Older adults with declining financial and health literacy are at risk of making mistakes that could significantly impact their well-being. They could, for instance, make wrong decisions on when to claim Social Security payments, become vulnerable to financial scams, or choose the wrong health care insurance.
New research by experts at Wharton and elsewhere takes a close look at where those literacy guardrails give way. Their study breaks fresh ground by tracking age-related declines in financial and health literacy over 12 years among 1,075 older men and women without dementia. The findings of the research were published by the Journal of the Economics of Ageing in a recent article titled “Declining Financial and Health Literacy Among Older Men and Women.”
“For the first time, we have been able to follow the same people over time, and we discovered that both older men and women exhibit declining financial and health literacy as they age,” said Olivia S. Mitchell, Wharton professor of business economics and public policy, who is also executive director of Wharton’s Pension Research Council. “This is important since previous work has only been able to measure financial literacy at a specific point in time, but did not follow the same people over time.”
Mitchell co-authored the paper with Rush University professors Patricia Boyle and Lei Yu of the Rush Alzheimer’s Disease Center, and Gary R. Mottola, research director at the FINRA Investor Education Foundation.
Scope of the Study
The study was part of the Rush Memory and Aging Project, which tracks common chronic conditions of aging, focusing on cognitive and motor decline and risk factors for Alzheimer’s disease and related dementias. Beginning in 1997, the project has recruited older adults throughout the Chicago metropolitan area.
Financial and health literacy scores were based on a 32-item measure, which included questions on numeracy, financial terms and concepts, Medicare, and prescription instructions. The study found that the average baseline score of 69.5% declined with advancing age by about one percentage point annually.
“The decline in financial and health literacy scores [among older adults] would have negative consequences for their ability to make important decisions about spending, insurance, medical care, and potentially to avoid financial as well as health care scams.”— Olivia S. Mitchell
Alarming Drop in Financial and Health Literacy
“The fact that people’s financial and health literacy falls by a percentage point per year of age is alarming, since our sample was age 81 on average, and we followed them for about 12 years,” Mitchell said. “A 12% drop in performance in terms of financial and health literacy scores would take the baseline score from about 70% to below 60%.”
“That decline in financial and health literacy scores would have negative consequences for these individuals’ ability to make important decisions about spending, insurance, medical care, and potentially to avoid financial as well as health care scams,” Mitchell said. “Older individuals make a host of critical financial decisions, including when to claim Social Security and pension benefits, how to pay off credit cards on time, not understanding long-term care insurance, withdrawing too much from their retirement accounts, and more.”
At the beginning of the study, men had higher scores than women in financial and health literacy. Older age, lower education, and lower income were associated with lower baseline literacy levels. However, only age was significantly associated with declining literacy. Some 13% of participants maintained their literacy levels. Older adults and those with lower initial literacy levels were more likely to experience declines.
Women at Greater Risk Than Men
As the study’s participants advanced in age, both men and women experienced parallel declines in literacy, with no significant difference in the rate of decline between genders. But the outcomes of declining literacy levels could be far worse for women than for men. With their longer lifespans, women are at greater risk of financial fragility and poor health-related decisions, the paper noted.
“Women generally are significantly less financially literate than men, thwarting their ability to accumulate, manage, and draw down retirement assets, and hence threatening their retirement well-being,” the paper stated, citing previous studies. Furthermore, since women typically live longer than men, low financial literacy coupled with age-related declines in financial literacy can be particularly problematic for them, it added. For instance, widows tend to experience a greater reduction in income and wealth than do widowers, it pointed out, referencing prior research.
“Older adults hold a large fraction of the nation’s wealth, yet their financial and health literacy tends to fall with age, so they are especially vulnerable.”— Olivia S. Mitchell
Benefits of Financial and Health Literacy Interventions
Clearly, the study’s findings could help inform policy interventions to improve those literacy levels among older adults, especially women, “to improve their well-being and quality of life,” the paper stated. Mitchell pointed to programs offered by many organizations, including the AARP, National Council on Aging, Federal Deposit Insurance Corporation (FDIC), National Elder Fraud Hotline, FINRA, and Consumer Financial Protection Bureau. These programs provide financial training and guidance for older persons along with tax preparation help for low-income individuals, she said. Another option she listed is the National Adult Protective Services Association, which helps protect vulnerable adults from abuse, neglect, and exploitation.
To be sure, the study’s findings have evergreen relevance. “Our nation’s rapidly aging population will surely require additional help and advice with managing health care and financial decisions through ever-lengthening lifetimes,” Mitchell said. “Moreover, older adults hold a large fraction of the nation’s wealth, yet their financial and health literacy tends to fall with age, so they are especially vulnerable.”
In that setting, it is increasingly critical that families implement protective mechanisms to help their relatives and friends maintain financial resilience in their later years, Mitchell said. She offered a couple of illustrations for how those mechanisms would work: For instance, security technology like bank account and credit score notifications can alert people’s next of kin or trusted advisors, in the event of attempted cash transfers to unknown destinations. Financial institutions could also offer monitoring of unusual movements in elderly persons’ accounts.
The paper’s authors recommended further research to identify strategies to help both men and women maintain or even enhance their financial and health literacy at older ages. It noted that women may benefit relatively more from such interventions because of their initially lower literacy levels and longer lifespans.
