Could financial education be a universal social policy? A simulation of potential influences on inequality levels

This paper aims to identify the potential influence of financial literacy’s marginal change on households’ income (wealth) inequality levels both at the mean value and along with the distribution. Using data from the Bank of Italy Survey of Households Income and Wealth (SHIW)’s 2016 wave – which includes the Big Three questions, a widely used measure of financial literacy - we show that replacing 10% of respondents reporting no correct answers with respondents reporting two correct answers out of three would increase the mean value of the household equivalized disposable income by 0.8% (160€ per year). Additionally, it would increase by +1.5% (285€ per year) if we replace 10% of respondents reporting no correct answers with those reporting three correct answers. These results are not trivial. A lump sum leading to the same household income increase would cost on average EUR 4.1 to 7.3 billion per year in Italy. Finally, heterogeneous analysis reveals that an increase in financial literacy levels often engenders a greater reduction of inequality levels among the most vulnerable groups. Our preliminary cost analysis supports mandatory financial education in schools.