Financial Illiteracy and Pension Contributions: A Field Experiment on Compound Interest in China
1298.ris
—
Octet Stream,
1 kB (1774 bytes)
This paper uses a field experiment to study the relationship between financial literacy and retirement savings in China. When the Chinese government launched a highly subsidized pension system in rural areas in 2009, 73% of households chose to save at a level that is lower than that implied by a benchmark life-cycle model. We test to what extent the low contribution level is due to a fundamental misunderstanding of the nature of compound interest. In a field experiment with more than one thousand Chinese households, we randomly assigned some households to a financial education treatment that emphasized the concept of compound interest. This treatment increased the pension contribution by roughly 40%. The increase accounts for 51% of the gap between contribution levels in the control group and those implied by the benchmark model. To pinpoint mechanisms, we test whether the effect is due to (1) changes in time preference, (2) learning about the expected benefits of pensions in general, or (3) a better understanding of compound interest, our focus. We find that financial education about compound interest does help households partially correct their erroneous understanding of compound interest, and (2) and (3) together explain the bulk of the effect. Welfare analysis suggests that financial education increases the total welfare, although heterogeneous effects suggest that some households end up saving at a level that is higher than that implied by the benchmark model.
RPRT
Song, Changcheng
2011
1298