New research co-authored by Wharton’s Olivia Mitchell shows how people’s trust in financial institutions and government programs could boost or deplete their retirement nest eggs.
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When planning for retirement, what would you trust in more: financial institutions such as mutual funds, or government programs such as Social Security or Medicare? The degree of your trust in either of those channels, guided by your level of financial literacy, will determine how you save and invest for retirement, according to a new research paper co-authored by experts at Wharton. The paper brings granular insights into how different types of trust shape retirement preparedness in the U.S., and the gaps that improved financial literacy could fill.
The paper’s focus is on trust in financial institutions and trust in government programs. “Our study’s domain-specific measures allow us to examine mechanisms directly tied to retirement saving behavior,” Mitchell says. The study also tracked metrics related to financial literacy, and how both trust and financial literacy vary by race and ethnicity.
According to the paper, “trust is broadly understood as the expectation that individuals, institutions, or systems will act fairly, reliably, and in alignment with established norms, especially under uncertainty.” Trust can promote investment and collaboration by reducing perceived risks in economic interactions, it adds.
“We found that, first of all, trust is multi-dimensional,” says Mitchell, who is also executive director of Wharton’s Pension Research Council. “The two areas we looked at—trust in financial institutions and trust in government programs—capture different behavioral mechanisms that the widely used ‘trust in people’ metric misses.”
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