Saturday, January 10, 2015

Highlights from 2014: Notes from my travels

As in my previous post, I would like to continue to reflect on highlights from last year. One of the advantages of founding and directing a global center is that I get to travel a lot. In the Fall 2014, I travelled to seven countries on two continents. I cannot tell you how much I have enjoyed it, even though I had little time to do anything else, including write my blog.

There are many things that surprise me as I attend conferences, meet people, and make my way through various cities. First, it is surprising how many similarities I’ve found across countries that we usually consider to be very different. I was at a restaurant in an unnamed city that was so special it could have been a very popular dining destination in New York, London, Rome, or Hong Kong, but it was in none of those cities.  And while the food has been good, the traffic has been bad and seems to be getting worse in every city around the world; this is not just a feature of Rome or Washington, DC.
And there are differences that also work in surprising ways. We refer to countries as “developed” versus “developing” or “emerging,” of course with the assumption that the developing countries have a host of problems to solve. One of the things I have started to notice in the supposedly “developing” countries is that women are often in positions of command. I was invited to speak at a conference in an “emerging” country where the rector from one of the oldest and most prestigious universities is a woman and where women are at the top management levels of financial institutions. In another developing country where I attended a conference at the beginning of the Fall, the chair of my session was a very famous journalist and, again, a woman.  Developed countries have well-developed markets, well-developed institutions, and good education systems, yet women are paid less than men, and finding women in positions of power is often rare if not impossible.  So watch out young people (young women)!
Another thing I have observed in the “developing” countries is that young people get good jobs. It is not unusual to see directors and managers who are under 30 or 40 year old, and I did not get the impression that they were considered inexperienced or less competent because of their age. In many developed countries, the unemployment rate among the young is so high that I am not sure why we do not consider it a crisis. In my native Italy, if you leave your parents’ home before age 30 or 40, you are considered an adventurous person who does not understand what a jungle it is out there.
I think we may want to change our terminology: we may want to refer to market economies as either “mature” or “young” because the lines between developed and developing countries are starting to be very blurred and there is not always such strong evidence of progress—as the term “developed” seems to imply—on how women and young people are faring in some of these supposedly developed countries. 
These are some observations from my travel last year and I hope to keep writing while sitting on airplanes…

Thursday, January 1, 2015

Financial Literacy Highlights of 2014: The PISA data

I am starting the new year by looking back and thinking of the highlights of 2014. For me, one event stands out: the release of the Programme for International Student Assessment (PISA) data, which measures the financial literacy of 15-year-olds around the world. I am very proud that the Global Financial Literacy Excellence Center (GFLEC) hosted the U.S. release of the data and that we did it in collaboration with three of the most important institutions for financial literacy: the Department of Education, the Consumer Financial Protection Bureau, and the Department of the Treasury. While my team can tell you that the months before the event were really hectic, my preparation actually happened over several years.  It started when the financial literacy expert group that was asked to design the financial literacy assessment for PISA first met. It was in Cambridge, Massachusetts (MA), and we all felt we were starting to work on something very important. Since that meeting, I had been waiting for the day when the data would be made available. That day was July 9, 2014.

The data was accompanied by a report that was written over a period of time (hence the different timing than the data release for other PISA subjects) and that can be accessed on the OECD’s and GFLEC’s website (see  A lot has already been written about the PISA financial literacy data and rather than summarizing the many findings, I would like to highlight three main facts from these important data.

1)      There are large differences in financial literacy across the 18 countries that participated in the assessment. It is not the countries that have the most developed financial markets or the highest Gross Domestic Product (GDP) per capita that rank at the top of the financial literacy scale. On the one hand, this should be a worry for rich countries, as it shows that their youth is not well prepared to deal with the complexity of these economies. On the other hand, it shows that financial literacy is not acquired informally, simply by living in economies with sophisticated financial markets (financial literacy does not come in the milk bottle.).
2)      There are wide differences in financial literacy within the countries that participated in the assessment. One of the most interesting findings is the difference between male and female students. Many have noted that, on average, there are no gender differences in financial literacy. This requires some clarification. We have worked very hard at designing questions that are gender neutral, and the methodology itself (some questions have open-ended answers, so respondents can answer in their own words) can soften the differences we have observed in male and female responses to financial literacy questions among adults. But gender differences are still present at these early stages of the life cycle. In fact, looking deeper one finds that boys are more likely to locate at both the top and bottom levels of the financial literacy scale than girls.
3)      A sizeable amount of the variation in financial literacy is accounted for by socio-economic status; in other words, the income and education levels of parents matter for youth financial literacy. This is a finding that we have documented among other age groups, for example young adults (age 23 to 28). It shows that differences in financial literacy start to emerge early in life, and depend on the family students are from. This is a worrisome finding, and in my view, one of the main reasons why we need financial literacy in school—to try to create a level playing field. This is the topic we discussed at the conference GFLEC organized jointly with the OECD last November titled “Toward a more inclusive society.” These are also my wishes for 2015: Having financial literacy in school and a more inclusive society (the two topics are related, but, okay, I like to dream big!).

Let me return to July 9, 2014, the day of the PISA data release.  As I mentioned earlier, for the financial literacy expert group (and many were there on stage at the Washington, DC, event), it was a day we had been waiting for for many years, since that first meeting in Cambridge, MA.  And as the data was being illustrated on slides, discussions, testimonials, and reports, we felt we had laid the first brick of a financial and economic structure that includes financial literacy. For me, this was the best day of 2014.

There are a lot of advantages to organizing the release of important data. You get to invite and meet famous people. You get to bring together representatives of important institutions. You get to hear new ideas. You get to test the patience and ingenuity of your collaborators. Arne Duncan, the U.S.  Secretary of Education, came to speak at the event. He is a very charismatic leader and I got to interview him on stage. He sent me a handwritten thank you note afterward, and I have framed it!

Happy new year.

Saturday, July 19, 2014

Hosting the US release of the the Programme for International Student Assessment (PISA) financial literacy data

I have not written for a long time and the reason is because of new data (only economists say these things).  I am returning to write because the data is finally out and there is a lot to report about it. I will start with the opening remarks I gave at the U.S. release of the Programme for International Student Assessment (PISA) financial literacy data, but a lot more is coming. I am so happy (I hope there are other people in the world who are happy about data!).

I am Anna Lusardi the Academic Director of the Global Financial Literacy Excellence Center, or GFLEC. We are delighted to host the US release of the PISA financial literacy assessment in collaboration with three of the most important institutions for financial literacy in the US: The Department of Education, The Department of the Treasury, and the Consumer Financial Protection Bureau.
We’ll be talking a lot today about the importance of financial literacy for young people. I am happy that we have many members of President Obama’s Advisory Council on Financial Capability for Young Americans here today. They join us both as speakers—including the chair of the Council—and in the audience.

For the financial literacy expert group that designed the PISA assessment, this has been a long journey. We first met in 2010 in Cambridge, Massachusetts, where I was asked to chair the group. For the next 2.5 years, we met regularly – in five different countries — to work on the assessment. And now many members of the group have traveled yet again — some from as far as New Zealand — to be here. I want to thank that work team for an exceptional collaboration. For us, this is a day of celebration.

We are at the beginning of something momentous. The new PISA data will serve as an important tool in helping us assess how much the young know and to guide programs and policies that can improve financial literacy among young people.   

To help us understand the data and how it can be used, we have Andreas Schleicher from the OECD here. Andreas, who has been in charge of PISA, travels around the world advising countries on their educational policies.  We are so fortunate to have him here today. The OECD was visionary in unveiling the PISA initiative in the year 2000, and it showed leadership again when it added financial literacy to the assessment in 2012. At GFLEC, we are very proud of our collaboration with the OECD.

Also this morning we will hear from two speakers whose financial literacy work goes back many years. Secretary of Education Arne Duncan will discuss the PISA findings together with John Rogers, the chair of the President’s Council on Financial Capability for Young Americans.  And we will hear from Richard Cordray, the Director of the Consumer Financial Protection Bureau, and Mary John Miller, the Under Secretary for Domestic Finance at the US Department of the Treasury. The word passion has come up when they speak about financial literacy.

For most of us here today, it is hard not to be passionate about this topic. Financial literacy is critically important for young people. While still in high school, students face life-changing decisions – notably about whether to continue their education and how to pay for it if they do. Financial literacy is also important for job readiness. But financial literacy may remain elusive unless we identify how – and where – financial education can achieve effective results.

There’s no question that it “takes a village” to make progress on financial literacy. That’s why I’m so pleased to have representatives from the private sector, from universities, and from other institutions join our conversation today. I know some of them are working on innovative ideas. In particular, I’m grateful to PwC for its support of this event. We will hear more this afternoon about the impressive work they are doing on financial literacy in schools.

You’ll also hear from students as the day goes on, and at the end of the day, from a surprise guest – although it might be hard to hide her all day. Who better to motivate and inspire students than a star athlete? At the George Washington University School of Business, we have a customized executive MBA program – STAR EMBA. “STAR” stands for Special Talent, Access and Responsibilities. One of our STAR “students” will join us on stage at the end of the day.

The broad impact of the PISA assessment cannot be underestimated. It has already sparked others to collect more data. McGraw Hill Financial and Gallup, for example, have launched the Global Financial Literacy Research project, which is collecting financial literacy data among adults in 148 countries. This adds data from a different age group and a larger set of countries. I’ll be working on this project, too, and I am excited about how this will enrich our understanding of financial literacy. And I would like to thank McGraw Hill Financial too for their support.

Please take note of the title of PISA’s latest volume, “Students and Money: Financial Literacy Skills for the 21st century.” Just as it was not possible to live in an industrialized society without the ability to read and write, so it is not possible to thrive in today’s world without being financially literate. 

Tuesday, December 24, 2013

Financial literacy in school is common sense

On my plane to London and then Milan, Italy , a few days ago, I picked up the Financial Times, a newspaper I particularly like, but that I normally read online. The week-end edition had a FT Money section, which was reviewing the main events of 2013. As I was browsing through the articles, I noticed one that was titled: “Cheer up, 2013 wasn’t as bad as we thought” by Jonathan Eley. It was about the UK and the author listed five reasons why 2013 was actually much better than it looked. I reported below his number 4 reason in quotation marks:
“Children will be taught about money. What was the best thing the government did this year? For me, it wasn’t putting Aim shares into Isas; it was putting financial education into the national curriculum. This passed barely noticed, won’t come into effect until next year, and will take many years to bear fruit. But it’s vital. We cannot expect young people to take responsibility for their own financial future unless we give them the skills and knowledge to do so.” 

 I report the link to the article at the end of this post, if you want to read the other four reasons why 2013 was not as bad.

I was pleasantly surprised to read this article, but it also made me realize that adding financial literacy in school has become common sense. Anyone who understands the changes in the current financial environment can see that the new generations will need new skills and these skills are best acquired in school. It is a simple argument and I hope not just the UK but other countries as well will think of adding financial literacy in school in the new year.

As I landed in Milan, I was determined to do some qualitative testing on my favorite subject: my little niece Giorgia. So after the many hugs and kisses I get when I come back to Italy and while I was looking at the new drawings she did for me, I asked her whether she was interested in learning about money. I was not even done asking the question that she jumped from the chair and she went to get her piggy bank. I was amazed by how much money she had in there. It was obvious that we had to go beyond the lesson on money, we had to talk about investment. So I told her that she should not leave the money in a piggy bank, she had to put the money at work. And while I was thinking of creative ways of explain that to her, she told me the she and her schoolmate Michelle were thinking if Santa Klaus needed help with his toy factory, an idea suggested by one of the parents.

 The morale of this story can be summarized as follows:
1)      It is never too early to talk about money to children;
2)      It is best if money is learned at school, so we do not have to spend our time thinking of ways to teach money ourselves (I do it for living, but in my case as well I would prefer to play checkers with Giorgia);
3)      It Santa Klaus were to do an IPO, we will be ready to invest. For the moment, indexed funds will have to do;
4)      The new year will not be as bad if we have financial literacy in school. 

Here is the article. The online version was titled: Five reasons why 2013 was better than it seemed

Monday, December 9, 2013

Keynote Address to CITI-FT Financial Education Summit 2013

My (short) keynote address to the CITI-FT Financial Education Summit 2013, “Moving Financial Capability Forward: Innovation, Scale and Impact,” held in Honk Kong on December 4-5, 2013.

It is an honor to speak at a conference that marks the 10th anniversary of an event held here in Hong Kong in 2004. One had to be visionary back then to think of financial capability and I want to acknowledge the wisdom of the Citi Foundation.

Robert Lucas, a Nobel Prize economist from the University of Chicago, once said that once you start thinking about economic growth, you cannot stop thinking about it. For me, this has been true about financial literacy. I have worked on the subject of financial literacy for more than 10 years and I want to use my short remarks today to talk about this important component of financial capability.

Financial literacy is a basic but essential skill for living in the 21st century. It is what reading and writing was for previous generations; somebody who could not read and write could not fully participate in society, just as today, somebody who is not financially literate cannot fully participate in the modern economy. We need to equip people with the basic skills necessary to live in the modern world and this has to start at school. I want to emphasize four reasons why we need financial literacy in school:

1.      The young face formidable challenges. One challenge is how to deal with an aging society. My Center organized a Global Financial Literacy Summit some weeks ago. It was held in Amsterdam in partnership with the World Pensions Summit. The discussion on planning for retirement was considered in combination with financial literacy in schools. In other words, preparing for retirement can be thought of as starting in school, where young people can learn the basics of financial decision making. On a selfish note, one of the reasons to focus on the young is that if they do not do well financially, they will move back in with us!
2.      Equality. Financial literacy is very unequally distributed in the population. A group that is particularly vulnerable is women. In all of the surveys I have done across countries, women always come out as the group that knows the least in terms financial literacy. We need to have financial literacy in schools to make sure women have equal access.
3.      Financial literacy is at the basis of democracy. How can we ask people to vote on economic reforms that they don’t understand? This is to say that financial literacy is not just about one’s personal finances; individual knowledge and decisions can impact the community, the country, and the global economy. We need to update the curricula to acknowledge this.
4.      Finally, we need financial literacy in schools because this is where young people are, and it is more scalable and cheaper to impart this knowledge while the young are still in school.

       As evidence that financial literacy is now considered a basic skill, like reading and writing, in 2012 the OECD Programme for International Student Assessment (PISA) added financial literacy to the list of topics it measures when it evaluating the knowledge of 15-year-olds. I look forward to the release of the financial literacy data, expected in June 2014, but for now I am happy to report that Hong Kong did extremely well in mathematics, reading, and science. These findings have been just released and Honk Kong came out in the top five in each topic (3rd in math, 2nd in reading, and 2nd in science)

I want to focus on financial literacy today because recent work in the United States has tried to dismiss its importance. I need to mention to you that financial education in US schools normally consists of a one-semester course taught in the senior year of high school (and often by teachers who report—when surveyed—that they do not feel qualified to teach the topic). I do not need to see an evaluation to predict that this sort of education does not work. We do not learn anything—not math, geography, history—by taking one course at the end of high school. We need to start early and build upon basic knowledge. We need experimentation, new ideas, and the help of technology. We need initiatives like the ones I heard about on the bus to dinner and during dinner last night. And we need to evaluate them to see what works, and then do more of what works.

       To summarize, the points I have touched upon are . . .
-          Financial literacy/education
-          Focus on women
-          The importance of evaluation

You may say Wait, but these are the topics we discussed ten years ago. Have we come full circle? Progress has been made, but my message today is that there is still work to do.

I think we may find inspiration from a city like Hong Kong. I am blown away by it. If a city can find a way to grow so much and so fast, if it can build these tall skyscrapers that light up at night to transform Hong Kong into a city of light, surely we can find a way to tackle financial literacy. Welcome back to this great city!

Monday, October 7, 2013

The Financial Fragility of American Families

I would like to continue writing about the research we have been doing, and I discuss in this post the financial fragility of American families. This is a topic I have written about before—I started this research project some years ago, during the financial crisis—but the work is continuing and it is important to examine how families are doing in the wake of the financial crisis.

Financial fragility is measured by a new and simple survey question, which was originally used in the 2009 Global Economic Crisis Study and was later added to the 2012 National Financial Capability Study.  The question is worded as follows:

“How confident are you that you could come up with $2,000 if an unexpected need arose within the next month?”  

Respondents could reply:
  • I am certain I could come up with the full $2,000
  • I could probably come up with $2,000
  • I could probably not come up with $2,000
  • I am certain I could not come up with $2,000
The amount was meant to reflect an unexpected expense, such as a car or home repair, a large medical expense (e.g. an emergency room visit), or another urgent need that had to be addressed in a month’s time. When asked in 2009, we found that about half of American families were certain they could not or probably could not come up with $2,000 in 30 days. This is a high proportion, perhaps telling us what a profound effect the financial crisis was having on the finances of so many families. But when the question was asked again in 2012, 40% of families said they were certain they could not or probably could not come up with $2,000 in 30 days. The proportion of those who were certainly not able to come up with $2,000 was about the same as it had been in 2009, about 25%; in other words, one in four families was certain they could not deal with an unexpected expense both during and in the years following the financial crisis.

In an earlier post, I discussed the 2009 data, and I want to focus now on the 2012 data. While financial fragility is more pervasive among the young, among African Americans and Hispanics, and among those with low income and low educational attainment, it is still high among many families.  Let’s look at a group that should be better able to weather a shock: older respondents on the verge of retirement (age 56–61). This group should be close to the peak of wealth accumulation and is expected to have accumulated resources to both keep consumption stable upon retirement as well as when facing a short-run shock. But according to the data, about 36% of older respondents stated they could not come up with $2,000 in 30 days.

There are other indicators in the data corroborating the finding of financial fragility among older adults. For example, about 40% of respondents in this group state they have too much debt. And debt they do have: they have mortgage debt and credit card debt. They have borrowed on their retirement accounts, and they have used payday loans and pawn shops. And medical expenses seem to be contributors as well, as a whopping 24% of older respondents report having unpaid medical bills. So, even those at a point in the life cycle when they should be well-equipped to deal with shocks are, in fact, financially fragile.

The worst of the financial crisis may be over, but many American families—even those who are expected to have accumulated wealth—are far from being insulated from shocks.  A protracted government shutdown may take a toll on the families of public employees.  And if it affects the confidence of the American public, it may make other families feel more insecure too.  After a Great Recession, we need to find ways to strengthen the capacity of families to deal with short-term shocks. It seems we are instead adding more of those shocks.

Monday, September 30, 2013

Debt and Debt Management Among Older Adults

I am writing this post and several subsequent ones on research findings. I spent a lot of the summer in front of the computer, looking at data, running regressions, scratching my head, walking around my office, and writing papers. Some of you might think that this sounds like a boring way to spend the day, but in fact, I am truly happy when I can spend time in the office or at home doing research.
The latest project I have been working on is in conjunction with my longtime co-author, Olivia Mitchell from the Wharton School. We examine debt and debt management among adults on the verge of retirement. We focus on debt for several reasons. First, debt generally rises at interest rates higher than those that can be earned on assets. For this reason, debt management is critical for those seeking to manage their retirement assets. Second, not only do families have greater opportunities to borrow to buy a home and to access home equity lines of credit but they also need lower down payments to buy a home. Additionally, as sub-prime mortgages proliferated, credit became increasingly accessible to consumers with low credit scores, little income, and few assets. Consumer credit, such as credit card borrowing, has also become more accessible, and this type of unsecured borrowing has increased over time. Third, in many states, alternative financial services have proliferated, including payday loans, pawn shops, auto title loans, tax refund loans, and rent-to-own shops.  Fourth, a focus on debt may help to identify financially fragile families who may be sensitive to shocks and unable to afford a comfortable retirement. Last, the recent financial and economic crisis was largely driven by borrowing behavior, so understanding debt may help us avoid a repeat of past errors.
What do we do to examine debt? We use data from the Health and Retirement Study (a great data set which, as the name implies, provides a lot of information for understanding retirement readiness) and compare three different cohorts of people on the verge of retirement: those who are age 56–61 at three different time periods: 1992, 2002, and 2008. We look not only at the debt these three groups of older adults hold at the time they are surveyed but also at how much debt they have in relation to their assets. We have the following findings, which I list here for ease of presentation (okay, call me nerdy).

·         Americans today are more likely to arrive at retirement with debt than in the past. Of the cohort surveyed in 1992, about 64% held debt, whereas by 2008, over 70% of the group surveyed held debt. This tells us that people retiring in the next several years (the baby- boom generation) are more likely to carry debt into retirement compared to previous cohorts.

·         Not only has the number of people holding debt increased, but the value of this debt also grew sharply. For those interested in values, median debt more than quadrupled from about $6,200 in 1992 to $28,300 in 2008 (in 2012 dollars) and many boomers (the 2008 survey cohort) had large amounts of debt (over $100,000) with respect to previous cohorts, something to worry about if interest rates increase.

·         A key reason that debt rose so rapidly for the 2008 (boomer) cohort is that this group spent more on housing than earlier cohorts. As a result, boomers are now more likely to have loans outstanding on their primary residences. Boomers are also more likely to carry non-housing debt.

·         Debt ratios have also increased, making recently surveyed (younger) cohorts more leveraged than older ones. For example, boomers have a much greater ratio of mortgage to home value to pay off and will have to service mortgage debt well into retirement. They are also much more likely to have debt equal to or greater than their liquid assets, meaning they will likely have to sell off less liquid assets (or borrow more) to pay their bills.

To get some insights into explanations for such debt and debt ratios, we turn to a data set that I have mentioned often in previous posts, the National Financial Capability Study. This is another rich set of data and because two waves are now available—2009 and 2012—we can look not just at the boomers of the same age group as were surveyed with the HRS, but also at older households in the wake of the financial crisis. The news derived from these data is not good either and reiterate the finding that many older Americans are exposed to illiquidity and/or problems with debt management.  Here are some more numbers:
·         Not only do older adults carry costly credit card debt but many have already tapped into their retirement accounts, and more than one in five have used high-cost methods of borrowing, such as payday loans, in the period from 2007 to 2012.

·         About 40% of older adults state they have too much debt, confirming the high values and ratios we see in the Health and Retirement Study data.

·         While older adults should be close to the peak of their wealth accumulation, in fact more than 35% state they could not come up with $2,000 in 30 days, one of our measures of financial fragility. Thus, many older Americans are vulnerable to shocks.

Several variables can be linked to the conditions of having too much debt and being financially fragile: having experienced a sharp decrease in income, number of dependent children, poor health, and low education and income. Financial literacy also strongly correlates with both high debt levels and financial fragility.
While protective legislation can be useful in situations where people lack opportunities to make repeat financial decisions, so as to learn from them, it can also be useful to better inform Americans of potential consequences of decisions such as buying a home, cashing out their 401(k) plans, or taking out credit card loans. As Olivia and I concluded in our recent review of financial knowledge and financial success, “the costs of raising financial literacy are likely to be substantial, but so too are the costs of being liquidity-constrained, over-indebted, and poor.”
I offer below the links to the data sets we have used in our study as well as to the Senate’s Special Committee on Saving, where Olivia testified on September 25, 2013.