Early Life Schooling and Late Life Financial Literacy in The - PowerPoint PPT Presentation

Early Life Schooling and Late Life Financial Literacy in The Wisconsin Longitudinal Study Pamela Herd and Karen Holden Prepared for presentation at the FLRC Conference, Washington, D.C. FLRC Conference, Washington, D.C. November 18 ‐ 19, 2010 SSA FLFC 19-F-10003-5-01, University of Wisconsin 1

The research reported herein was performed pursuant p p f p to a grant from the U.S. Social Security Administration (SSA) funded as part of the Financial Literacy Research Consortium. Consortium The opinions and conclusions expressed are solely those The opinions and conclusions expressed are solely those of the author(s) and do not represent the opinions or policy of SSA or any agency of the Federal Government or of the of the University of Wisconsin System, including the Center for Financial Security. SSA FLFC 19-F-10003-5-01, University of Wisconsin 2

Study Contributions Study Contributions • Focusing on the relationship between ‘general Focusing on the relationship between general skills’ early in life and financial literacy in late life rather than ‘specific skills’ training life rather than specific skills training. • Testing alternative measures of financial literacy literacy. SSA FLFC 19-F-10003-5-01, University of Wisconsin

Changing Context of Retirement Changing Context of Retirement • Individualized retirement planning Individualized retirement planning – Shift from Defined Benefit to Defined Contribution – Parallels in health care Parallels in health care • The rising importance of financial literacy skills – Parallels in health care (health literacy) . SSA FLFC 19-F-10003-5-01, University of Wisconsin

Specific vs. General Skills: Interventions • Current research emphasis on specific kinds of Current research emphasis on specific kinds of ‘educational’ intervention—specific skills • But what about general skills? How does early life schooling matter? Might these more lif h li ? Mi h h general skills matter in the ability to adapt in changing contexts? h i ? SSA FLFC 19-F-10003-5-01, University of Wisconsin

Measures of Financial Literacy Measures of Financial Literacy • Existing measures include: Existing measures include: – Knowledge (ability to calculate compound interest) interest) – Behavior based measures (i.e. debt levels, participation in retirement plans) participation in retirement plans) • Proposed Measure: Knowledge of individual financial resources financial resources – Captures both knowledge and behavior – Usefulness may vary based on age of respondents Usefulness may vary based on age of respondents SSA FLFC 19-F-10003-5-01, University of Wisconsin

Research Question Research Question • How do early life schooling and general How do early life schooling and general cognition measures correlate with knowledge of individual financial resources in late life? of individual financial resources in late life? SSA FLFC 19-F-10003-5-01, University of Wisconsin

Data: Wisconsin Longitudinal Study Data: Wisconsin Longitudinal Study • 1 in 3 Wisconsin high school graduates from 1 in 3 Wisconsin high school graduates from the class of 1957 • We employ the 1957 and 2004 data • We employ the 1957 and 2004 data. • Sample loss due to death, attrition, and non ‐ response. SSA FLFC 19-F-10003-5-01, University of Wisconsin

Data: Wisconsin Longitudinal Study Data: Wisconsin Longitudinal Study • Outcome Measures (2004): Outcome Measures (2004): – Ability to answer values on all asset questions (percent of assets held for which exact amount (percent of assets held for which exact amount was given). – Ability to provide value of retirement accounts Ability to provide value of retirement accounts that accumulate a balance including IRAs, 401 ‐ ks, etc. – Ability to state value of checking account. SSA FLFC 19-F-10003-5-01, University of Wisconsin

Data: Wisconsin Longitudinal Study Data: Wisconsin Longitudinal Study • Covariate Measures (1957): Covariate Measures (1957): – Sex – Age Age – Parental SES – Educational Attainment (updated in recent Ed ti l Att i t ( d t d i t surveys) – Coursework (English, Algebra, Trig/Physics) Coursework (English Algebra Trig/Physics) – IQ (3 splines) – High School Rank Hi h S h l R k SSA FLFC 19-F-10003-5-01, University of Wisconsin

Methods Methods • OLS and Logit/Probit Models OLS and Logit/Probit Models • Separate models for those with and without college degrees college degrees. SSA FLFC 19-F-10003-5-01, University of Wisconsin

Findings Findings SSA FLFC 19-F-10003-5-01, University of Wisconsin SSA FLFC 19-F-10003-5-01, University of Wisconsin 12

Results: Assets Summary Results: Assets Summary 0 1 0.1 0.09 0.08 0.07 0.07 0.06 0.05 College 0.04 0.03 No College NS 0.02 NS NS NS NS 0.01 0 0 ‐ 0.01 SSA FLFC 19-F-10003-5-01, University of Wisconsin

Results: Assets Summary Results: Assets Summary • IQ and high school rank matter for those IQ and high school rank matter for those without a college degree. Up to 100, each 10 points is associated with a 3% increase asset points is associated with a 3% increase asset knowledge. • Coursework (Trig/Physics/Algebra) matter for • Coursework (Trig/Physics/Algebra) matter for those with a college degree. But these effects are smaller than the IQ effects for those are smaller than the IQ effects for those without a college degree, but closer to the ‘rank’ effect rank effect. SSA FLFC 19-F-10003-5-01, University of Wisconsin

Results: Private Pensions Results: Private Pensions 0 2 0.2 0.15 0.1 College NS N C ll No College 0.05 NS 0 0 Male IQ Bottom IQ Middle Additional Schooling ‐ 0.05 SSA FLFC 19-F-10003-5-01, University of Wisconsin

Results: Private Pension Results: Private Pension • For those without a college degree IQ For those without a college degree, IQ matters. (up to 120, each 10 points is associated with a 4% increase in the associated with a 4% increase in the probability of knowing the value). • For those with a college degree it’s additional • For those with a college degree it s additional schooling that matters. (2% for each additional level) additional level). SSA FLFC 19-F-10003-5-01, University of Wisconsin

Results: Checking Accounts Results: Checking Accounts 0.12 0.1 0 08 0.08 0.06 Men IQ Middle IQ Middl 0.04 0.02 NS 0 College No College ‐ 0.02 0.02 SSA FLFC 19-F-10003-5-01, University of Wisconsin

Results: Checking Account Results: Checking Account • For those without a college degree IQ For those without a college degree, IQ matters. 10 points increase probability by 3 percent for middle IQ group percent for middle IQ group. • For those with a college degree, algebra coursework is weakly related coursework is weakly related. SSA FLFC 19-F-10003-5-01, University of Wisconsin

Sensitivity Analyses Sensitivity Analyses • Comparing do not knows to refusals Comparing do not knows to refusals – IQ – Gender Gender – Underestimated effects • Varying the course content measures V i th t t • Probabilities instead of odds ratios SSA FLFC 19-F-10003-5-01, University of Wisconsin

Discussion Discussion • Importance of early life cognition and Importance of early life cognition and educational attainment • GENDER! • GENDER! • Need more tests of these outcome measures (i (i.e. utilize bracketing) ili b k i ) SSA FLFC 19-F-10003-5-01, University of Wisconsin

Full contact info: Pamela Herd, 1080 Observatory Drive, Madison, WI 53706, email: pherd@lafollette.wisc.edu. http://cfs.wisc.edu/ 21