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Financial literacy, trust and retirement planning

Published online by Cambridge University Press:  20 August 2015

ORNELLA RICCI  and
MASSIMO CARATELLI
ORNELLA RICCI
Affiliation:
Business Studies, University of Roma Tre, Rome, Italy (e-mail: [email protected])
MASSIMO CARATELLI
Affiliation:
Business Studies, University of Roma Tre, Rome, Italy (e-mail: [email protected])
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Abstract

We study the complex relationship between financial literacy, retirement planning and trust in financial institutions, using data from the 2010 Bank of Italy Survey on Household Income and Wealth. The impact of financial literacy on retirement planning is a well-established issue in the existing empirical literature; our main contribution is proving that financial knowledge not only impacts retirement planning, but also the decisions of entering a private pension scheme (or devoting the severance pay to a private pension scheme). Adding the consideration of trust poses serious econometric concerns, since both financial literacy and trust in financial institutions are likely to be endogenous and the presence of two endogenous regressors renders the identification of causality very difficult. Our solution is to keep only financial literacy as endogenous and include in our models an exogenous regional indicator of social capital (similar to the one adopted by Guiso et al., 2004), as a proxy for the level of trust between the counterparts of a financial contract in each geographical area. Our main findings show that trust has a positive influence on both the decisions to enter a private pension scheme or to devote the severance pay to a private pension scheme.

Keywords

D14D83D91E21Retirement planningpension plan participationfinancial literacytrust
Type
Articles
Information
Journal of Pension Economics & Finance , Volume 16 , Issue 1 , January 2017 , pp. 43 - 64
Copyright
Copyright © Cambridge University Press 2015 

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