Understanding pensions: cognitive function, numerical ability and retirement saving

Abstract

As the degree to which individuals are expected to provide their own resources forretirement increases, there is a correspondingly increasing importance of individualsbeing able to understand the financial choices they face and to choose savings products,portfolios and contribution rates accordingly. In this paper we look at numerical abilityand other dimensions of cognitive function in a sample of older adults in England andexamine the extent to which these abilities are correlated with various measures ofwealth and retirement saving outcomes. The key findings are:a) Relatively large fractions of the population can be seen to have relatively low levels offinancial numeracy and these numeracy levels decline systematically with age.b) Numeracy levels are correlated with measures of retirement saving and investmentportfolios, even when we control for other cognitive ability and education.c) Numeracy is correlated with knowledge and understanding of pension arrangements,and with perceived financial security, even when we control for other cognitive ability,education and the level of overall retirement saving.The lessons of our analysis are threefold, even though at this point we have only crosssectionaldata available on which to base our analysis. Firstly, it shows yet anotherdimension in which inequalities amongst older individuals are apparent. Second, theanalysis suggests that in the short run there may be a role for targeting simple retirementplanning information at low numeracy, low wealth, low education groups. Third, itsuggests that a longer run policy goal might want to target numeracy levels moregenerally in order to reduce the fraction of the population with low basic skills. Whethersuch a policy would have knock on effects on to retirement planning arrangements,however, is a more difficult question to answer on the basis of the conditionalcorrelations we present here. On this topic in particular, there is much further work to bedone. As the degree to which individuals are expected to provide their own resources forretirement increases, there is a correspondingly increasing importance of individualsbeing able to understand the financial choices they face and to choose savings products,portfolios and contribution rates accordingly. In this paper we look at numerical abilityand other dimensions of cognitive function in a sample of older adults in England andexamine the extent to which these abilities are correlated with various measures ofwealth and retirement saving outcomes. The key findings are:a) Relatively large fractions of the population can be seen to have relatively low levels offinancial numeracy and these numeracy levels decline systematically with age.b) Numeracy levels are correlated with measures of retirement saving and investmentportfolios, even when we control for other cognitive ability and education.c) Numeracy is correlated with knowledge and understanding of pension arrangements,and with perceived financial security, even when we control for other cognitive ability,education and the level of overall retirement saving.The lessons of our analysis are threefold, even though at this point we have only crosssectionaldata available on which to base our analysis. Firstly, it shows yet anotherdimension in which inequalities amongst older individuals are apparent. Second, theanalysis suggests that in the short run there may be a role for targeting simple retirementplanning information at low numeracy, low wealth, low education groups. Third, itsuggests that a longer run policy goal might want to target numeracy levels moregenerally in order to reduce the fraction of the population with low basic skills. Whethersuch a policy would have knock on effects on to retirement planning arrangements,however, is a more difficult question to answer on the basis of the conditionalcorrelations we present here. On this topic in particular, there is much further work to bedone.