Tabea Bucher-Koenen

Financial Literacy and Retirement Planning in Germany

We examine financial literacy in Germany using data from the SAVE survey. We find that knowledge of basic financial concepts is lacking among women, the less educated, and those living in East Germany. In particular, those with low education and low income in East Germany have little financial literacy compared to their West German counterparts. Interestingly, there is no gender disparity in financial knowledge in the East. In order to investigate the nexus of causality between financial literacy and retirement planning, we develop an IV strategy by making use of regional variation in the financial knowledge of peers. We find a positive impact of financial knowledge on retirement planning.

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, Riester Pensions, and Other Private Old Age Provision in Germany

Financial knowledge is not wide spread in Germany. In that respect we confi rm results found for other countries, like the United States and the Netherlands. Women, those with low education and low income, as well as households in east Germany are at risk of having low fi nancial literacy. In 2001 a state subsidized private pension scheme (Riester pensions) was introduced in Germany. The central question is, Are Riester pensions successful at encouraging individuals with low fi nancial literacy to save privately for old age? Our results indicate that financial literacy is positively related to privately saving for retirement independent of state subsidies. Levels of private coverage are particularly low among individuals in the lowest income quartile, who would profi t most from the state subsidies. At the same time they show the lowest levels of financial literacy.

Savings In Times Of Demographic Change: Lessons From The German Experience

Pension reforms in many developed countries make individuals shoulder a bigger share of longevity and income risks. The desired response is that individuals accumulate private assets for retirement. Whether this actually takes place, is of paramount relevance for scientists and policy makers. We take Germany as an example: Twenty years of pension reform have transformed the monolithic German pension system into a multipillar system. Formerly generous public pension benefits are gradually being reduced, whereas substantial incentives are granted to occupational and private saving schemes. Has this transition worked out? We survey the reform steps and households’ reactions: How did individuals adjust their labor market behavior? How did private and occupational pension plans take off? How do behavioral adjustments vary in the population? Most Germans adapted to the new situation. Both actual and expected retirement decisions changed and the share of households without supplementary pensions decreased from 73% to 39% in little more than a decade. This is a remarkable success. Nonetheless, households with low education, low income and less financial education did neither adjust their retirement behavior nor pick up supplementary pension plans and are thus likely to face difficulties in bridging the gap arising in future pension income.

The Long Shadow of Socialism: On East-West German Differences in Financial Literacy

We use the German reunification as a natural experiment to understand drivers of financial literacy accumulation. With the transformation from a planned to a market-based economy in 1990, the incentives to invest in financial literacy were changed exogenously for East Germans and remained the same for West Germans. Our results show that even 20 years after reunification there is evidence for a significant financial literacy gap between East and West. While some groups, for instance women and those who have migrated from the East to the West, show similar levels of financial literacy compared with their West German peers, others do not. Differences in financial literacy are present across all educational groups and at the top and the bottom of the income distribution. We decompose the financial literacy gap taking account of factors commonly integrated in theoretical models of financial literacy. Most of the gap remains unexplained. Extending empirical and theoretical models by including differences in attitudes and values might improve our understanding of financial literacy acquisition.

Financial Literacy and Private Old-Age Provision in Germany – Evidence from SAVE 2008

The German population has good financial knowledge measured on the basis of three financial literacy questions. Around 85 % of the individuals comprehend the functioning of interest and inflation. And 60 % of the individuals understand the relationship of risk and diversification. Overall around 52 % of the individuals give correct answers to all three considered questions of financial literacy. Bi-variate and multivariate analyses of the relation between giving three correct answers and socio-demographic characteristics reveal that higher wealth is associated with higher levels of financial literacy. Moreover, financial literacy relates to higher levels of income and education. There is a significant difference between men and women to give three correct answers. Individuals in East and West, are equally literate, when controlling for differences in income, wealth and education. A positive correlation of financial literacy and financial decision making is identified: more literate households are more likely to save privately for their old-age and at the same time households saving privately for their old-age acquire financial knowledge to improve their investment decisions. Interestingly, the possession of a state subsidised Riester contract is related to lower levels of financial literacy than the possession of other non-subsidised forms of private old-age provision. This indicates that Riester subsidies to some extent successfully encourage individuals with lower financial knowledge to save for old-age. Nevertheless, individuals in the lowest income quintile still have very low levels of private coverage despite the high subsidies. At the same time they show the lowest levels of financial literacy.

Dangerous flexibility – retirement reforms reconsidered

SUMMARYFlexible retirement is supposed to increase labour supply of older workers without touching the third rail of pension politics, the highly unpopular increase of the retirement age. While this may have intuitive appeal, this paper shows that it might be wishful thinking. Economic theory tells us that flexible retirement policies can have a zero or positive effect on labour force participation (LFP) while the effect on hours worked can be positive or negative depending on the distribution of leisure preferences. Thus, the overall effect is ex ante unclear. Empirical results from nine OECD countries show that the effect on LFP is ex post small and positive while the effect on hours worked is negative. Overall, there is no evidence of the desired positive effect on total labour supply (TLS). We conclude that the flexibility reforms enacted so far are dangerous instruments if one wants to increase TLS because they postpone or even replace the instalment of more effective policies and may, even worse, reduce total labour volume.

Do Seemingly Smarter Consumers Get Better Advice

In this paper, we study the interaction between financial advisors and customers with a potential conflict of interest. We show in a simple analytical framework that advisors have an incentive to provide better advice to consumers who appear to be better informed. From this, we derive an identification strategy to infer the quality of advice received from variables observed in a representative survey of German consumers. Our identification strategy makes use of the fact that we observe both a generally observable signal of a customers financial literacy as well as an objective measure, which is not observed by the advisor. We apply this strategy to three different empirical settings. In each of these settings, we find consistent evidence that consumers with worse signals of financial literacy on average receive worse financial advice. In particular, both women and individuals without tertiary education are negatively affected.

The Long Shadow of Socialism: Puzzling Evidence on East-West German Differences in Financial Literacy: The Long Shadow of Socialism

We use the German re†unification as a natural experiment to understand drivers of financial literacy accumulation. We find that 20 years after re†unification there is evidence for a significant financial literacy gap between East and West. While for instance women and those who have migrated from East to West have mastered to catch up with their West German peers, others did not. Decomposition of the financial literacy gap shows that most of it remains unexplained when including common factors explaining financial literacy acquisition. Thus, even if the socio†demographic differences between East and West were to vanish, differences in financial literacy would remain.

Szenarien für eine nachhaltige Finanzierung der gesetzlichen Rentenversicherung (Scenarios for the Sustainable Development of the German Public Pension Insurance)

German Abstract: Im Laufe des Jahres 2016 ist es zu einer neuerlichen Rentendiskussion gekommen, die insbesondere die intergenerative Aufteilung der Finanzierungslast des demographischen Wandels in Frage gestellt hat. Insbesondere wurde die Fixierung eines hoheren Sicherungsziels als es derzeit im Sozialgesetzbuch verankert ist ins Spiel gebracht. Diese Studie hat drei Ziele. Erstens legen wir eine langfristige Vorausschatzung der wichtigsten Kenngrosen der GRV bis zum Jahr 2060 vor. Zweitens zeigen wir die Auswirkungen der zurzeit im politischen Diskurs kursierenden Reformvorschlage auf den Beitragssatz, das Rentenniveau und die finanzielle Lage der GRV. Drittens berechnen wir die Konsequenzen eigener Vorschlage zur Anpassung der GRV an den demographischen Wandel.Die Hauptergebnisse sind: Die Lage der GRV ist bis 2030, dem Zeithorizont des aktuellen Rentenversicherungsberichts, stabil im Sinne der Marken, die §154 SGB IV gesetzt hat. Bei derzeitiger Rechtslage wird der Beitragssatz jedoch ab 2031 die 22%-Marke uberschreiten, und das Nettorentenniveau vor Steuern wird ab 2036 die 43%-Grenze unterschreiten. Eine Fixierung des Nettorentenniveaus auf 46% (50%) wurde Mehrkosten von ca. 17,5 (38) Mrd. Euro im Jahr verursachen und den Beitragssatz im Jahr 2040 auf uber 24% (26%) anheben. Eine automatische Anpassung der altersabhangigen Parameter in der GRV an die Lebenserwartung kann das Sicherungsniveau dagegen dauerhaft uber 43% halten, ohne dass es zu einer Erhohung des Beitragssatzes uber 23% kommen wird.Aus diesen Uberlegungen folgt, dass es nicht nur keine finanziellen Spielraume gibt, den Leistungsumfang der Sozialsysteme auszuweiten, sondern es im Gegenteil weiterhin notwendig ist, Reformen zur langfristigen Finanzierbarkeit der GRV in Angriff zu nehmen.English Abstract: During 2016 a new policy debate about the German public pension system has started. The focus of the discussion has been the inter-generational distribution of the financial burden arising from demographic change. Among other things, it has been suggested to fix the pension level at a rate higher than the current minimum level. This study has three objectives. First, we will provide long-term projections of the contribution rate and the pension level, which are the most important determinants of the German Public Pension Insurance (GRV). Second, we will calculate the consequences of several pension reform proposals which are currently debated. Third, we will present several alternative reform options targeted at adjusting the development of the GRV to future demographic challenges.The main findings are: up to the year 2030 – which is the time horizon of the official pension forecast – the development of the GRV is within the targets prescribed by law (§154 SGB IV). Following the current legal situation the contribution rate will, however, exceed the threshold of 22% in 2031 shortly after the official forecast ends. The net pension level before taxes will be lower than the prescribed minimum of 43% after 2036. Fixing the net pension level at 46% (50%) would result in additional costs of about 17.5 (38) billion Euro each year and a contribution rate of 24% (26%) by 2040. On the other hand, a pension level above 43% could be reached without increasing the contribution rate above 23% by adapting the age-specific parameters of the GRV automatically to changes in life expectancy.This means first that there is no leeway to increase the generosity of the pension system now, and second, that reform steps to work towards the long-term sustainability of the system should be taken.