Psychosocial Factors and Financial Literacy

For much of the 20th century, most US pensions were defined benefit plans in which workers received retirement benefits based on a formula that included earnings, years of service, and final salary as inputs.

However, over the last several decades, there has been a well-documented trend away from defined benefit plans toward defined contribution plans, in which an employee’s retirement income depends on contributions to the plan along with the investment earnings on those contributions (Butrica and others 2009).

Current workers increasingly must decide how much to contribute to retirement plans and how to invest plan contributions. Thus, today’s workers require greater financial sophistication to manage their retirement savings.

By understanding which personal characteristics are associated with financial literacy, policymakers may target limited education resources to individuals with psychosocial traits that indicate risk for low financial literacy and insufficient retirement planning.

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