by Elsa Fornero, Noemi Oggero, Riccardo Puglisi; CeRP WP 180/18
Abstract
The accumulation of pension wealth is a long and complex endeavour, with various ‘moments’ in which the individual has to make decisions, even in public systems with a strong compulsory component. Awareness is essential to increase welfare, as citizens are more likely to make sensible choices and avoid regrettable mistakes. Awareness requires both information and the ability to use it wisely; in turn, this requires a minimum economic-financial knowledge, typically called financial literacy. Workers must have some knowledge (conjecture), as precise as possible, of where they stand on their accumulated (prospective) pension wealth and retirement options. This knowledge is less important in the traditional world of DB pension promises, because of their ‘guaranteed’ nature (although the political risk—a risk that people are more likely to ignore, by appealing to the notion of ‘acquired rights’—was never explicitly taken into account and thus covered). Knowledge is instead essential in (N)DC schemes because of their more complicated structure, combined with a higher level of individual responsibility and corresponding risk. In this chapter, we investigate the importance of both information and financial literacy, as they are complementary in achieving a socially sustainable NDC pension system.
Published: May 2018
published in “Progress and Challenges of Nonfinancial Defined Contribution Pension Schemes”, Volume 1: Addressing Marginalization, Polarization, and the Labor Market, World Bank, 2020.