In my previous post, I have announced the creation of a new Financial Literacy Center, a collaborative effort among Dartmouth, the Wharton School, and RAND. I would like to explain in more detail its mission and its purpose.
MOTIVATION TO BUILD A FINANCIAL LITERACY CENTER
Individuals and families are increasingly being asked to take command of their own financial well-being. They must determine not only where and how long to work, but also how much to save and how to allocate their pension assets, when to claim Social Security and pension benefits, and how to manage their assets throughout a potentially long retirement period. These decisions were always difficult, but they have become even more so today since increasingly intricate and hard-to-understand financial products are now accessible to many people who are actually quite ill-equipped to take on the task. As a result, widespread saving shortfalls and difficulties with debt are emerging as serious challenges to households already at risk. And without a doubt, the current financial crisis has underscored the reality that, as a nation, we are subject to deep systemic risk attributable in part to financial illiteracy. These facts threaten to undermine many Americans’ hopes for a rewarding retirement.
Our goal with the creation of the Financial Literacy Center is to harness creativity and ingenuity to generate rigorous quantitative analysis and build innovative and exciting products that will work effectively in real-world settings to better identify and resolve the challenge of financial illiteracy. A multidisciplinary approach is integral to understanding the problem, so as to formulate concrete steps that can be structured to conquer inertia and to test products to determine what works best. The Center includes several strong cross-disciplinary teams that draw from diverse but relevant fields, including traditional economics and finance, behavioral economics, social marketing, psychology, marketing science, and sociology. Working across disciplines and theoretical backgrounds encourages the creativity needed to foster unconventional but potentially effective designs, to test programs and products for effectiveness, and to articulate best practice in a variety of different settings under this common unifying theme. All these steps will be invaluable in helping Americans of all working ages better understand the role of Social Security benefits and the need to save and dissave sensibly over their lifetimes.
Our review of the existing literature leads to the following general observations relevant to the goals of the Center:
1. Financial illiteracy is widespread. Financial literacy cannot be taken for granted among the population, particularly among specific groups (including those with low education, women, and minorities). This raises the issue of how to communicate information effectively, particularly to those who need it most.
2. Financial education can work. The provision of financial literacy can be invaluable in enhancing saving and investment decisions, retirement planning, and retirement outcomes.
3. “One size fits all” does not work. Different segments of the workforce require appropriate tailoring in terms of message and delivery system for financial literacy.
4. The financially illiterate require both information and help with implementation. Building literacy requires products and programs that (a) inform workers of retirement goals; (b) give them concrete ways to begin to think about how to attain these; (c) offer simple approaches to attain their goals and overcome obstacles; (d) provide timely reminders and encouragement about how to meet the goals; (e) offer additional information if the client so desires.
5. A step-by-step approach is needed. Enhancing financial literacy requires a sequence of steps: (a) a baseline assessment of literacy shortfalls; (b) the development of material and tools, including implementation steps, appropriate to specific subpopulations; (c) the development of modes of communication and delivery systems attractive to the relevant subpopulation; (d) evaluation of outcomes.
6. It is essential to integrate a thorough and careful project evaluation to fill in the knowledge gap about what works in the financial literacy.