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Understanding pensions: cognitive function, numerical ability and retirement saving

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  • James Banks

    () (Institute for Fiscal Studies and University of Manchester)

  • Zoe Oldfield

    () (Institute for Fiscal Studies and Institute for Fiscal Studies)

Abstract

As the degree to which individuals are expected to provide their own resources for retirement increases, there is a correspondingly increasing importance of individuals being 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 ability and other dimensions of cognitive function in a sample of older adults in England and examine the extent to which these abilities are correlated with various measures of wealth and retirement saving outcomes. The key findings are: a) Relatively large fractions of the population can be seen to have relatively low levels of financial numeracy and these numeracy levels decline systematically with age. b) Numeracy levels are correlated with measures of retirement saving and investment portfolios, 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 crosssectional data available on which to base our analysis. Firstly, it shows yet another dimension in which inequalities amongst older individuals are apparent. Second, the analysis suggests that in the short run there may be a role for targeting simple retirement planning information at low numeracy, low wealth, low education groups. Third, it suggests that a longer run policy goal might want to target numeracy levels more generally in order to reduce the fraction of the population with low basic skills. Whether such 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 conditional correlations we present here. On this topic in particular, there is much further work to be done.

Suggested Citation

  • James Banks & Zoe Oldfield, 2006. "Understanding pensions: cognitive function, numerical ability and retirement saving," IFS Working Papers W06/05, Institute for Fiscal Studies.
  • Handle: RePEc:ifs:ifsewp:06/05
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    1. Belot, Michele & van Ours, Jan C., 2001. "Unemployment and Labor Market Institutions: An Empirical Analysis," Journal of the Japanese and International Economies, Elsevier, vol. 15(4), pages 403-418, December.
    2. Nickell, Stephen, 1999. "Product markets and labour markets1," Labour Economics, Elsevier, vol. 6(1), pages 1-20, March.
    3. Marianne Bertrand & Francis Kramarz, 2002. "Does Entry Regulation Hinder Job Creation? Evidence from the French Retail Industry," The Quarterly Journal of Economics, Oxford University Press, pages 1369-1413.
    4. Giuseppe Nicoletti & Stefano Scarpetta, 2005. "Product Market Reforms and Employment in OECD Countries," OECD Economics Department Working Papers 472, OECD Publishing.
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