Catch them young - PISA reveals worrying levels of financial illiteracy among students

Previous PISA assessments have revealed 15-year-olds’ skills in reading, mathematics and science. But how good is their understanding of financial issues, so-called financial literacy? How do they handle bank accounts, credit and debit cards, or planning and managing finances? What do they know about interest rates, savings, risk and rewards? The current PISA assessment by the OECD (Organisation for Economic Co-operation and Development) tested these issues for the first time and identified significant knowledge gaps. The results were published in Paris today in the presence of Mr. Angel Gurría, OECD Secretary-General, and Queen Máxima of the Netherlands, UN Secretary General’s Special Advocate for Inclusive Finance for Development.

A look beyond PISA shows: the need for financial education among adults is huge, too – with dramatic consequences.

15 percent of students, on average, score below the basic level of performance. At best, these students can make simple decisions about everyday spending. Shanghai-China had the highest average score with Belgium being a distant second.

The gender gap was not significant. This was a surprise because adults do show a gender gap in terms of financial literacy. Additionally it became clear that economically advantaged students perform better. “This is bad news as it contributes to freezing the picture” says Gurría. Queen Maxima comments: “The results are a game changer and an impetus for action in many countries.”

“It is surprising how poorly our children are equipped for modern life. We must act – that’s beyond doubt,” Brigitte Miksa, Head of International Pensions at Allianz Asset Management, comments on the current PISA results.

“It is surprising how poorly our children are equipped for modern life. We must act – that’s beyond doubt,” Brigitte Miksa, Head of International Pensions at Allianz Asset Management, comments on the current PISA results.

Few know the interest rate effect

“It is surprising how poorly our children are equipped for modern life. We must act – that’s beyond doubt,” Brigitte Miksa, Head of International Pensions at Allianz Asset Management, comments on the current PISA results. “Only if they understand how interest works, for example, or how products like investment funds or insurance can assess risk and rewards, they are able to get informed and take decisions to secure their financial welfare.”

But, she points out, a look beyond PISA shows that even among adults, financial literacy does not look good. Previous OECD assessments show that there is plenty of  potential for improvement, especially among women. Studies conducted by Annamaria Lusardi, George Washington School of Business, and Olivia Mitchell, University of Pennsylvania, confirm these findings: only 30 percent of survey respondents in the US had an understanding of interest rates, inflation and diversification. Japan and France showed similar results, whereas other countries differed significantly downwards – regardless of the economic situation of each country. However, in Germany, just over half of the respondents knew the right answer for all three questions.

Lack of knowledge costs money

 

Lusardi and Mitchell reveal that for individuals, the cost of such financial illiteracy is high. They tend to borrow more, accumulate less and pay more in fees relating to financial products, according to the scientists. Many overspend, use cash advances and are less likely to know the terms of their mortgages and other loans. Miksa says: “Taken over a lifetime, such behavior results in serious financial self-harm. Considering the demographic development, and that governments and corporations are passing increasing responsibility on to individuals to secure their own retirement income, it is essential for everyone to take precautions. A population inadequately prepared to make critical financial decisions is a recipe for social disaster.”

 

Are educational initiatives for children a solution?

 

Experts have discussed whether financial education for children can help solve this problem – and the opinions differ widely. While some think that governments, regulators and the financial industry should promote financial skills at early ages, believing this to be the only way to learn appropriate behavior, others have the opinion that this approach is doomed to failure. Against this background initiatives like My Finance Coach aim to raise teenagers’ awareness about responsibly handling money.

 

Miksa sums up the discussion: “Everybody knows that we do not always take good and right decisions. But principally it is important to give people the tools they need to make informed financial decisions.”

 

7 facts on financial literacy that might surprise you
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Petra Brandes
Allianz SE
Tel. +49 89 3800 18797
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