Strengthening the role of business in creating a more inclusive, equitable, and sustainable global economy. That’s Wharton Social Impact’s mission. In our research and training programs, we are proud to recognize and build on the work of Wharton’s extraordinary faculty.
In our “Social Impact Faculty Spotlight” series, we highlight recent research by Wharton professors whose research focuses on the intersection of business and impact.
This month, we spoke with Olivia S. Mitchell, a leading economist and a professor in Wharton’s Department of Business Economics and Public Policy, about her new research on financial well-being (FWB) among Black and Hispanic women.
In your research, you have studied public and private pensions, insurance and risk management, financial literacy, public finance, and wealth accumulation. How would you describe the common thread that unites your work?
Mitchell: My main areas of research and teaching are international private and public insurance, risk management, public finance, and compensation and pensions. My 300+ books and published articles analyze pensions and healthcare systems, wealth, health, work, wellbeing, household financial decision making, and retirement.
I also do extensive policy-related research, having served on President Bush’s Commission to Strengthen Social Security, the U.S. Department of Labor’s ERISA Advisory Council, and as Vice President of the American Economic Association.
You just completed a study of the financial well-being among Black and Hispanic women. How do you define financial well-being?
Mitchell: In our study, we adopt the definition proposed by the Consumers Financial Protection Board: financial well-being (FWB) is “a state of being wherein a person can fully meet current and ongoing financial obligations, can feel secure in their financial future, and is able to make choices that allow enjoyment of life.”
Rather than focusing on objective financial behaviors such as borrowing, financial well-being is a measure of how people perceive their financial skills, behavior, and situations. We also used additional proxies for well-being, including self-reported financial dissatisfaction, financial anxiety, indebtedness, and financial fragility.
Why were you eager to tackle this specific topic?
Mitchell: For over a decade, my coauthors and I have devoted much of our research to an examination of financial literacy and how to address financial knowledge shortfalls when people are unfamiliar with basic financial topics. Specifically, we have defined individuals as financially literate if they can answer three basic financial literacy questions correctly covering the understanding of inflation, interest compounding, and risk diversification.
Previously we had not been able to compare White, Black, and Hispanic women’s financial knowledge and link it to their financial well-being due to the lack of a sufficiently rich and large dataset. The National Financial Capability Survey (NFCS) of 2018, a national study of about 27,000 adults conducted every three years by the FINRA Investor Education Foundation, made this possible.
In a nutshell, what were your most important findings?
Mitchell: Financial knowledge is quite low among White women, with only 21% being able to answer all three financial literacy questions. Black and Hispanic women scored even lower, with only 9% of Black women and 13% of Hispanic women deemed financially literate.
These low scores were partly driven by many “do not know” responses to financial knowledge questions. We believe that women often lack confidence in their answers, and it could also indicate that they were aware of what they did not know. Awareness of their lack of knowledge could spur participation in financial education programs and knowledge acquisition.
What surprised you most?
Mitchell: On average, FWB scores were quite close for Black, Hispanic, and White women, yet the factors contributing to these outcomes were not the same. Earning a perfect score on the financial literacy questions was strongly positively related to greater FWB for Whites and Hispanics, yet for Black women it was negative. Interestingly, all three groups of women reported being offered financial education at similar rates: 24% of Whites, 28% of Blacks, and 27% of Hispanics, and conditional on having been offered it, about three-quarters of each group participated. Nevertheless, the resulting financial literacy differences indicate that this education did not improve all groups’ FWB equally.
We also learned that, for White women, unemployment was significantly negatively associated with FWB, yet it was not significant for Black or Hispanic women. One possible explanation is that having a job has less of a positive effect on FWB for Black and Hispanic women. That is, even when they are working, Black and Hispanic women have less access to employer-sponsored benefits including healthcare coverage and paid time off.
Family structure also has different impacts on Black, Hispanic, and White women’s FWB. For instance, Black and Hispanic women were more likely to have financially dependent children, yet this was not strongly linked to lower well-being. By contrast, though White women were less likely to have financially dependent children, when they did, the children contributed to a larger negative impact on mothers’ FWB. This might arise because some parents will limit their own consumption to save for their children’s education, while in other cultures, parents may instead expect that children will provide for them in retirement.
What is the most important lesson or takeaway for practitioners, policymakers, and/or other decision-makers?
Mitchell: Our results indicate that a “one size fits all” approach is unlikely to address financial well-being deficits across the board, in view of the very different patterns we have uncovered. Instead, targeted programs are likely to better serve people who differ in terms of financial experience.
Financial education programs must direct more attention to the specific needs of Black and Hispanic women in terms of their financial well-being. For example, a financial education curriculum can inform participants about the costs associated with alternative financial services or credit cards, but it will succeed better if it acknowledges the particular constraints facing Black and Hispanic women, such as lack of access to lower-cost credit. Programs could be designed with the understanding that Black and Hispanic women may have economic needs and perspectives about personal finance that differ from those of White women.
Access the full paper on the TIAA Institute website.
Posted: March 30, 2021
