I am back in Hanover after a term where part of every week was spent working in Washington, D.C., and I am looking forward to the new year. The beginning of a new year raises hopes and expectations; we expect the upcoming year to be different from the previous one and for things to be better. Our wishes often do not materialize but I have, nevertheless, three wishes for 2010.
In December, the findings from the new Survey on Financial Capability were released. They paint a troubling picture of the U.S. population both in terms of financial knowledge and financial behavior. As has been documented in other surveys, knowledge of basic concepts of finance and economics is lacking in the population. The majority of people do not understand the workings of inflation, risk diversification, and basic asset pricing. Nevertheless, individuals have to decide how much to save to afford a comfortable retirement and how to allocate their pension wealth. Moreover, and disturbingly, half of the population does not have a buffer stock of savings to shield against unexpected events like job loss or emergencies. This makes both individuals and the economy as a whole more vulnerable to shocks. There are many other findings that I will discuss in more detail in future blogs. (The executive report is available at http://www.finrafoundation.org/resources/research/p120478).
My first wish for the New Year is that these findings will provide the stimulus for implementing policies to improve financial literacy and help American families in their financial decision-making.
My second wish for the year is that attention will turn to the groups that need financial literacy the most. One of these groups is women. The Survey on Financial Capability (as well as other surveys) documents that women are lagging behind men in terms of financial knowledge. This is not only the case for older women; it is also true for young women entering the labor market and for high school students. In all of these demographic groups, women are found to be less financially knowledgeable than men. Women are a large and important group. With one in two marriages ending in divorce or separation, women increasingly have to rely on both their earning capacity and their ability to manage resources well to take care of themselves and others. However, very few financial education programs are targeted to women and much more can and should be done to empower women with financial knowledge and financial capability.
My third wish is for financial literacy to be taught in schools. As I have mentioned in previous blogs, financial literacy is an essential piece of knowledge that every student should have. Just as reading and writing became skills that enabled people to succeed in modern economies, today it is impossible to succeed without being able to "read and write" financially—in other words, without financial literacy. Students face formidable financial challenges both during their school years (when they are bombarded with credit card offers) and in the years of young adulthood when they have to make important decisions, including how to finance a college education. My hope is that knowledge and understanding of financial concepts will impact their lives in one particularly important way: the understanding that one of the most important assets they can invest in is their own education.
On a personal level, I will try to stay away from New Year’s resolutions I know I cannot keep, such as shedding these extra pounds (I like eating!), traveling less (the weather and the new security measures are taking care of it), and writing a novel (I am too nerdy for it). But I will continue doing my research and writing my blog. This continues year after year and does not notice the passage of time. It does not even require a special resolution. Happy New Year to all of you!