The Links between Early-Life Cognition and Schooling and Late-Life Financial Knowledge

Using the Wiseonsin Longitudinal Study, a sample of Wisconsin high school graduates from the class of 1957, we explore the relationship between late-life financial knowledge and human capital formed in early life. Specifically, we examine the associations between early-life cognition and schooling experiences--such as academic performance and coursework--and late-life financial knowledge. Financial knowledge is measured as individuals' knowledge of their own financial situations, which we argue is a prerequisite for good financial behavior. We find that those with lower early-fife cognitive functioning, especially those without college degrees, have lower levels of financial knowledge in late life. We find more limited evidence for independent associations of academic performance and math course work with late-life financial knowledge. ********** The determinants of financial knowledge and skills have become of increasing interest to researchers and policymakers given the growing complexity of peoples' financial lives. As compared with a generation ago, individuals have more to manage when it comes to their financial lives. The growing availability and variation in credit instruments and the growing array of savings vehicles are just two examples of this trend. One of the most striking examples, however, involves retirement. Two decades ago, most retirement planning was handled by employers via their control over employees' defined benefit pension plans. The shift toward defined contribution pension plans and individual retirement accounts means that the responsibility for saving and investing wisely for retirement now falls largely on individuals. Yet there is considerable evidence that many Americans lack the skills to effectively complete this task. One-third of adults in their fifties say they have failed to develop any kind of retirement saving plan at all (Lusardi 2003). Surveys of financial literacy find that most respondents do not understand basic financial concepts necessary for retirement planning, including topics such as bonds, stocks, mutual funds, compound interest, loans and mortgages (Agnew and Szykman 2005: Bernheim 1994, 1998; Hogarth and Hilgert 2002; Mandell 2004, 2007; Moore 2003; National Council for Economic Education 2005). Some are also uninformed about Social Security and work-related pensions, two of the most important components of retirement wealth (Chan and Stevens 2008; Gustman and Steinmeier 2004; Mastrobuoni 2005). These skills are not only important for retirement planning, they are just as important during retirement. Unlike previous cohorts who had relatively simple income streams, more recent cohorts have a complex array of defined contribution plans, private individual retirement accounts and general stock market investments that must be managed throughout retirement. The concern about how people are managing their finances across their lives has led to a plethora of programs and initiatives to promote and provide financial education to US consumers. These initiatives range from facilitating the use of traditional financial institutions for the "unbanked," to initiatives focused on developing the financial skills necessary for building and maintaining an economically secure retirement. These interventions have largely focused on providing specific financial skills, such as budgeting strategies, to specific subpopulations (Collins and O'Rourke 2010; Lyons et al. 2006). The results from these different programs and populations have been generally positive, but small, perhaps in part because they focus on short-term interventions and outcomes (Collins and O'Rourke 2010; Lyons et al. 2006). Although the value of more specific interventions is growing clear, there is limited evidence regarding the role of general human capital, especially schooling and cognition, in shaping financial literacy and skills (Lusardi, Mitchell, and Curto 2010). …