Maarten van Rooij

Financial literacy and retirement preparation in the Netherlands

We present new evidence on financial literacy and retirement preparation in the Netherlands based on two surveys conducted before and after the onset of the financial crisis. We document that while financial knowledge did not increase from 2005 to 2010, in 2010 significantly more individuals report having thought about their retirement. Using information on financial conditions and financial knowledge of relatives, we find a positive causal effect of financial literacy on retirement preparation. Employing the panel feature of our dataset, we show that the effect of financial knowledge on retirement planning is bound to be positive.

How Financially Literate are Women? An Overview and New Insights

We document strikingly similar gender differences in financial literacy across countries. When asked to answer questions that measure knowledge of basic financial concepts, women are less likely than men to answer correctly and more likely to indicate that they do not know the answer. In addition, women give themselves lower scores on financial literacy self-assessments than men. Both young and old women show low levels of financial literacy. Moreover, women for whom financial knowledge is likely to be very important—for example widows or single women—know little about concepts relevant for day-to-day financial decisions. Even women in favorable economic conditions are less financially knowledgeable than men. This is important because financial literacy has been linked to economic behavior, including retirement planning and wealth accumulation. Women live longer than men and are likely to spend time in widowhood. As a result, improving women’s financial literacy is key to helping them prepare for retirement and promoting their financial security.

Financial Literacy, Retirement Preparation and Pension Expectations in the Netherlands

We present new evidence on financial literacy and retirement preparation in the Netherlands based on two surveys conducted before and after the onset of the financial crisis. We document that while financial knowledge did not increase from 2005 to 2010, significantly more individuals planned for their retirement in 2010. At the same time, employees’ expectations about the level of their pension income are high compared to what retirement plans may realistically provide. However, financially knowledgeable employees report lower expected replacement rates and acknowledge higher levels of uncertainty. Moreover using instrumental variation for financial conditions and financial knowledge of relatives, we find a positive effect of financial literacy on retirement preparation. Employing the panel feature of our dataset, we show that financial knowledge has a causal impact on retirement planning. Our findings suggest that the formation of pension expectations might be an important mechanism contributing to the impact of financial literacy on planning.

PALMNET: A Pension Asset and Liability Model for the Netherlands

This study presents a pension model geared to the typical pension contract in the Netherlands. It is based on a defined benefit/average earnings pension system. Nominal benefits are guaranteed and indexation is intended. The model provides a framework for analysing adjustments to such factors as the asset mix, retirement age, returns and the method of discounting, premium setting and indexation. The importance of uncertainty over interest rate movements and returns on shares is made explicit by means of stochastic and historical simulations. In this, PALMNET differs from existing, often deterministic pension models. The main findings are, first, a wage -indexed defined benefit pension is still affordable despite the current shortfall of wealth of pension funds. Second, fair value accounting considerably increases the volatility of pension premiums. Third, reducing risks by adjusting the asset mix towards more bonds is costly in terms of average premiums, but reduces the volatility. These conclusions are based on realistic to conservative assumptions regarding returns and risks.

The Rose-Colored Glasses of Homeowners

Based on annual household surveys between 2003 and 2012, we show that owners have a rosy picture of their current house value and hold optimistic views on the historical and expected change in house value compared to general price trends. Optimism is both driven by loss aversion and an endowment effect as overestimation of the house value is positively related to the mortgage loan-to-value ratio and tenure of the owner-occupier. After several years of national declines in house prices, the estimates in our sample have become more realistic but the glasses of homeowners remain rose-colored. Even groups of homeowners that are arguably well-informed, e.g. homeowners with moving plans and homeowners that are in charge of household finances, overestimate the value of their house.

Consumption Uncertainty and Precautionary Saving

Using survey data from a representative sample of Dutch households, we estimate the strength of the precautionary saving motive by eliciting subjective expectations on future consumption. We find that expected consumption risk is higher for the young and the self-employed, and is correlated positively with income risk. We insert these subjective expectations (rather than consumption realizations, as in the existing literature) in an Euler equation for consumption, and estimate the degree of prudence by associating expected consumption risk with expected consumption growth. Robust OLS and IV estimates both indicate a coefficient of relative prudence of around 2.

Social Interactions and the Retirement Age

In this study, we gauge the impact of social interactions on individual retirement preferences. A survey including self-assessments and vignette questions shows that individual preferences are affected by preferences and actual retirement behavior of the social environment. Retirement from paid work depends on the retirement age of relatives, friends, colleagues and acquaintances. Information and advice provided by the social environment play a role in the retirement decision. A majority of respondents would postpone retirement when their social environment retires later. A one year increase in the social environment’s retirement age leads to an average increase of three months in the individual retirement age. In addition, people tend to stick more to the state pension age than to other retirement ages, which suggests a norm about retirement at the state pension age.

Asymmetric Consumption Effects of Transitory Income Shocks

We use the responses of a representative sample of Dutch households to survey questions that ask how much they would consume of an unexpected, transitory, and positive income change, and by how much they would reduce their consumption in response to an unexpected, transitory, and negative income change. The questionnaire distinguishes between relatively small income changes (a one-month increase or drop in income), and relatively larger ones (equal to three months of income). The results are broadly in line with models of intertemporal choice with precautionary saving, borrowing constraints, and finite horizons.

Trust in the Central Bank and Inflation Expectations

Using micro data from the 2015 Dutch CentERpanel, we examine whether trust in the European Central Bank (ECB) influences individuals’ expectations and uncertainty about future inflation, and also whether it anchors inflation expectations. We find that higher trust in the ECB lowers inflation expectations on average, and significantly reduces uncertainty about future inflation. Moreover, results from quantile regressions suggest that trusting the ECB increases (lowers) inflation expectations when the latter are below (above) the ECB’s inflation target. These findings hold after controlling for people’s knowledge about the objectives of the ECB. In addition, higher trust in the ECB raises expectations about GDP growth. The findings suggest that a central bank can influence the economy through people’s expectations, even in times when conventional monetary policy tools likely have weak effects.

Measuring Expectations of Inflation: Effects of Survey Mode, Wording, and Opportunities to Revise

Several national consumer surveys aim to elicit consumers’ inflation expectations. Median reported expectations have been shown to track objective inflation estimates over time, although respondents display relatively large disagreement. Observed medians, however, tend to differ between consumer surveys, possibly reflecting survey design differences. In this paper, we examine the importance of three survey features in explaining these differences: question wording (‘prices in general’ vs. ‘inflation’), interview mode (face-to-face vs. web), and the explicit opportunity to revise responses. We find systematic effects on item non-responses, reported inflation expectations and their dispersion. We discuss implications of our findings for survey design.