financial education for people on the verge of
major financial decisions, such as the first mortgage, student loan, or
retirement investment. However, at the same time it is important to resist
information overload, support more research into financial literacy,
especially behavioural aspects of financial decision-making, and increase
private sector involvement since they are at the forefront of financial
education and service provision. |