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The German population has good financial knowledge measured on the basis of three financial literacy questions. Around 85 % of the individuals comprehend the functioning of interest and inflation. And 60 % of the individuals understand the relationship of risk and diversification. Overall around 52 % of the individuals give correct answers to all three considered questions of financial literacy. Bi-variate and multivariate analyses of the relation between giving three correct answers and socio-demographic characteristics reveal that higher wealth is associated with higher levels of financial literacy. Moreover, financial literacy relates to higher levels of income and education. There is a significant difference between men and women to give three correct answers. Individuals in East and West, are equally literate, when controlling for differences in income, wealth and education. A positive correlation of financial literacy and financial decision making is identified: more literate households are more likely to save privately for their old-age and at the same time households saving privately for their old-age acquire financial knowledge to improve their investment decisions. Interestingly, the possession of a state subsidised Riester contract is related to lower levels of financial literacy than the possession of other non-subsidised forms of private old-age provision. This indicates that Riester subsidies to some extent successfully encourage individuals with lower financial knowledge to save for old-age. Nevertheless, individuals in the lowest income quintile still have very low levels of private coverage despite the high subsidies. At the same time they show the lowest levels of financial literacy.

Financial Literacy and Private Old-Age Provision in Germany – Evidence from SAVE 2008