tag:blogger.com,1999:blog-77364467732451915042024-03-19T00:15:08.377-04:00Financial Literacy and IgnoranceWhat do people actually know about personal finance?
Not much, it seems...Annamaria Lusardihttp://www.blogger.com/profile/05956062460452648142noreply@blogger.comBlogger144125tag:blogger.com,1999:blog-7736446773245191504.post-16418865072410649092017-06-29T10:24:00.001-04:002017-06-29T10:27:07.180-04:00Three Cheers For Financial LiteracyThis blog post was also posted on <em>Forbes</em> and can be found <a href="https://www.forbes.com/sites/pensionresearchcouncil/2017/06/23/three-cheers-for-financial-literacy/#3ecc49ef1204" target="_blank">here</a>.<br />
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Since 2000, the Programme for International Student Assessment (PISA) coordinated by the Organization for Economic Cooperation and Development (OEDC) has assessed the reading, math, and science knowledge of 15-year-olds around the world every three years. More recently, since 2012, the program has also measured teen’s financial literacy. The <a href="http://www.oecd.org/daf/fin/financial-education/launch-pisa-financial-literacy-students-2017.htm" target="_blank">latest findings</a> just released by the OECDs provided small - but consequential - reasons for celebration.<br />
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The full report on the latest PISA financial literacy assessment is <a href="http://bit.ly/2qTLbFm" target="_blank">extensive</a>, showing a disappointingly high proportion of teenagers who struggle to understand money matters, indicating where various countries rank on the list, and highlighting financial literacy disparities both across and within countries.<br />
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Yet it is also crucial to acknowledge that headway is being made, despite those continuing concerns.<br />
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First, important issues need champions, and the financial literacy campaign has picked up its share of celebrities! For instance, Her Majesty Queen Máxima of the Netherlands spoke at the May 24 PISA launch. The Queen has been and continues to be an impressive ambassador for financial knowledge. She was introduced by the OECD Secretary General, Angel Gurría, who also spoke eloquently about the importance of financial literacy for the young. France’s Central Bank Governor, François Villeroy de Galhau, discussed activities to boost financial literacy in his country, including plans for a new museum to teach about money, personal finance, and economics. These high-profile advocates contributed to a Paris gathering that was, quite simply, spectacular.<br />
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A second high point was that Germany’s G20 presidency has brought financial literacy into the global agenda. The Vice President of the Bundesbank, Claudia Buch, offered <a href="http://www.bundesbank.de/Redaktion/EN/Downloads/Press/Reden/2017/2017_05_24_buch.pdf?__blob=publicationFile" target="_blank">an illuminating explanation</a> as to why financial literacy is important for individuals, society, and central banks. A major takeaway from her presentation is that financial education matters, and public policy can improve financial decision-making. Moreover, the effects of higher financial literacy can be particularly beneficial for the young.<br />
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PISA is a visionary project that recognizes financial literacy as an essential skill for navigating today’s society, not just in advanced economies, but globally. Countries participating in the assessment allow us to measure and compare financial literacy. This leads me to another piece of good news: new countries participated in the 2015 assessment and we can assess financial literacy in a sizeable group of economies.<br />
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Portugal’s Minister of Education, Tiago Brandão Rodrigues, stole the spotlight in Paris, not just for the enthusiasm and charisma he showed during his presentation, but also for his Ministry’s ambitious work to advance financial literacy. He formally announced that Portugal will join the PISA assessment in 2018.<br />
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Using the new data, we have been able to assess the state of financial knowledge among the young on five continents. For countries which participated in both the 2012 and 2015 rounds, we can also measure changes over time; this too has produced some positive news. For instance, we have learned that it is possible to improve financial literacy, even in as short a time span as three years. Two countries have done this: Italy and the Russian Federation. I am eager to study these results in greater depth, particularly since Italy is my native country.<br />
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Another hopeful sign came from the developing world, especially the BRICS (Brazil, Russia, India, China, and South Africa). The Securities and Exchange Commission of Brazil (CVM)’s chairman, Leonardo P. Gomes Pereira, gave a truly impressive talk. Brazil may be last in PISA’s 15-country ranking, but it is pushing toward the forefront when it comes to the pro-financial literacy work it is implementing and planning.<br />
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It was my privilege to participate in the design of the PISA’s financial literacy assessment, and collaborate with the OECD to host the <a href="http://www.oecd.org/finance/financial-education/Symposium-Financial-Literacy-Agenda.pdf" target="_blank">Global Policy Research Symposium to Advance Financial Literacy</a> following the PISA data release. As one whose academic life has been dedicated to economics and financial literacy, I am encouraged by the bright moments at the OECD gathering and the focused efforts underway in many countries.<br />
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In Paris, we toasted to financial literacy, and we also raised our glasses to Brazil. Progress can be achieved; it is within reach! Rankings are useful because they can change, and changes should be anticipated when we meet again in three years. Most importantly, we toasted to the young: we must never forget that they are our future.Annamaria Lusardihttp://www.blogger.com/profile/05956062460452648142noreply@blogger.com0tag:blogger.com,1999:blog-7736446773245191504.post-83506648406033559002017-05-12T17:44:00.000-04:002017-05-12T17:44:09.312-04:00How Much Financial Knowledge Do People Acquire as They Age? Not Much.This blog post was also posted on <i>The Wall Street Journal</i> and can be found <a href="https://blogs.wsj.com/experts/2017/05/11/how-much-financial-knowledge-do-people-acquire-as-they-age-not-much/" target="_blank">here</a>.<br />
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People often argue that financial knowledge can be acquired with experience. But if the evidence from a new survey index is any indication, that way of learning may, in fact, be very slow or not work well at all.<br />
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<a href="http://gflec.org/initiatives/personal-finance-index/" target="_blank">The TIAA Institute-GFLEC Personal Finance Index</a>, or P-Fin Index for short, provides a snapshot of Americans’ understanding of basic financial concepts. And the results don’t look too promising.<br />
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U.S. adults surveyed only answered about half the questions in the index correctly. Just 16% demonstrated a relatively high level of personal-finance understanding; they answered more than three-quarters of the questions correctly. But what was surprising is that Americans’ knowledge of personal finance is low even among people who have already made many important and fundamental financial decisions. This includes older Americans who own investment assets.<br />
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Specifically, by age 45 only 10% of respondents could answer more than three quarters of the survey questions correctly.<br />
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More unsurprisingly, younger adults fared the worst. Just 30% of people aged 18 to 30 were able to correctly answer only a quarter—or fewer—of the questions in the P-Fin Index.<br />
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This is worrisome as young people today have to deal with important and consequential decisions, from whether to invest in education and how to finance that education, to saving and investing in retirement accounts that are much more dependent today than in the past on an individual’s savvy. It is also worrisome because, if we can infer how learning progresses with age by looking at the experience of the older survey cohorts, we see from the index that learning, overall, is slow.<br />
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We can get further insights on that learning from the concepts the index covers. While previous surveys gauged financial knowledge by using only a handful of questions, the P-Fin Index encompasses 28 questions covering eight functional areas: earning, consuming, saving, investing, borrowing, insuring, risk and reliable sources of information and advice.<br />
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For most topics, American adults can barely answer half of the questions correctly, even when the topics affect decisions that are made regularly. Take risk and risk management. It is a feature of most, if not all, financial decisions since financial decisions relate to the future, which is by definition uncertain. On average, U.S. adults answered only 39% of the risk-related questions correctly. Risk is a very complex concept, and perhaps this is what limits learning by experience.<br />
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One example of a question measuring risk:<br />
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<i>There’s a 50/50 chance that Malik’s car will need engine repairs within the next six months which would cost $1,000. At the same time, there is a 10% chance that he will need to replace the air conditioning unit in his house, which would cost $4,000. Which poses the greater financial risk for Malik?</i><br />
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<i>- The car repair (correct answer; chosen by 41% of respondents)</i><br />
<i>- The air-conditioning replacement (chosen by 19% of respondents)</i><br />
<i>- There is no way to tell in advance (chosen by 19% of respondents)</i><br />
<i>- Don’t know (chosen by 20% of respondents)</i><br />
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Interestingly, most U.S. adults understand borrowing. But knowledge about debt seems the exception rather than the rule. On average, 61% of the questions about borrowing were answered correctly. Debt is now a standard component of American life, and it may be that knowledge and understanding is generated from confronting accumulated debt, often while young.<br />
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Many of the index’s findings, while troubling, point to avenues for putting consumers on a safer financial track, which was one of the objectives of collecting these new data. We know people are making financial decisions that are important to their future and to society, yet their choices rely on a base of very limited personal-finance knowledge. We also know from P-Fin Index data that only 40% of U.S. adults have been exposed to financial-education programs. Clearly, access to financial education should be embraced and expanded.<br />
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School is one logical place to start. <a href="https://www.wsj.com/articles/should-college-students-be-required-to-take-a-course-in-personal-finance-1489975500" target="_blank">As I have written previously</a>, a mandatory personal-finance course in college would provide a powerful boost. But we could—and should—start even earlier. Financial literacy in primary and high schools would prepare the young, including informing the decision to go to college.<br />
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Financial education in the workplace is another important avenue, particularly now that individuals carry greater responsibility for managing their pensions and health coverage. Workplace education also may be a way to reach older individuals.<br />
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Young people do not have the financial understanding they need to make informed decisions about their future. And now we see that U.S. adults, even late in life, have still not acquired that knowledge. Just relying on experience for enlightenment may offer too little and deliver it too late.<br />
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<br />Annamaria Lusardihttp://www.blogger.com/profile/05956062460452648142noreply@blogger.com0tag:blogger.com,1999:blog-7736446773245191504.post-9863895557682488362017-05-11T10:39:00.001-04:002017-05-11T10:39:50.518-04:00Access to Financial Services But Without the Skills to Use Them: The Importance of Financial LiteracyThis article was originally posted on the "Think20" blog, published by the German Development Institute and the Kiel Institute for World Economy. You can view the original post by clicking <a href="http://blog.t20germany.org/2017/05/09/access-to-financial-services-but-without-the-skills-to-use-them-the-importance-of-financial-literacy/" target="_blank">here</a>.<br />
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Only half of the adults in major advanced economies who use a credit card or borrow from a financial institution are financially literate. In emerging economies, financial literacy levels are even lower. And around the world, population subgroups—women, the poor, people with low formal education—trail in their financial knowledge, regardless of the strength of their countries’ economies.<br />
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According to the new Standard & Poor’s Global Financial Literacy survey—the world’s largest and most comprehensive study of financial knowledge—we have reached a crisis stage. Financial literacy is not only very low in emerging countries, such as the BRICS, but it is also shockingly low in countries with well-developed financial markets and countries with high per-capita income. That includes the major advanced economies—among them the G7—where the use of financial products is widespread.<br />
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In order to make sound financial decisions, people must understand at least basic financial concepts. Yet the data shows that too much of the world’s population lacks the ability to make informed financial choices when it comes to saving, investing, borrowing, and more.<br />
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Financial knowledge is especially important during times when increasingly complex financial products are easily available to a wide range of the population. We are living in those times. As governments in many countries push to boost access to financial services, the number of people with bank accounts and credit products is rising rapidly. Changes in the pension landscape are transferring decision-making responsibility to workers who previously relied on their employers or governments to ensure their financial security after retirement. In the United States, where lawmakers are promising to revise an already complicated health insurance system, most Americans do not understand the precepts of insurance. In China, where credit card ownership has doubled since 2011, only half of credit card owners can perform simple calculations related to interest.<br />
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Financial ignorance carries a hefty price tag. Consumers who do not understand interest compounding, for example, spend more on transaction fees, run up bigger debts, and incur higher interest rates on loans. They also end up borrowing more and saving less.<br />
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The potential benefits of financial literacy, meanwhile, are manifold. People with strong financial skills do a better job planning and saving for retirement. Financially savvy investors are more likely to diversify risk by spreading funds across several ventures. They also earn more on their investments.<br />
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Until recently, a comparison of financial literacy across many countries was not possible. The Standard & Poor’s Ratings Services Global Financial Literacy Survey has opened the way to a comparable measure of financial literacy in more than 140 countries. The S&P Global FinLit Survey, for short, also links financial literacy to measures of financial inclusion provided by the Global Findex Database. These new data make it possible to examine financial knowledge worldwide and to assess the potential impact of what consumers do—or do not—know.<br />
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Financial literacy is measured through questions that assess basic knowledge of four fundamental concepts in financial decision-making: interest rates, interest compounding, inflation, and risk diversification. The S&P Global FinLit Survey findings are sobering. Worldwide, only 1-in-3 adults are financially literate. Or put in another way, some 3.5 billion adults globally fail to understand basic financial concepts.<br />
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Worldwide, there are striking similarities among the groups that are less likely to be financially literate. Irrespective of the level of income or the sophistication of the financial markets, women’s financial literacy levels are low—and that is true in almost all countries. This finding is important since roughly half the people on the planet are female. Worldwide, 30 percent of women are financially literate. That compares with 35 percent of men.<br />
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Income is another indicator. The rich have better financial skills than the poor. Some 31 percent of adults in the richest 60 percent of households in the major emerging economies are financially literate. In the poorest 40 percent of households, 23 percent of adults are financially literate. The size of the income gap is similar in the major advanced economies, although some suffer from even deeper inequality.<br />
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<b>Access to Financial Services Carries Benefits; Poor Financial Literacy Dilutes Them</b><br />
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Financial literacy skills are important for people who use payment, savings, credit, and risk-management products. For many, opening an account at a bank or other financial institution—or using a mobile money-service provider—is an important first step to participation in the financial system. When people have financial accounts and use digital payments, they are better able to provide for their families, save money for the future, and survive economic shocks. According to the S&P Global FinLit Survey, financial account holders tend to be more financially savvy (although plenty of them still lack financial skills). Globally, 38 percent of account-owning adults are financially literate, as are 57 percent of account owners in major advanced economies and 30 percent in major emerging economies.<br />
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But there is a drawback. Account owners without financial knowledge may not fully benefit from what their accounts have to offer. Even more, this access to financial products can propel them into financial disaster, such as high debt or bankruptcy.<br />
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Take savings as an example. Globally, 57 percent of adults save money, but just 27 percent use a formal financial institution, such as a bank, to do so. Others rely on more precarious and less lucrative alternatives, such as informal savings groups or stuffing cash under a mattress. Only 42 percent of account owners worldwide use their accounts to save, and 45 percent of these adult savers are financially literate. Given the benefits derived from using financial services, it is important to ensure that people are capable of managing those services to their advantage.<br />
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Financial literacy challenges are universal, confronting developing economies and advanced economies alike. Policymakers should build strong consumer protection regimes to safeguard citizens from financial abuse and provide a smooth market environment. They should also take steps to ensure access to financial education.<br />
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School seems a great place to start, both for its capacity to reach large segments of the population (including women) and because individuals lacking financial knowledge are less likely to learn it from families or peers. Low-income groups can be targeted by embedding financial education programs in some of the programs already offered to them.<br />
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The message of the G20 Summit is “shaping an interconnected world.” As these influential leaders convene to empower people around the globe, addressing the challenges of financial literacy promises a high-impact multiplier effect.<br />
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<b>Map 1: Global Variations in Financial Skills</b><br />
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<br />Annamaria Lusardihttp://www.blogger.com/profile/05956062460452648142noreply@blogger.com0tag:blogger.com,1999:blog-7736446773245191504.post-12085253783149231642017-05-05T10:14:00.001-04:002017-05-05T10:19:56.316-04:00New insight into Americans' financial capabilityThis blog was originally published in the May 15, 2017 print issue of <em>Pensions & Investments</em>. The online version can be found <a href="http://www.pionline.com/article/20170503/ONLINE/170429908/new-insight-into-americans-financial-capability" target="_blank">here</a>. <br />
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When the National Financial Capability Study launched in 2009, it promised valuable new information about the financial situations of U.S. households following the Great Recession. The ongoing national surveys — every three years — have lived up to that expectation, revealing not only how people manage their finances but also whether they are capable of handling those responsibilities.<br />
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But the FINRA Investor Education Foundation sought an even deeper dive into what we know about consumer finances. In 2012, it provided funding to add the NFCS' questions to a representative sample of 2,000 individuals selected from the RAND American Life Panel, which includes more in-depth information about Americans' finances. That new data is examined in “Financial Capability of the American Adults: Insights from the American Life Panel,” a report I wrote in collaboration with Marco Angrisani and Arie Kapteyn from the Center for Economic and Social Research at the University of Southern California. It includes a number of findings of interest for the pension and financial industry.<br />
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Out-of-pocket medical expenses are a significant source of financial strain.<br />
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The likelihood of incurring large out-of-pocket expenses — for preventive care or treatment after a medical crisis — is, perhaps not surprisingly, linked to how healthy an individual is and whether they have insurance. But the weight of those factors is impressive when looking at short-term shocks and their affect on families' security. At the same time, since low education and low income often go hand-in-hand with poor health and lack of insurance, households with low socioeconomic status are both more likely to face economic shocks and less prepared to deal with them. <br />
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Using respondents' self-assessment, our study divides individuals into those with good health and those with poor health. As expected, we find the risk of health shocks to be high for individuals who smoke, have a body mass index greater than 30 or have been diagnosed with high blood pressure. We also break respondents into groups depending on whether they have health insurance. Respondents with poor health, a higher risk of health shocks and no health insurance — those who are most likely to face a health shock — are 15 to 30 percentage points less likely to have money to cover an emergency than respondents on the opposite end of the scale.<br />
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<b>When it comes to planning for the long term, most Americans fall short.</b><br />
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An important aspect of planning is to set medium- and long-term financial goals, taking into consideration future events such as retirement. But the NFCS-ALP reveals a widespread lack of planning. Only 40% of respondents have ever thought about their retirement savings. Looking more closely, only 47% of workers aged 40 to 59 have planned at all. Among younger (workers aged 18 to 39) the figure is much lower: it is only 31%.<br />
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<b>People nearing retirement age are not thinking ahead.</b><br />
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Even when it comes to individuals aged 60 and older, less than 50% have thought about planning for their post-work years. To look at this unsettling finding in more detail, we take working individuals in the NFCS-ALP who are at least 60 years old and separate them into two groups, according to whether their expected likelihood of working past age 65 is below or above 50%. We would assume that workers more likely to leave the labor force by 65 will have put more thought into their retirement savings. Indeed, 66% of them have (as have 56% of those more likely to work past 65). Still, it is striking that more than half of older workers on the verge of retirement have not done any retirement planning.<br />
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<b>Financial planning is critical for economic well-being, but a large proportion of Americans live from paycheck to paycheck</b>. <br />
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The NFCS-ALP questionnaire asks respondents whether they have set aside a “rainy day” fund to cover expenses for three months in the event of sickness, job loss or other adverse circumstances. Only 41% of respondents answer affirmatively. As further evidence of the financial fragility of American families, only 44% are certain they could come up with $2,000 if an unexpected need arose within the next month.<br />
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<b>Planning for retirement pays off in powerful ways.</b><br />
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There are striking differences between non-planners and planners when it comes to the wealth they have available beyond employer-sponsored pension plans. Among workers over the age of 60, the median financial wealth is only $1,500 for those who have not planned. At $160,000, it is many times that amount for planners. Viewed another way, the mean financial wealth for non-planners is $65,000 while that of those who plan is $310,000 — still a dramatic difference.<br />
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<b>Financial literacy levels are an obstacle.</b><br />
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Research has found that higher financial literacy correlates strongly with whether individuals plan for retirement and have rainy day funds. The NFCS measures financial literacy through questions addressing key concepts of economics and finance, notably compounding interest, inflation and risk diversification. Two additional questions test individuals' understanding of the effect of the length of a mortgage and the relationship between interest rates and bond prices. These questions have been asked in the broader ALP panel as well. Only 18% of the respondents in the NFCS-ALP sample answer all five questions correctly. Less than a third — 31% — answer four questions correctly. Consistent with previous research, data from the NFCS-ALP show those who are more financially literate are more likely to plan for retirement and more likely to hold precautionary savings.<br />
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What do all these findings mean? By exposing the behaviors and barriers that contribute to financial vulnerability, the new data open a pathway for exploring policies and programs that will make American families more secure. It will be important to fortify financial health not only in the long term but also in the short term. And it will be critical to ensure Americans have the basic knowledge needed for sound financial decisions, including to plan for retirement and to save for unexpected shocks.Annamaria Lusardihttp://www.blogger.com/profile/05956062460452648142noreply@blogger.com0tag:blogger.com,1999:blog-7736446773245191504.post-6127568418833662922017-04-20T16:43:00.001-04:002017-04-20T17:19:49.932-04:00Imparare a valutare il rischioThis blog, written in Italian, was originally published in the April-May 2017 edition of <em>Focus Risparmio, </em>which can be found by clicking <a href="https://issuu.com/focussalone/docs/focusrisparmio_aprilemaggio_2017_we" target="_blank">here</a>. <br />
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In un arco temporale di più di dieci anni, assieme a un team di ricerca, siamo riusciti a misurare la financial literacy in molti Paesi, aggiungendo domande relative alla conoscenza finanziaria in indagini nazionali, fino a realizzare un paio di anni fa un’indagine globale della financial literacy in più di 140 Paesi, in collaborazione con Gallup e la Banca Mondiale. Ma ciò che mi ha sempre interessato in modo particolare è la risk literacy, ovvero la conoscenza finanziaria relativa al rischio. Poiché molte delle decisioni finanziarie si riferiscono al futuro, che è per definizione incerto, capire il rischio e i concetti a esso legati, per esempio la relazione tra rendimento e rischio, è fondamentale nella gestione della finanza personale. Un argomento su cui avevamo dibattuto già qualche anno fa, ma i dati si basavano su pochissime domande (spesso solo una) relative alla conoscenza di concetti quali la diversificazione del rischio. È per questo che siamo stati felici di collaborare con Allianz in un’indagine non solo sulla conoscenza finanziaria ma, in particolare, sulla risk literacy in ben 10 Paesi europei, inclusa l’Italia. Abbiamo utilizzato domande che si riferivano alla conoscenza finanziaria di base e alla risk literacy. I risultati di questo nuovissimo studio fatto lo scorso autunno sono stati resi pubblici a gennaio.<br />
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Tre gli elementi di particolare interesse. Primo: anche se esistono varie differenze tra i dieci Paesi europei, un aspetto comune è la bassa risk literacy. In generale, in tutti i Paesi, meno del 50% della popolazione sa rispondere correttamente a domande relative al rischio. Contrariamente alle domande relative alla financial literacy, quelle sulla risk literacy hanno un’alta percentuale di “non lo so”. In sostanza, i dati rilevano una ignoranza diffusa su uno dei concetti fondamentali per le decisioni di risparmio e di investimento.<br />
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Secondo: la conoscenza conta! Oltre alle domande relative alla conoscenza finanziaria, il questionario ha incluso tre scenari che consistevano nella scelta del migliore prodotto finanziario in situazioni di rischio. In particolare, viene valutata la capacità di assicurarsi contro il rischio di non avere risorse finanziarie in età avanzata, la capacità di gestire la liquidità in un orizzonte temporale di breve periodo, e la capacità di diversificare il rischio in scelte di portafoglio di lungo periodo. Chi ha una conoscenza finanziaria di base e ha una conoscenza del rischio è in grado di scegliere prodotti finanziari adeguati alle esigenze descritte nei tre scenari. Terzo: nel confronto con gli altri dieci Paesi, l’Italia ha la più bassa financial e risk literacy.<br />
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Non tutti questi risultati sono nuovi. Al contrario, molti tendon a confermare i risultati di altri studi fatti nell’arco di più di dieci anni. È forse questa la novità. Senza interventi mirati a migliorare la conoscenza finanziaria è difficile aspettarsi che le persone la acquisiscano da soli. E la bassissima conoscenza tra i Millennials è una indicazione che i giovani sono fortemente impreparati a scelte finanziarie e assicurative. Il messaggio di questi dati è semplice: “Abbiamo un grande bisogno di cambiamento, in particolare in Italia”.</div>
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Annamaria Lusardihttp://www.blogger.com/profile/05956062460452648142noreply@blogger.com0tag:blogger.com,1999:blog-7736446773245191504.post-10403439748438260692017-03-22T13:15:00.000-04:002017-03-22T13:16:12.454-04:00Should College Students Be Required to Take a Course in Personal Finance? YES: Ignorance Carries a High Price<div>
This is an extract of an article which first appeared on the front page of the Personal Finance section of <i>The Wall Street Journal</i> on March 19, 2017. Read the full online version by clicking <a href="https://www.wsj.com/articles/should-college-students-be-required-to-take-a-course-in-personal-finance-1489975500" target="_blank">here</a>. </div>
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Think about driving. To ensure orderly traffic, we create speed limits and roadway rules. We erect signs to warn where turns are difficult or roads are treacherous. And before we allow someone behind the wheel, we make sure they understand the basics. That’s where a driver’s license comes in. We take those precautions to protect the drivers and to protect others.</div>
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It is time to extend that type of thinking to financial knowledge by making personal finance a required course at U.S. colleges and universities. For people—especially young people—to survive and thrive in today’s financial environment, knowledge of personal finance is a necessity.</div>
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We’re already seeing what happens when young adults juggle high-impact financial decisions without the benefit of financial knowledge. Take the well-known burden of student-loan debt. Student loans are the second-largest part of the consumer credit market, after mortgages. The lion’s share of that debt sits in the hands of millennials—and our research shows they worry about their ability to pay off those loans. As well they should. The default rate on student loans is sobering.</div>
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Multiple studies confirm that students have little understanding of how student loans work. Our <a href="http://gflec.org/wp-content/uploads/2016/11/GFLEC-Brief-Student-loan-debt-1.pdf?x28148" target="_blank">analysis</a> of the latest National Financial Capability Study, or NFCS, finds that more than half of millennials take on student loans without even attempting to calculate what their payments will be. Given that student loans are pursued to acquire an education, it seems only prudent to have that education include the knowledge needed to manage that debt.</div>
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But student debt is just one of the challenges. These young people will have to support long retirements on savings and investments managed throughout their careers. To accomplish that feat, they will depend on interest compounding—a basic concept that they don’t fully understand. They also struggle with two other critical concepts: risk diversification and inflation.</div>
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These are the ABCs of personal finance, the benchmarks by which we measure financial literacy. By age 40, when a majority of Americans have already made most of their important financial decisions, only 1 in 3 has mastered these concepts, according to the NFCS. Unless something changes, millennials will become part of that disturbing statistic.</div>
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Such courses must be well designed to be effective. There is mounting <a href="https://www.finra.org/sites/default/files/investoreducationfoundation.pdf" target="_blank">evidence</a> that personal-finance courses with a rigorous curriculum and trained teachers are influencing behaviors of young people in matters such as debt and defaulting on debt. Teaching personal finance is not about describing financial products, it is about teaching the principles of financial decision-making so that people understand how financial instruments work. When people are knowledgeable, they also are better able to benefit from the services of financial advisers.</div>
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Those opposed to requiring personal-finance courses say that the main thing students should learn is skepticism about the financial industry and its products. Some skepticism is always warranted, and I teach my students about the potential conflicts of interest that financial advisers may have. But the purpose of a personal-finance course goes beyond those topics.</div>
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Financial literacy is about prevention. Regulators simply cannot keep up; they tend to come in when a problem already exists. This is why regulation is not enough.</div>
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The lack of financial literacy—just like the lack of a driver’s license—is more than a personal problem. It is dangerous for our country’s economic health. The Great Recession was driven by mortgages and loan terms consumers didn’t understand. The entire nation went into an economic tailspin as a result of that lack of understanding.</div>
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Looking ahead, will young people saddled with student loans be less likely to buy cars and homes? Will their ability to engage in transactions that require not just liquidity but good credit ratings be hampered? Will they veer away from starting their own businesses or pursuing advanced degrees? If they are not saving enough for retirement, will they have to be rescued from poverty in old age—and at what price to the country?</div>
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One of the basic lessons in personal finance is that time is money. But time is starting to run out. Young people are already behind the steering wheel of their financial decision-making. It’s time we step in to make sure they know how to navigate the highway ahead.<br />
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Annamaria Lusardihttp://www.blogger.com/profile/05956062460452648142noreply@blogger.com0tag:blogger.com,1999:blog-7736446773245191504.post-43451902668438051652017-02-02T11:53:00.000-05:002017-04-20T16:46:07.976-04:00Educazione finanziaria, costa di più non farlaA shorter version of this blog was published in <i>Il Sole 24 Ore</i> and can be found <a href="http://www.ilsole24ore.com/art/commenti-e-idee/2017-02-01/educazione-finanziaria-costa-piu-non-farla-202818.shtml?uuid=AEUzxCM" target="_blank">here</a>. <br />
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Ci sono alcune somiglianze tra l’inizio del 2017 ed il 2016. Un anno fa si parlava di bail-in, ma anche di educazione finanziaria per salvaguardare i risparmiatori. Un anno dopo si parla di nuovo di decreto legge “salva banche” e di educazione finanziaria. Questa volta però, le indiscrezioni sul Dl banche sembrano autorizzare la speranza che il più trascurato dei due temi riceverà qualche attenzione in più rispetto al passato.<br />
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Tutti i sondaggi parlano chiaro. Il livello della conoscenza finanziaria in Italia è molto basso e molto più basso della maggioranza degli altri Paesi europei. L’analisi dei nuovi dati su un campione di dieci Paesi europei pubblicati proprio lo scorso lunedì in un rapporto di Allianz fatto in collaborazione con il Global Financial Literacy Excellence Center vede l’Italia fanalino di coda. Rispetto a Paesi come l’Austria, il Belgio, la Francia, la Germania, l’Olanda, il Portogallo, il Regno Unito, la Spagna e la Svizzera, l’Italia si colloca ultima o penultima in quasi tutte le domande che misurano i concetti base della finanza, l’abc della conoscenza finanziaria. Più del 30% degli Italiani non sa calcolare il 2% su una somma di 100 euro. La conoscenza più bassa si riferisce al rischio e alla diversificazione del rischio, un fatto di cui avevamo preso amaramente nota lo scorso anno guardando agli investimenti dei risparmiatori di Banca Marche, Banca Etruria, CariFe e Carichieti.<br />
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Altre indagini confermano gli stessi risultati. Il S&P Global Financial Literacy Survey, il Programma per la valutazione internazionale dell’allievo (PISA) dell’OCSE, e i dati della Banca d’Italia sono tutti concordi nel descrivere un Paese con pochissime conoscenze dei principi alla base delle decisioni finanziarie. Se per importanza economica l’Italia si colloca tra i Paesi del G7, per conoscenza finanziaria assomiglia invece alle economie emergenti, dove anche il Sud-Africa fa un po’ meglio dell’Italia. Purtroppo questo è vero anche per i giovani: nella valutazione della conoscenza finanziaria dei quindicenni in PISA, gli studenti italiani sono arrivati penultimi; fanno meglio solo della Colombia. Non possiamo quindi aspettarci che le generazioni future facciano meglio delle generazione odierne; il ciclo della bassa conoscenza finanziaria sembra destinato a ripetersi.<br />
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I costi dell’ignoranza finanziaria sono spaventosi. L’ignoranza è un po’ come quelle malattie silenziose che si annidano nel corpo senza particolari sintomi che siano visibili a occhio nudo, per poi esplodere al momento dei test, quando talvolta è troppo tardi per curarle. Il costo delle scelte sbagliate dei mutui negli Stati Uniti si è transformato in una enorme crisi finanziaria non solo per le famiglie ma per l’intera economia. Se ci riferiamo solo al comportamento relativo alle carte di credito, secondo le nostre stime, più di un terzo delle spese relative a interessi ed altri costi del credito—per intenderci più di 3.5 miliardi di dollari nel 2009—è dovuto alla mancanza di conoscenza finanziaria, ovvero a costi che potevano essere evitati. Sempre negli Stati Uniti, si è stimato che l’ammontare dei mancati rendimenti degli investimenti azionari dovuti a commissioni ed altre spese si aggira intorno ai 100 miliardi di dollari, e questi costi sono sostenuti soprattutto da chi ha bassi livelli di alfabetizzazione finanziaria. <br />
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I costi dell’ignoranza finanziaria sono alti anche nella semplice gestione del conto bancario, non di complessi portafogli. Secondo recenti stime, il mancato utilizzo di tecnologie come online banking, unito all’ignoranza finanziaria crea perdite di ricchezza anche nello strumento finanziario più semplice che tutti possediamo, ovvero il conto corrente.<br />
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In passato abbiamo creduto di poter risparmiare dei soldi rinunciando all’educazione finanziaria? Purtroppo anche l’ignoranza finanziaria costa. Non solo i costi ci sono, ma sono anche alti, e se non vengono pagati adesso, saranno pagati nel futuro. Se le risorse da investire nell’educazione dei cittadini non sono sufficienti dobbiamo intervenire anche noi. Ci sono varie organizzazioni in Italia che si stanno occupando di alfabetizzazione finanziaria, dalle organizzazioni dei consumatori, al Museo del Risparmio di Torino che è nato proprio per promuovere l’educazione finanziaria. Lavoriamo con loro. E possiamo fare molto nelle scuole e nelle università in modo che i nostri giovani siano meglio preparati a capire il nuovo mondo finanziario che si apre di fronte a loro, e per non creare nuove vittime e nuove povertà.<br />
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L’educazione finanziaria è un investimento per il futuro. In tutti i paesi i mercati finanziari sono diventati più complessi, i prodotti finanziari più numerosi e le scelte finanziarie, anche quando si riferiscono agli strumenti di base, sono più difficili rispetto al passato. Ogni cittadino si confronta con queste scelte. L’obiettivo dell’educazione finanziaria è quello di trasformare i risparmiatori non già in esperti ma solo in persone più consapevoli. Promuovere l’educazione finanziaria significa fare prevenzione invece di interventi drastici quando i problemi si sono protatti così a lungo che non sono nemmeno più curabili con semplici medicine. I costi allora sì che esplodono.<br />
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Il 2017 non deve diventare una triste continuazione del 2016. No grazie, non abbiamo tempo da perdere. Una cosa che ci insegna la finanza, è che il tempo è denaro. L’educazione finanziaria non può più aspettare.Annamaria Lusardihttp://www.blogger.com/profile/05956062460452648142noreply@blogger.com0tag:blogger.com,1999:blog-7736446773245191504.post-55432320883072196372017-01-20T17:12:00.000-05:002017-01-20T17:16:59.337-05:00Our hopes for the future<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "times new roman" , serif; font-size: 12pt;">Many challenges await
the new president, some of great urgency. In his inaugural address, he expressed
a desire for action. There are many areas of action but one especially
pernicious issue has several relatively simple solutions. That is the problem
of financial illiteracy. </span><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><o:p></o:p></span></div>
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<span style="font-family: "times new roman" , serif; font-size: 12pt;">Our research shows that
financially knowledgeable individuals make smarter financial decisions and achieve
better outcomes; they are more likely to save, plan for the future, invest, and
become contributing members of society; and less likely to take on expensive
debt.</span><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><o:p></o:p></span></div>
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<span style="font-family: "times new roman" , serif; font-size: 12pt;">However, millions of
Americans lack even a basic understanding of personal finance. In 2015, only 32
percent of Americans could answer correctly three basic questions on financial
concepts like interest rate, inflation, and risk diversification. This
“financial illiteracy” undermines their quest for a better future.</span><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><o:p></o:p></span></div>
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<span style="font-family: "times new roman" , serif; font-size: 12pt;">Consider debt. The number of student loan
borrowers has nearly doubled in the past decade, and many borrowers do not
understand the effects of that borrowing beforehand. According to our research,
54 percent of student loan holders did not try to calculate their monthly
payments before borrowing, and 53 percent said that given the chance, they
would do things differently. This debt causes financial stress: 37 percent of
people with student loan payments due said they were late with a payment at
least once in the last 12 months.</span><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><o:p></o:p></span></div>
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<span style="font-family: "times new roman" , serif; font-size: 12pt;">Debt is also a growing problem for older
Americans, threatening their retirement security. And speaking of retirement,
only 39 percent of Americans have even tried to determine how much money they
will need in later life, a figure barely changed since 2009.</span><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><o:p></o:p></span></div>
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<span style="font-family: "times new roman" , serif; font-size: 12pt;">Financial fragility is another problem
exacerbated by limited financial literacy. Some 34 percent of Americans said that
they could not come up with $2000 if an unexpected need arose within the next
month. We need to put in place policies that improve individuals’ financial
security both in the long-term and the short term. We need to equip people with
the knowledge to make quality financial decisions around debt, and we need ways
to encourage American families to build “rainy day funds” for emergencies. </span><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><o:p></o:p></span></div>
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<span style="font-family: "times new roman" , serif; font-size: 12pt;">There is an urgent need for policy action to
encourage the spread of financial education so that people in all walks of life
can make savvy financial choices. Parents and teens would benefit from having a
better grasp on how to pay for college. Millions of Americans would be more
likely to build emergency savings if they realized their importance. People
also would benefit from a better understanding of how to save for retirement.
Our research shows that the mere act of planning for retirement is a strong predictor
of retirement wealth.</span><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><o:p></o:p></span></div>
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<span style="font-family: "times new roman" , serif; font-size: 12pt;">Some schools already provide financial education
for all students. Workplace financial education and financial wellness programs
can also impart essential knowledge. Government incentives for both employers
and schools to provide financial education could spur new solutions to the
problem of low financial literacy.</span></div>
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<span style="font-family: "times new roman" , serif; font-size: 12pt;">If more schools and employers provided financial
education, millions of American would have the tools to build better lives for
themselves and for us all. This is a vision for the future we hope for.</span><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><o:p></o:p></span></div>
Annamaria Lusardihttp://www.blogger.com/profile/05956062460452648142noreply@blogger.com0tag:blogger.com,1999:blog-7736446773245191504.post-6254783819359997472017-01-13T12:56:00.001-05:002017-01-13T12:57:51.959-05:00Six Questions to Help Determine Your Financial Health<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "times new roman" , serif; font-size: 12pt;">This blog post was also posted on the Wall Street Journal and can be found <a href="http://blogs.wsj.com/experts/2017/01/11/six-questions-to-help-determine-your-financial-health/">here</a></span></div>
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<span style="font-family: "times new roman" , serif; font-size: 12pt;">Many people, when
thinking about their financial health, focus on a single indicator, such as
whether they are saving enough for retirement or carrying too much student-loan
debt. If personal finances were limited to--or fixed by--a single line item in
the balance sheet, that approach would be fine.</span><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><o:p></o:p></span></div>
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<span style="font-family: "times new roman" , serif; font-size: 12pt;">But they aren’t.</span><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><o:p></o:p></span></div>
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<span style="font-family: "times new roman" , serif; font-size: 12pt;">During an annual
physical exam, it is not possible to assess how well a patient is doing simply
by checking the heart rate or blood pressure. Rather, a more comprehensive
series of evaluations are needed. How well is the patient managing his or her
health? Is the patient taking medicines as prescribed? Is the patient
exercising and eating well? </span><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><o:p></o:p></span></div>
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<span style="font-family: "times new roman" , serif; font-size: 12pt;">The same is true of
financial health.</span><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><o:p></o:p></span></div>
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<span style="font-family: "times new roman" , serif; font-size: 12pt;">Fortunately, there is a
short financial checkup that effectively predicts what I think of as the key
components of financial health--including short-term and long-term savings,
management of financial products and financial literacy. The six-question test,
which is based on a body of national and international research, evaluates four
key areas: 1) ability to make ends meet, 2) advance planning, 3) management of
financial products and 4) financial knowledge. (More in-depth questions from a
national survey on financial capability, now in its third wave, are available</span><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><a href="http://www.usfinancialcapability.org/" target="_blank"><span style="color: blue;"> online</span></a>.) <o:p></o:p></span></div>
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<span style="font-family: "times new roman" , serif; font-size: 12pt;">Taken together, the
questions below--and their answers--provide a starting point for people to
better understand and improve their personal finances.<o:p></o:p></span></div>
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<b><span style="font-family: "times new roman" , serif; font-size: 12pt;">1. How confident are you
that you could come up with $2,000 if an unexpected need arose within the next
month?</span></b><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><o:p></o:p></span></div>
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<span style="font-family: "times new roman" , serif; font-size: 12pt;">- I am certain I
could come up with the full $2,000.</span><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><o:p></o:p></span></div>
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<span style="font-family: "times new roman" , serif; font-size: 12pt;">- I could probably
come up with $2,000.</span><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><o:p></o:p></span></div>
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<span style="font-family: "times new roman" , serif; font-size: 12pt;">- I could probably
not come up with $2,000.</span><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><o:p></o:p></span></div>
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<span style="font-family: "times new roman" , serif; font-size: 12pt;">- I am certain I
could not come up with $2,000.</span><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><o:p></o:p></span></div>
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<span style="font-family: "times new roman" , serif; font-size: 12pt;">This first question of
the test assesses financial fragility--or the ability to mobilize resources
when facing a shock. It is a rich measure that goes well beyond availability of
or access to liquid assets, taking into consideration that one could deal with
a shock by borrowing, by relying on the help of family and friends, by selling
possessions or through other strategies. Moreover, it is a summary measure of
the balance-sheet situation (not just assets) even as it addresses how one manages
resources. Research links the lack of resources or the inability to access them
when facing a midsize shock (specifically, answering this question with either
of the last two responses) with indicators of financial distress. </span><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><o:p></o:p></span></div>
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<b><span style="font-family: "times new roman" , serif; font-size: 12pt;">2. Have you ever tried
to figure out how much you need to save for retirement?</span></b><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><o:p></o:p></span></div>
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<span style="font-family: "times new roman" , serif; font-size: 12pt;">This question measures
advance planning by examining the longer-term horizon and whether one has made
plans for the future. While simple and intuitive, the question looks yet again
at the state of personal finances and, in particular, at the steps taken to
accumulate retirement savings, which can take many forms, including keeping
within a budget. Academic research shows that those who answer affirmatively to
this question have up to three times the amount of wealth as they near
retirement as those who have not made any plans.</span><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><o:p></o:p></span></div>
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<b><span style="font-family: "times new roman" , serif; font-size: 12pt;">3. On a scale from 1 to
7 (where 1 = strongly disagree and 7= strongly agree), how strongly do you
agree or disagree with the following statement: I have too much debt right now.</span></b><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><o:p></o:p></span></div>
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<span style="font-family: "times new roman" , serif; font-size: 12pt;">The third question turns
to the liability side of the balance sheet. There are many opportunities to
borrow and a multitude of options for doing so. Many young employees today
start their working life in debt. The answer to this question reveals both the
extent of the respondent’s debt burden and his or her management of finances.
Those who choose value above the median (value 4 ) are found to carry not only
several forms of debt, both short term and long term, but also to use high-cost
methods of borrowing, such as payday loans.</span><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><o:p></o:p></span></div>
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<span style="font-family: "times new roman" , serif; font-size: 12pt;">The next three questions
measure understanding of the ABCs of personal finance. They apply to the many
financial decisions people have to make and that, ultimately, shape their
finances and ability to achieve financial security in the short and long term.
The questions address fundamental concepts--interest compounding, inflation and
risk diversification--that underlie financial decisions, from day-to-day money
management, to saving and investing for retirement, to borrowing.</span><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><o:p></o:p></span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "times new roman" , serif; font-size: 12pt;">Those who correctly
answer the three questions reported below (the correct answers are the end) are
not only less likely to be financially fragile and over indebted, but they are
also more likely to plan for the future and to engage in many other behaviors
conducive to higher retirement savings.</span><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><o:p></o:p></span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<b><span style="font-family: "times new roman" , serif; font-size: 12pt;">4. Suppose you had $100
in a savings account and the interest rate was 2% per year. After five
years, how much do you think you would have in the account if you left the
money to grow?</span></b><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><o:p></o:p></span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "times new roman" , serif; font-size: 12pt;">- More than $102</span><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><o:p></o:p></span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "times new roman" , serif; font-size: 12pt;">- Exactly $102</span><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><o:p></o:p></span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "times new roman" , serif; font-size: 12pt;">- Less than $102</span><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><o:p></o:p></span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "times new roman" , serif; font-size: 12pt;">- Don’t know<o:p></o:p></span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<b><span style="font-family: "times new roman" , serif; font-size: 12pt;">5. Imagine that the
interest rate on your savings account was 1% per year and inflation was 2% per
year. After one year, with the money in this account, would you be able to buy…</span></b><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><o:p></o:p></span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "times new roman" , serif; font-size: 12pt;">- More than today </span><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><o:p></o:p></span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "times new roman" , serif; font-size: 12pt;">- Exactly the same
as today</span><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><o:p></o:p></span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "times new roman" , serif; font-size: 12pt;">- Less than today</span><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><o:p></o:p></span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "times new roman" , serif; font-size: 12pt;">- Don’t know<o:p></o:p></span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<b><span style="font-family: "times new roman" , serif; font-size: 12pt;">6. Do you think the
following statement is true or false? Buying a single company stock usually
provides a safer return than a stock mutual fund.</span></b><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><o:p></o:p></span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "times new roman" , serif; font-size: 12pt;">Rather than looking at a
single behavior--an approach that usually is inadequate for evaluating how
someone is doing financially--this test provides an encompassing measure of
financial capability. It also identifies the areas where help may be
needed. Even more, it allows individuals to compare their results to those
of the average American. The findings for each question are available </span><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><a href="http://gflec.org/wp-content/uploads/2017/01/Financial-Capability-Test-NFCS.pdf" target="_blank"><span style="color: blue;">here</span></a>.<o:p></o:p></span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "times new roman" , serif; font-size: 12pt;">As employers and others
look for ways to help employees become financially fit, this test may provide
them with a tool to measure, assess, and reconsider what they are doing.
Perhaps it is something to add to employee benefits in 2017.</span><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><o:p></o:p></span></div>
<br />
<div class="MsoNormal">
<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt; line-height: 115%;">
(Answers: 4. More than $102; 5. Less than
today; 6. False.)</span><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt; line-height: 115%;"><o:p></o:p></span></div>
Annamaria Lusardihttp://www.blogger.com/profile/05956062460452648142noreply@blogger.com0tag:blogger.com,1999:blog-7736446773245191504.post-89114713376635593592016-04-01T19:25:00.000-04:002016-04-01T19:26:16.589-04:00Happy Financial Literacy Month!<span style="font-family: "times new roman" , "serif"; font-size: 12pt;">This is a
slighly modified blog that was published in Forbes. The link is here: <a href="http://www.forbes.com/sites/pensionresearchcouncil/2016/04/01/happy-financial-literacy-month/#517158ee5308">http://www.forbes.com/sites/pensionresearchcouncil/2016/04/01/happy-financial-literacy-month/#517158ee5308</a></span><br />
<div class="MsoNormalCxSpFirst" style="line-height: normal; margin: 1em 0px 0pt; mso-add-space: auto; text-align: justify;">
<span style="font-family: "times new roman" , "serif"; font-size: 12pt;">April is
Financial Literacy Month. You might suspect there is a problem with financial
literacy in America, if an entire month is dedicated to it! And you would be
right.<o:p></o:p></span></div>
<span style="font-family: "times new roman" , "serif"; font-size: 12pt;"></span><br />
<span style="font-family: "times new roman" , "serif"; font-size: 12pt;">The <a href="http://bit.ly/1T1EhSw"><span style="color: blue;">S&P Global Financial Literacy Survey</span></a>
released last fall showed that only 57 percent of adult Americans know basic
financial literacy concepts such as interest compounding, inflation, and risk
diversification. And high school students do no better: the <a href="http://bit.ly/1SrXBpT"><span style="color: blue;">Programme for International Student Assessment
(PISA)</span></a> reported that 18 percent of US students do not reach the baseline
level of proficiency in financial literacy. Moreover, Millennials don’t learn
much about financial literacy after they leave high school, according to the <a href="http://bit.ly/1UYDp4W"><span style="color: blue;">National Financial Capability Study</span></a>.<o:p></o:p></span><br />
<span style="font-family: "times new roman" , "serif"; font-size: 12pt;"></span><br />
<span style="font-family: "times new roman" , "serif"; font-size: 12pt;">For this reason,
April is an opportune time to look at three efforts that may have a chance to
combat financial illiteracy. These are chosen because of their scalability and
capacity to make a real difference for financial literacy in America.<o:p></o:p></span><br />
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "times new roman" , "serif"; font-size: 12pt;"></span></b><br />
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "times new roman" , "serif"; font-size: 12pt;">Financial
literacy in school:</span></b><span style="font-family: "times new roman" , "serif"; font-size: 12pt;">
According to the <a href="http://bit.ly/1kBlFGC"><span style="color: blue;">Council for Economic Education</span></a>,
only 19 states require schools to offer a personal finance course. This does
not bode well, considering that the student loan market has now surpassed $1 trillion,
and student loans are a deep worry for many young adults. <o:p></o:p></span><br />
<span style="font-family: "times new roman" , "serif"; font-size: 12pt;"></span><br />
<span style="font-family: "times new roman" , "serif"; font-size: 12pt;">Teaching kids
about financial matters in school can help. For instance, students exposed to a
rigorous financial literacy program are much less likely to get into trouble with
debt after they graduate, according to recent <a href="http://1.usa.gov/1qCIz6M"><span style="color: blue;">research</span></a>.
We don’t need a federal or state mandate to add financial literacy in schools:
parents can simply ask their school districts for such courses. After all, <a href="http://bit.ly/1oAE20P"><span style="color: blue;">nations around the world</span></a> have now agreed:
financial literacy is essential to participate in society in the 21<sup>st</sup>
century.<o:p></o:p></span><br />
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "times new roman" , "serif"; font-size: 12pt;"></span></b><br />
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "times new roman" , "serif"; font-size: 12pt;">Financial
literacy in the workplace:</span></b><span style="font-family: "times new roman" , "serif"; font-size: 12pt;"> Many companies today offer defined contribution
pensions, which put workers in charge of deciding both how much to save and how
to invest their pension assets. And health plans also require participants to
be more financially savvy, to manage high deductibles, copays, and Health
Saving Accounts, and to compare prices for medical care. <o:p></o:p></span><br />
<span style="font-family: "times new roman" , "serif"; font-size: 12pt;"></span><br />
<span style="font-family: "times new roman" , "serif"; font-size: 12pt;">For this reason,
workplace financial education programs are often provided to educate employees
on how to manage these decisions. Yet employers can benefit as well, since the <a href="http://bit.ly/1PkNZl3"><span style="color: blue;">stress generated by money problems</span></a> can
translate into lower worker productivity, higher absenteeism, and more turnover.
In our tightening labor market, an employer who offers help with money
management or debt can readily attract and retain workers. Some firms have even
stepped up to help relieve employees of student loan obligations, which can
improve worker loyalty.<o:p></o:p></span><br />
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "times new roman" , "serif"; font-size: 12pt;"></span></b><br />
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "times new roman" , "serif"; font-size: 12pt;">Financial
literacy in the community.</span></b><span style="font-family: "times new roman" , "serif"; font-size: 12pt;"> One particularly noteworthy program, both for its
potential impact and scalability, comes from the <a href="http://bit.ly/1oq9yEp"><span style="color: blue;">American
Library Association</span></a>. Every community, big or small, has a library—a place
where anyone, young or old, can go to learn, including via easy access to the
Internet. As hubs for knowledge and information, libraries are ideal venues in
which to provide financial education. Through the Association, programs that
prove especially effective in one place can be extended nationwide. Libraries
can also complement school or workplace financial literacy programs. <o:p></o:p></span><br />
<span style="font-family: "times new roman" , "serif"; font-size: 12pt;"></span><br />
<span style="font-family: "times new roman" , "serif"; font-size: 12pt;">Financial
literacy won’t change overnight, nor in a month or even a year. Yet initiatives
taken in schools, workplaces, and in communities add up. My hope is that
someday, in the future, the month of April can be re-dedicated to another topic!<o:p></o:p></span>Annamaria Lusardihttp://www.blogger.com/profile/05956062460452648142noreply@blogger.com0tag:blogger.com,1999:blog-7736446773245191504.post-43823630610415912232016-02-07T10:50:00.000-05:002016-02-07T10:53:40.978-05:00Looking for a Super Bowl cheer that lasts a lifetime This a slighly modified version of the blog I wrote for the Wall Street Journal in collaboration with Colin Camerer. The WSJ blog is posted here : <a href="http://blogs.wsj.com/experts/2016/02/05/the-sad-financial-future-that-awaits-many-nfl-players/">http://blogs.wsj.com/experts/2016/02/05/the-sad-financial-future-that-awaits-many-nfl-players/</a><br />
<br />
<div class="MsoNormal" style="margin: 0in 0in 10pt;">
<span style="font-family: "times new roman" , "serif"; font-size: 12pt; line-height: 115%;">The winners of this Sunday’s Super Bowl will have
much to celebrate. In addition to their team victory, the players will see
substantial financial bonuses, including potentially richer contracts and future
sponsorships. Even the players who lose at football will be financial winners.
After all, they, too, made it to the Super Bowl, one of the world’s
most-watched sporting events.</span></div>
<div class="MsoCommentText" style="margin: 0in 0in 10pt;">
<span style="font-family: "times new roman" , "serif"; font-size: 12pt;">The
2016 championship game may mark the career finale for some of these
extraordinary players. Will Peyton Manning retire after this year? Will anyone
else leave football? If they do, sad to say, they may be in for some bad news.
Our research shows that a surprising number of NFL players declare bankruptcy not
long after they retire. </span></div>
<div class="MsoNormal" style="margin: 0in 0in 10pt;">
<span style="font-family: "times new roman" , "serif"; font-size: 12pt; line-height: 115%;">For our research published last year in the <a href="https://www.aeaweb.org/articles.php?doi=10.1257/aer.p20151038"><i style="mso-bidi-font-style: normal;"><span style="color: blue;">American Economic Review</span></i></a>, we collected
data on more than 2,000 players—all of those who were drafted by the NFL from
1996 to 2003—and followed them until 2013. We were interested in seeing how
well football players do, financially, after they leave the game. Because it is
very hard to find out how much they earned and spent after they retire, we looked
at a simple measure of financial distress which is publicly available:
bankruptcy filings. And we found that things did not go well at all.</span></div>
<div class="MsoNormal" style="margin: 0in 0in 10pt;">
<span style="font-family: "times new roman" , "serif"; font-size: 12pt; line-height: 115%;">Football players, even those with short careers, usually
earn more than what most college-educated workers earn during a lifetime.
Because NFL careers are so short, the players’ post-NFL retirements can be long.
Many get other jobs, but only a tiny percentage end up with coveted high-salary
jobs such as sportscasting. Following all the players together as a group, as
they retire, players start going bankrupt. <span style="mso-spacerun: yes;"> </span>After 12 years in post-NFL retirement, more
than 15 percent of the players we followed had declared bankruptcy. We also
found that bankruptcy does not depend on how much an NFL player earned in their
career or how long he plays. Amazingly, higher income or longer careers seem to
offer little protection against bankruptcy. </span></div>
<div class="MsoNormal" style="margin: 0in 0in 10pt;">
<span style="font-family: "times new roman" , "serif"; font-size: 12pt; line-height: 115%;">These findings have been documented, with some
variation, by other sources. There are numerous news stories and interviews describing
instances where players have lost all the money they earned. Unfortunately, we
continue to witness this phenomenon each year.</span></div>
<div class="MsoNormal" style="margin: 0in 0in 10pt;">
<span style="font-family: "times new roman" , "serif"; font-size: 12pt; line-height: 115%;">We offer three recommendations that could help keep
these professional athletes celebrating financial success long after the Super
Bowl. These guidelines apply to anyone who finds himself/herself with a lot of
money earned in a very lucrative short-lived career.</span></div>
<div class="MsoNormal" style="margin: 0in 0in 10pt;">
<span style="font-family: "times new roman" , "serif"; font-size: 12pt; line-height: 115%;">First, become financially literate. Exposure to
basic financial knowledge helps young people understand not just the workings
of interest rates and financial markets, but it also builds healthy habits
around money and money management. The opportunity to become financially
literate before contracts are signed and large sums of money are earned is
probably the best medicine for the financial health of these high-earning young
professionals.</span></div>
<div class="MsoCommentText" style="margin: 0in 0in 10pt;">
<span style="font-family: "times new roman" , "serif"; font-size: 12pt;">Second,
learn to manage money. Money-management training could be a key part of
contract signings or receipt of bonuses. Athletes are used to the kind of training
that requires enormous discipline, and they are very good at it. Comprehensive
money-management training could offer information that goes beyond simple
recommendations for investments or rookie camps. Players could get training
that helps them to figure out how far into the future their money can last, how
to build a budget that allows them to achieve their objectives, and how to help
their families and friends without putting themselves at financial risk. An
extra benefit is that managing their own money well makes them into financial
role models in addition to athletic role models. The same traits that make
players successful on the field—practice, persistence, and the ability to
overcome setbacks—can make them successful in managing their finances.</span></div>
<div class="MsoCommentText" style="margin: 0in 0in 10pt;">
<span style="font-family: "times new roman" , "serif"; font-size: 12pt;">Third,
choose a pay structure wisely. Financial advisors often tell big lottery
winners to arrange their winnings to be paid over decades, rather than in one
tempting lump sum.<span style="mso-spacerun: yes;"> </span>How about a system
that offers remuneration as a series of payments over a long period of time?
This option could generate a stable standard of living for those players who
prefer not to engage in complex money management decisions. It also has the
benefit of showing how far the money that athletes receive in a single contract
can, indeed, go.<span style="mso-spacerun: yes;"> </span>After all, the income
earned by college-educated people who are not professional athletes is
distributed over a lifetime. And it is a way to tie ones’ hand and resist the
temptation to spend it all. A lot of research has shown that these types of commitment
devices work like wonder.</span></div>
<div class="MsoNormal" style="margin: 0in 0in 10pt;">
<span style="font-family: "times new roman" , "serif"; font-size: 12pt; line-height: 115%;">Wouldn’t it be something if the winners in this
year’s Super Bowl could wear their Super Bowl ring proudly for the rest of
their lives, rather than having to sell it some day to stay afloat? <o:p></o:p></span></div>
<i style="mso-bidi-font-style: normal;"><span style="font-family: "times new roman" , "serif"; font-size: 12pt; line-height: 115%;">Colin Camerer is a neuroeconomist and the Robert
Kirby Professor of Behavioral Economics at the California Institute of
Technology. In 2013, he was awarded the MacArthur Fellowship</span></i>Annamaria Lusardihttp://www.blogger.com/profile/05956062460452648142noreply@blogger.com1tag:blogger.com,1999:blog-7736446773245191504.post-80591002242015401642016-01-22T23:50:00.003-05:002016-01-22T23:53:01.790-05:00Understanding the Implications of an Interest Rate Hike <span style="font-family: "times new roman" , "serif"; font-size: 12pt;">This is a
slightly modified version of the blog I wrote for Forbes.<o:p></o:p></span><br />
<span style="font-family: "times new roman" , "serif"; font-size: 12pt;"></span><br />
<span style="font-family: "times new roman" , "serif"; font-size: 12pt;">Pundits keep a close watch on the U.S. Federal Reserve as it
meets to raise interest rates after seven years of effectively zero rates. Yet the
reality is that many Americans know little about interest rates, and much less about
the implications of a rate hike for their finances! <span style="mso-spacerun: yes;"> </span>This was one key finding from the recently
released <a href="http://bit.ly/1T1EhSw"><span style="color: blue;">S&P Global FinLit Survey</span></a>, gathered
with the support of McGraw Hill Financial. <o:p></o:p></span><br />
<span style="font-family: "times new roman" , "serif"; font-size: 12pt;"></span><br />
<span style="font-family: "times new roman" , "serif"; font-size: 12pt;">The goal of the international study was to compare adult
financial literacy levels across more than 140 nations. Financial literacy was
measured using questions assessing basic knowledge of four fundamental
concepts: numeracy or capacity to do simple calculations in the context of
interest rates, interest compounding, inflation, and risk diversification. Respondents
were deemed “financially literate” if they could correctly answer three of the four
questions. </span><a href="http://bit.ly/1luKF9I"><span style="font-family: "times new roman" , "serif"; font-size: 12pt;"><span style="color: blue;">The
Global Financial Literacy Excellence Center</span></span></a><span style="font-family: "times new roman" , "serif"; font-size: 12pt;">
helped design the survey and analyze the results. <o:p></o:p></span><br />
<span style="font-family: "times new roman" , "serif"; font-size: 12pt;"></span><br />
<span style="font-family: "times new roman" , "serif"; font-size: 12pt;">Staggeringly, we found that only <i style="mso-bidi-font-style: normal;">one in three</i> adults is financially literate around the world<b>. </b>While
Americans far a bit better, only a little more than half of US adults scores
this well, a finding that bodes ill for one of the world’s most advanced
financial markets.</span><span style="font-family: "times new roman" , "serif"; font-size: 9.5pt;"><o:p></o:p></span><br />
<span style="font-family: "times new roman" , "serif"; font-size: 12pt;"></span><br />
<span style="font-family: "times new roman" , "serif"; font-size: 12pt;">More importantly, our research has also identified what
people </span><a href="http://bit.ly/1YkN8jh"><span style="font-family: "times new roman" , "serif"; font-size: 12pt;"><span style="color: blue;">don’t
know</span></span></a><span style="font-family: "times new roman" , "serif"; font-size: 12pt;"> about their finances. One giant void
has to do with compound interest, despite the fact that many are quite vulnerable
to interest rate changes. For example, when combining information with the
Global Findex data, we find only 66% of Americans who hold credit cards understand
interest compounding. In Brazil, Latin America’s largest economy, only about
half of credit-card holders can accurately answer our interest-compounding
question. Similar results apply to borrowers elsewhere. The logical implication
is that, whatever the Federal Reserve decides, most people will snooze through
the news. This, of course, can be dangerous to debtors everywhere. </span><span style="font-family: "times new roman" , "serif"; font-size: 9.5pt;"><o:p></o:p></span><br />
<span style="font-family: "times new roman" , "serif"; font-size: 12pt;"></span><br />
<span style="font-family: "times new roman" , "serif"; font-size: 12pt;">There are a few financial concepts that people <i>do</i> tend
to understand, particularly inflation. Naturally, this topic is one where
experience matters: having struggled mightily with hyperinflation in the
late1980s and early 1990s, two-thirds of Argentinians can answer an inflation question
accurately. Similar patterns are observed in Georgia, Bosnia and Herzegovina,
and Peru, all of which also suffered under hyperinflation in the past. By
contrast, only half of Japanese adults understand the corrosive power of
inflation, having suffered deflation over the past few decades. In the U.S.,
the figure is just shy of two thirds (63%).</span><span style="font-family: "times new roman" , "serif"; font-size: 9.5pt;"><o:p></o:p></span><br />
<span style="font-family: "times new roman" , "serif"; font-size: 12pt;"></span><br />
<span style="font-family: "times new roman" , "serif"; font-size: 12pt;">Monetary policy affects households and household finances,
yet what people know about some of its levers is limited. As interest rates
start rising, some people will learn about interest compounding. But this begs
the question: should experience <i style="mso-bidi-font-style: normal;">alone</i>
be our teacher?</span><span style="font-family: "times new roman" , "serif"; font-size: 9.5pt;"><o:p></o:p></span>Annamaria Lusardihttp://www.blogger.com/profile/05956062460452648142noreply@blogger.com0tag:blogger.com,1999:blog-7736446773245191504.post-47748257938080933372015-12-27T11:19:00.002-05:002015-12-27T11:39:51.208-05:00What’s Behind the Financial Literacy Gender Gap? <span style="font-family: Calibri;"><span style="font-family: "Arial","sans-serif"; font-size: 15pt; line-height: 115%; mso-fareast-font-family: "Times New Roman";"><span style="font-family: Times New Roman;">
<span style="font-size: 11pt;">This is a slightly
modified version of the blog I wrote for the Wall Street Journal, which is
posted here: <a href="http://blogs.wsj.com/experts/2015/11/02/whats-behind-the-financial-literacy-gender-gap/"><span style="color: blue;">http://blogs.wsj.com/experts/2015/11/02/whats-behind-the-financial-literacy-gender-gap/</span></a><o:p></o:p></span></span></span></span><br />
<span style="font-family: Calibri;"><span style="font-family: "Arial","sans-serif"; font-size: 15pt; line-height: 115%; mso-fareast-font-family: "Times New Roman";"><span style="font-family: Times New Roman;">
</span></span></span><br />
<span style="font-family: Calibri;"><span style="font-family: "Arial","sans-serif"; font-size: 15pt; line-height: 115%; mso-fareast-font-family: "Times New Roman";"><span style="font-family: Times New Roman;"><div style="tab-stops: .25in;">
<span style="font-size: 11pt;">If asked three simple
questions designed to measure financial literacy, more than half of Americans
will answer incorrectly. But there is another disturbing finding in the data
from the <a href="http://www.usfinancialcapability.org/"><span style="color: blue;">U.S. National Financial
Capability Study</span></a>: Women know even less than men.</span><br />
<span style="font-size: 11pt;"><o:p></o:p></span> </div>
<div style="tab-stops: .25in;">
<span style="font-size: 11pt;">This gender gap is
not limited to the United States. Women in countries as different as Germany,
Australia, Canada, Italy, Sweden, Switzerland, New Zealand, Japan and the
Netherlands all display lower levels of financial literacy than men. As
additional countries are added to the financial literacy comparison, this
evidence grows even more persistent. </span><br />
<span style="font-size: 11pt;"><o:p></o:p></span> </div>
<div style="tab-stops: .25in;">
<span style="font-size: 11pt;">This disparity is
important because women tend to live longer than men. Moreover, women have less
attachment to the labor market, with interrupted careers because of
childbearing, and potentially fewer financial resources over the life cycle.
Thus, women’s financial acumen is particularly important for their well-being
before and after retirement.</span><br />
<span style="font-size: 11pt;"><o:p></o:p></span> </div>
<div style="tab-stops: .25in;">
<span style="font-size: 11pt;">Together with our
international collaborators, we set out to study this gender difference <a href="http://gflec.org/wp-content/uploads/2015/08/WP-2014-7-How-Financially-Literate-Are-Women.pdf"><span style="color: blue;">in
a paper</span></a> that covers data from the most comparable countries: the United
States, Germany and the Netherlands. Even accounting for different workforce
participation, educational levels and parenting responsibilities, the gender
gap cannot be fully explained. For example, although younger generations of
women are more likely to be in labor market, to have college degrees and to
move away from traditional societal roles, young women in all three countries
were less financially literate than young men.</span><br />
</div>
<div style="tab-stops: .25in;">
<span style="font-size: 11pt;">One might argue that
there is specialization within a household, and women have delegated the
acquisition of financial knowledge and financial decision-making to their
partners. However, even in households where women are the financial
decision-makers, they know less than men. And women do not know less because
they opt to rely on financial advisers who supplement their lack of knowledge.
Indeed, they are <i style="mso-bidi-font-style: normal;">less</i>likely
than their male counterparts to consult advisers or online resources for
information.</span><br />
<span style="font-size: 11pt;"><o:p></o:p></span> </div>
<div style="tab-stops: .25in;">
<span style="font-size: 11pt;">In looking at the
channels through which financial literacy may be acquired, we examined data
from what was East Germany vs. that from West Germany, since residents of these
two regions were exposed to different financial markets and institutions.
Although 25 years have passed since unification, we find large differences in
financial literacy between the East and the West. This supports evidence that
learning can take a long time. But it also tells us something more: There is a
gender difference among respondents in West Germany but no knowledge gap
between men and women living in East Germany, even after accounting for many
demographic and economic characteristics. In other words, as financial
institutions and markets develop, there is no guarantee that women will acquire
financial literacy in the same way that men do.</span></div>
<div style="tab-stops: .25in;">
<span style="font-size: 11pt;"><o:p></o:p></span> </div>
<span style="font-family: "Times New Roman","serif"; font-size: 11pt; line-height: 115%; mso-ansi-language: EN-US; mso-bidi-language: AR-SA; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin;">One takeaway from
this study is that learning from experience or from participating in financial
markets is not enough. Women are still left behind. Perhaps women simply have
less opportunity to learn. One simple way to equip everyone with basic
financial skills—and close the gender gap—is to start at the beginning, adding
financial literacy in school.</span></span></span></span><br />Annamaria Lusardihttp://www.blogger.com/profile/05956062460452648142noreply@blogger.com2tag:blogger.com,1999:blog-7736446773245191504.post-20265232139460822472015-11-29T16:40:00.003-05:002015-11-29T16:46:17.944-05:00Millennials and their struggle with debtThis is a slightly modified version of the blog I wrote for the Wall Street Journal, which is posted here: <a href="http://blogs.wsj.com/experts/2015/10/05/the-alarming-facts-about-millennials-and-debt/">http://blogs.wsj.com/experts/2015/10/05/the-alarming-facts-about-millennials-and-debt/</a><br />
<br />
<div class="MsoNormal" style="margin: 0in 0in 10pt;">
<span style="font-family: "times new roman" , "serif"; font-size: 12pt; line-height: 115%;">Much has been written about Millennials—if they are
moving back with their parents, whether they are buying cars or homes, how much
they are saving for retirement. There may not be consensus on all these issues
but one thing is clear: Millennials and debt go hand-in-hand.</span></div>
<div class="MsoNormal" style="margin: 0in 0in 10pt;">
<span style="font-family: "times new roman" , "serif"; font-size: 12pt; line-height: 115%;">Our <a href="http://gflec.org/wp-content/uploads/2015/01/a738b9_b453bb8368e248f1bc546bb257ad0d2e.pdf"><span style="color: blue;">research</span></a>
using data from the National Financial Capability Study shows that two-thirds
of Millennials (those aged 23-35 in 2012) have at least one source of
outstanding long-term debt—whether student loans, home mortgages, or car payments—and
30 percent have more than one. Among the college-educated, a staggering 81
percent have at least one source of long-term debt</span></div>
<div class="MsoNormal" style="margin: 0in 0in 0pt; mso-layout-grid-align: none;">
<span style="font-family: "times new roman" , "serif"; font-size: 12pt; line-height: 115%;">Not only do Millennials carry debt, but
they struggle with it. A majority report having too much debt, difficulty in making
payments, and worries about it. Specifically, the ability to pay off student
loans troubles more than half of Millennials who have such loans. Low-income
respondents tend to be more concerned than higher-income earners, but even 34
percent of Millennials with annual household income above $75,000 doubt they
will be able to repay their student loans. Moreover, even several years after
college, the percentage of those worried about repaying student loans remains
high. Fifty-four percent of Millennials who are over age 30 and have student loans
are worried about repaying them.<o:p></o:p></span></div>
<br />
<div class="MsoNormal" style="margin: 0in 0in 0pt; mso-layout-grid-align: none;">
<span style="font-family: "times new roman" , "serif"; font-size: 12pt; line-height: 115%;">Along with long-term debt, Millennials
also carry short-term debt, most often from credit cards. This debt can be
costly. More than half of Millennials’ credit card users say they carried over
a balance—for which they were charged interest—in the last 12 months. A sizable
share has been hit with late fees (22 percent), over-the-limit fees (13
percent), and fees for cash advances (14 percent).<o:p></o:p></span></div>
<br />
<div class="MsoNormal" style="margin: 0in 0in 0pt; mso-layout-grid-align: none;">
<span style="font-family: "times new roman" , "serif"; font-size: 12pt; line-height: 115%;">The use of alternative financial
services (AFS), such as auto title loans, payday loans, pawnshops, rent-to-own
loans, and tax refund advances, represents another significant source of short-term
debt. More than two-in-five Millennials in the study relied on AFS at least
once during the five years prior to the survey. Those turning to these services
are not always low income: More than a quarter of Millennials with annual
household income higher than $75,000—four times the poverty level for a
standard household of three—have used AFS.<o:p></o:p></span></div>
<br />
<div class="MsoNormal" style="margin: 0in 0in 0pt; mso-layout-grid-align: none;">
<span style="font-family: "times new roman" , "serif"; font-size: 12pt; line-height: 115%;">It doesn’t end there. Millennials are tapping
their bank and retirement accounts. Twenty-nine percent with bank accounts
report occasionally overdrawing them, and 22 percent of retirement-account
owners took loans or hardship withdrawals in the 12 months prior to the survey.<o:p></o:p></span></div>
<br />
<div class="MsoNormal" style="margin: 0in 0in 10pt;">
<span style="font-family: "times new roman" , "serif"; font-size: 12pt; line-height: 115%;">While these findings should worry Millennials, there
is something that should concern all of us: This next generation is not
prepared for the financial engagement it faces. Millennials give themselves high
marks on their financial knowledge. Yet the data show that only 8 percent of them
could correctly answer five questions used to assess understanding of the
fundamental concepts that define financial literacy. </span></div>
<div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; mso-layout-grid-align: none;">
<span style="font-family: "times new roman" , "serif"; font-size: 12pt;">They owe a lot. They know too little.
Millennials’ struggle with debt may eventually become our problem, too.</span></div>
<div class="MsoNormal" style="margin: 0in 0in 0pt; mso-layout-grid-align: none;">
<span style="font-family: "times new roman" , "serif";"><o:p></o:p></span> </div>
Annamaria Lusardihttp://www.blogger.com/profile/05956062460452648142noreply@blogger.com1tag:blogger.com,1999:blog-7736446773245191504.post-2143467327278131282015-11-27T23:13:00.000-05:002015-11-27T23:13:26.749-05:00“Just in time education”? Just in time is too late
This is a slightly modified version of the blog I wrote for the Wall Street Journal, which is posted here: <a href="http://blogs.wsj.com/experts/2015/09/21/why-just-in-time-financial-education-is-too-late/">http://blogs.wsj.com/experts/2015/09/21/why-just-in-time-financial-education-is-too-late/</a><br />
<br />
<div class="MsoNormal" style="margin: 0in 0in 10pt;">
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;">Several people and institutions have been advocating
for “just in time” education as an alternative to financial education. I take this
to mean that financial education should be provided at the point of sale. Academic
studies have found that financial knowledge decays over time, and “just in
time” proponents see on-the-spot education as a way to address that challenge.</span></div>
<div class="MsoNormal" style="margin: 0in 0in 10pt;">
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;">But there are problems with the “just in time” concept.
For starters, all education—not just financial knowledge—erodes over time. If I
were to re-test my undergraduate and graduate students a few months after they
finish a course (any course!), the results would deviate from those of their
final exams. This hardly means we should sidestep teaching entirely, to replace
it with targeted information that is dispensed only as needed. <i style="mso-bidi-font-style: normal;">Do you want to go to a Shakespeare play tonight?
Here is what he wrote and why he is so famous. No need to bother with a
literature course in college.</i> “Just in time” ignores the value that comes
from education. <span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal" style="margin: 0in 0in 10pt;">
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;">The second reason I question “just in time” is that my
academic research shows that financial literacy brings benefits. Financially
knowledgeable individuals are more likely to plan for future events, to save, and
to invest in higher return assets. But that knowledge is important <i style="mso-bidi-font-style: normal;">before</i> they take those actions. Indeed,
it is what positively influences their behavior. </span></div>
<div class="MsoNormal" style="margin: 0in 0in 10pt;">
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;">For example, those who know about the power of
interest compounding understand the importance of starting to save early. For
those with no financial literacy, there is really no point of sales benefit –
no big sign that states “Come here if you have not started to save yet.” If
“just in time” is their only option, these people will not receive any
education. They will learn about the value of saving when they are close to
retirement, when it is already too late. </span></div>
<div class="MsoNormal" style="margin: 0in 0in 10pt;">
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;">This underscores the more basic problem with the
“just in time” argument: Most financial decisions are not made at the point of
sale. Consider a home mortgage. By the time buyers come to a broker or a loan
officer at the bank, many decisions have already being made. The buyers may
have decided on the house they want to buy. But what if they have chosen a property
they cannot afford or they have not searched for the best offer? At that point,
“just in time” education is again too late. Consumers need financial knowledge <i style="mso-bidi-font-style: normal;">before</i> the dream of home ownership is
formed. </span></div>
<div class="MsoNormal" style="margin: 0in 0in 10pt;">
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;">“Just in time” education reflects a pretty grim view
of financial education, which it seems to see as a bitter medicine that should
be dispensed in a targeted dose—nothing more—and only when needed. The
prevalence of financial illiteracy, combined with the many financial decisions
we constantly must make, demands a more comprehensive cure than that. </span></div>
<div class="MsoNormal" style="margin: 0in 0in 10pt;">
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;">I was inspired to write this post after I was
contacted by a student in the personal finance course I have been teaching at
the George Washington University. He asked whether I was also teaching an
advanced course on the subject. That message came just in time! <o:p></o:p></span></div>
Annamaria Lusardihttp://www.blogger.com/profile/05956062460452648142noreply@blogger.com4tag:blogger.com,1999:blog-7736446773245191504.post-12482274891078617182015-06-21T17:42:00.000-04:002015-06-21T17:43:00.249-04:00What advice do you wish you had—or had not—gotten about your finances after graduating from college?This is a slightly modified version of the blog I wrote for the Wall Street Journal, which is posted here: <a href="http://blogs.wsj.com/experts/2015/06/17/the-financial-advice-i-wish-i-had-gotten-at-graduation/">http://blogs.wsj.com/experts/2015/06/17/the-financial-advice-i-wish-i-had-gotten-at-graduation/</a><br />
<br />
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;">For everyone, the memories of life after college are
a mix of excitement and trepidation about what is coming next. For me it was
also a transition year, as I had some teaching and research assistant work
while applying to graduate school. Realizing now how important a time that was to
think about finances, my first wish would have been for some advice! As a major
in economics, I knew about Edgeworth box and Pareto efficiency, but not much about
how to manage my (little) money. My parents thought an education from the best
private college in Italy would provide the skills a young person needed to
navigate today’s economy, but they never checked. <o:p></o:p></span><br />
<br />
<div class="MsoNormal" style="margin: 0in 0in 10pt;">
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;">The advice I wish I had received after graduating
from college and graduate school is about the importance of planning for the
future—for retirement, for buying a house and so on. I have always been a
saver, even during the grueling low-income period in graduate school, but
saving equated to what was left over each year without any specific target to
achieve. It took me a while to figure out that my savings were either too
little or not allocated properly. <o:p></o:p></span></div>
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;">Had I planned to buy a home, I would have been able
to buy it sooner and a more suitable house as well. But an early start in saving
for retirement is where I could have benefitted the most. My retirement is
likely to be as long as my working career. I sincerely hope that is true and a
lot of savings will be necessary to support those post-employment years—and that
cannot be achieved by leaving things to chance. </span><br />
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;"><o:p></o:p></span><br />
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;">In my case, three things were needed. First, I had to
figure out how much to save in order to retire at a target date. That required
calculations, not just relying on the gut feeling about saving I had used after
college and graduate school. Second, I needed a proper allocation of those
savings. It was inefficient to save without taking advantage of tax-favored
vehicles, such as Supplementary Retirement Accounts and IRAs, or to invest in
managed funds that generated dividends and charged high fees. Third, I needed a
system to keep myself on track and to evaluate how well I was doing. Even
though I came late to understanding these future-planning requirements, the changes
are paying off. Empirically, it turns out that those who plan for retirement
end up with about three times the wealth of those who do not plan. <span style="mso-spacerun: yes;"> </span><o:p></o:p></span><br />
<br />
<div class="MsoNormal" style="margin: 0in 0in 10pt;">
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;">One of the keynote speakers at our financial
literacy seminar series said that it is very hard to support a 30-year
retirement with a 40-year working career. It will be even worse if retirement is
extended (longevity keeps increasing) while the working years when one can
contribute to retirement savings get shorter. The latter can happen because of graduate
school, repaying student loans and the failure to think about contributing to a
retirement account.<o:p></o:p></span></div>
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%; mso-ansi-language: EN-US; mso-bidi-language: AR-SA; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin;">I now ask the
following question to my students when discussing the importance of financial
planning: Suppose you do no planning for your vacation, you just show up. What
are the chances that you will have a good experience? </span>Annamaria Lusardihttp://www.blogger.com/profile/05956062460452648142noreply@blogger.com2tag:blogger.com,1999:blog-7736446773245191504.post-82325694495399034392015-06-11T20:45:00.001-04:002015-06-11T20:45:57.950-04:00Taking your pension as a lump sum? It comes with risks
This is the longer version of the blog I wrote for the Wall Street Journal, which is posted here: <a href="http://blogs.wsj.com/experts/2015/06/11/the-pension-payout-lump-sum-or-annuity/">http://blogs.wsj.com/experts/2015/06/11/the-pension-payout-lump-sum-or-annuity/</a><br />
<br />
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-fareast-font-family: "Times New Roman";">As employers continue shifting
pension responsibilities to workers, a new question has surfaced: Should
employees take their pensions as annuities or lump sums? Workers with defined contribution
pensions will have to decide this, and employees with defined benefit pensions
are increasingly given this choice too, as firms try, for example, to reduce
oversized plan liabilities. <o:p></o:p></span><br />
<br />
<div class="MsoNormal" style="line-height: normal; margin: 0in 0in 12pt; mso-margin-top-alt: auto;">
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-fareast-font-family: "Times New Roman";">Managing one’s pension can bring
opportunities, but it also comes with risks. Indeed, the very reason for offering
a lump sum is to transfer the risks from the pension plan sponsor to the
individual. There are several issues to consider when such option is on the
table.<b style="mso-bidi-font-weight: normal;"><o:p></o:p></b></span></div>
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-fareast-font-family: "Times New Roman";">Financial markets: </span></b><span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-fareast-font-family: "Times New Roman";">An
individual who opts for a lump sum must then manage that money. If investing in
financial markets, the individual must decide how much risk to take. Even if
the money is tucked under the mattress (figuratively), there is inflation
risk—the risk that rising prices will dilute the money’s purchasing power. <o:p></o:p></span><br />
<br />
<div class="MsoNormal" style="line-height: normal; margin: 0in 0in 12pt; mso-margin-top-alt: auto;">
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-fareast-font-family: "Times New Roman";">Longevity:</span></b><span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-fareast-font-family: "Times New Roman";">
If a pension is taken as a lump sum, it still must last a lifetime. Individuals
can buy annuities in the retail market, and there is a notion that there may be
more and better choices in the market than what is offered by a single plan
sponsor. However, as the<span style="color: black; mso-themecolor: text1;"> </span></span><span style="color: black; font-family: "Times New Roman","serif"; font-size: 12pt; mso-themecolor: text1;">January 2015 report of the Government Accountability
Office (GAO) [</span><span style="color: #1f497d; font-family: "Times New Roman","serif"; font-size: 12pt;">“</span><span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-fareast-font-family: "Times New Roman";">Private Pensions/ Participants Need
Better Information When Offered Lump Sums that Replace their Lifetime Benefits”]
emphasized, retail market annuities are likely to be more expensive than group
annuities.<o:p></o:p></span></div>
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-fareast-font-family: "Times New Roman";">Protection:</span></b><span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-fareast-font-family: "Times New Roman";">
The Employee Retirement Income Security Act of 1974 (ERISA) established
protection for pension plan participants and their beneficiaries. For example, ERISA
set minimum funding standards for pension plans that are sponsored by private
employers. And the Pension Benefit Guaranty Corporation (also established by
ERISA) acts as the insurer of private sector defined benefit pension plans by
guaranteeing participants’ benefits up to a certain statutory limit. The
protection ERISA offers to defined benefit pensions is lost when pensions are
taken as a lump sum.<o:p></o:p></span><br />
<br />
<div class="MsoNormal" style="line-height: normal; margin: 0in 0in 12pt; mso-margin-top-alt: auto;">
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-fareast-font-family: "Times New Roman";">Whether to take a lump sum payment
is not an easy decision. One of the greatest risks is perhaps the failure to
understand the risks involved. When I testified about this issue before the
ERISA Advisory Council on May 28, 2015, I discussed the empirical evidence we
have about financial literacy and how little people know about risk and how to
manage risk. This is why it is so important to provide not just information but
also tools that make it easier for individuals to tackle this decision. One
such tool is a calculator that shows how different interest rates and mortality
tables translate into different lump sum payments.</span></div>
<div class="MsoNormal" style="line-height: normal; margin: 0in 0in 12pt; mso-margin-top-alt: auto;">
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-bidi-font-style: italic;">Lump sum payments can sound attractive, and for
some workers they may be better than annuities, but this is a serious decision
that requires careful thought, clear planning and an understanding of how
markets work</span><span style="font-family: Calibri;"><i>. </i><span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-fareast-font-family: "Times New Roman";"><o:p></o:p></span></span></div>
Annamaria Lusardihttp://www.blogger.com/profile/05956062460452648142noreply@blogger.com1tag:blogger.com,1999:blog-7736446773245191504.post-16427811180800051582015-06-01T21:59:00.003-04:002015-06-01T21:59:37.599-04:00What information do participants need to make informed decisions in pension risk-transfer transactions?
This is an abridged version of my testimony before the ERISA Advisory Council. The full testimony is posted here: <a href="http://gflec.org/research/?type=policy-briefs">http://gflec.org/research/?type=policy-briefs</a><br />
<br />
Thank you for inviting me to testify about information that
participants need to make informed decisions in pension risk-transfer
transactions. This is an important issue, and I am grateful for the opportunity
to testify.<span style="mso-spacerun: yes;"> </span>My name is Annamaria Lusardi
and I am the Denit Trust Chair of Economics and Accountancy at the George
Washington University School of Business and the founder and academic director
of the Global Financial Literacy Excellence Center (GFLEC).<o:p></o:p><br />
<br />
<div class="MsoNormal" style="margin: 0in 0in 0pt;">
In my testimony, I would like to make four main points.
First, this is a very important and timely issue. With the shift from defined benefit
(DB) to defined contribution (DC) pensions, most of the risks regarding
pensions have been shifted from employers and pension providers to pension participants.
We have focused a lot on the accumulation of pension wealth versus the drawdown
of that wealth, but what people do with their accumulated pension wealth is
important and consequential. Moreover, as mentioned in the January 2015 Report
of the General Accountability Office (GAO), even in traditional DB pensions,
pension providers have offered participants the choice to take their pensions
as a lump sum, thus shifting the responsibility for managing pension wealth
after retirement and insuring for longevity and other risks to pension participants.
As I have argued in many of my research papers, participants are ill-equipped
to deal with this new responsibility, in particular when it comes to
understanding and managing risk. The second point I would like to make has to
do with the information that participants need when asked to choose to take
their pension as a lump sum versus an annuity. While the information is listed
and discussed in the GAO Report, it is also critically important to consider the
ways that information is provided, particularly when faced with participants
who display very low levels of financial literacy. Third, I would like to offer
some suggestions on the provision of information, in particular about risk.
Fourth, I would like to make some remarks on ways to improve the current
retirement system so that participants are more empowered to make the decisions
they now face and that are going to become even more important going forward.<o:p></o:p></div>
<br />
<div class="MsoNormal" style="margin: 0in 0in 0pt;">
The first point I would like to make with regard to the
decisions that participants face when given the option to take their pension as
a lump sum is that the level of financial literacy of most participants is very
low. This fact is barely mentioned in the GAO Report but, in my view, is
important. For more than ten years now I have documented that most individuals
do not possess the knowledge of the fundamental concepts that form the basis for
financial decision making, for example, knowledge of the workings of interest
compounding or the effects of inflation. Moreover and most importantly for the
topic of this testimony, individuals have the most difficulty grasping the
concept of risk and understanding the workings of risk diversification. In my
recent paper titled “Risk Literacy,” I document that people not just in the
United States but also around the world display very little understanding of
risk. This lack of “risk
literacy” is particularly worrisome when we consider the choice between a lump
sum or an annuity and the decisions involved in managing that lump sum. </div>
<br />
<div class="MsoNormal" style="margin: 0in 0in 0pt;">
The research on financial and risk literacy offers two
additional findings for the topic under considerations. First, there are
subgroups of the population that are particularly vulnerable when it comes to
understanding risk and the workings of risk diversification; these subgroups
are women and older adults. Women display much lower financial literacy than
men. Moreover, when confronted with questions assessing knowledge of risk,
women disproportionately tend to respond “I do not know” to the questions, a
finding that is consistent in all surveys I have studied and that holds true
across countries. The proportion of “do not know” responses is particularly
sensitive to the way the questions—in particular the questions assessing risk—are
framed. For example, questions that are heavy in economic and financial jargon
elicit a very high share of “do not know” responses among women. Older adults,
in particular those 60 and older, also display very low levels of financial and
risk literacy. We do not know whether this is an age effect, due perhaps to a
decline in cognitive abilities, or a cohort/generation effect due, for example,
to the fact that older individuals lived in different economic circumstances
and may not have been exposed to financial education in school and/or the workplace.
Unfortunately, decisions about whether or not to annuitize wealth are made at
older ages. Second, notwithstanding this severe lack of financial knowledge,
when asked to assess their own financial literacy, most individuals (as many as
75%) gave themselves very high scores, well beyond what the scores resulting
from the financial literacy questions would imply. The biggest mismatch between
self-assessed and objective knowledge is found among older respondents; not
only do they score lowest on the financial literacy questions (in comparison to
other age groups), but they also give themselves the highest scores in terms of
self-assessed knowledge. This mismatch could result in older individuals relying
on their limited knowledge and skills and not asking for advice or consult
advisors about managing their pension.<o:p></o:p></div>
<br />
<div class="MsoNormal" style="margin: 0in 0in 0pt;">
This brings me to my second point: it is unlikely that
providing people with more information or the types of information that the
GAO<span style="mso-spacerun: yes;"> </span>Report found missing when
participants were offered a choice between a lump sum and annuitized benefits
is going to substantially enhance the choice that participants will make.
Simply stated, most people can hardly do a 2% calculation, let alone understand
how different interest rates and mortality tables will translate into different
lump sums. The research I have mentioned provides instead three basic
recommendations:</div>
<div class="MsoNormal" style="margin: 0in 0in 0pt;">
</div>
<div class="MsoListParagraphCxSpFirst" style="margin: 0in 0in 0pt 21pt; mso-add-space: auto; mso-list: l0 level1 lfo1; text-indent: -0.25in;">
<span style="mso-fareast-font-family: "Times New Roman";"><span style="mso-list: Ignore;">1)<span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";"> </span></span></span>The
information has to be readily available and easily accessible as individuals
are unlikely to even be looking for it. The GAO Report mentioned that
participants had to actively look for information, and that it was often hard
to find.<o:p></o:p></div>
<br />
<div class="MsoListParagraphCxSpMiddle" style="margin: 0in 0in 0pt 21pt; mso-add-space: auto; mso-list: l0 level1 lfo1; text-indent: -0.25in;">
<span style="mso-fareast-font-family: "Times New Roman";"><span style="mso-list: Ignore;">2)<span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";"> </span></span></span>The
information has to be provided in very simple ways and in plain English; in
other words, complex financial jargon has to be avoided as many individuals, in
particular women, find it difficult to understand that type of information. <o:p></o:p></div>
<br />
<div class="MsoListParagraphCxSpLast" style="margin: 0in 0in 0pt 21pt; mso-add-space: auto; mso-list: l0 level1 lfo1; text-indent: -0.25in;">
<span style="mso-fareast-font-family: "Times New Roman";"><span style="mso-list: Ignore;">3)<span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";"> </span></span></span>Help
has to be provided to conceptualize the information; for example participants
may not understand that taking a lump sum means not just having access to and
managing their pension but also taking up many risks, including the risk of
outliving one’s resources. This help should include providing tools that makes
it easy for people to do calculations or make comparisons.<o:p></o:p></div>
<br />
<div class="MsoNormal" style="margin: 0in 0in 0pt;">
This all may seem very daunting, and many have interpreted
lack of financial literacy to mean that people should not be in charge of
making complex financial decisions, but in fact our research also shows there
are simple yet effective ways to provide information that help people in
financial decision-making. <o:p></o:p></div>
<br />
<div class="MsoNormal" style="margin: 0in 0in 0pt;">
In my research, in collaboration with a group of co-authors
I have designed short videos to explain, in very simple ways, concepts such as
the power the interest compounding and the workings of inflation and risk
diversification. Concepts are embedded into a simple narrative that highlights
not simply what the concept means but also how to conceptualize it. For
example, the video about risk explains the concept of risk diversification
using the metaphor of not putting all of one’s eggs in a single basket to make
clear what it means investing in just one asset or one’s own company stock. We
have tested the effectiveness of these videos by assessing whether financial
literacy and self-efficacy (i.e., confidence in making decisions) change when
exposed to the videos. We divided our participants into several groups, those
exposed to the videos, those exposed to a written narrative (rather than
watching the video, participants had to read the story) and a control group who
was not exposed to this information. We found that the videos increased financial
knowledge and self-efficacy more effectively than did the print narrative. This
study suggests there are ways to provide information that can be more useful
and effective than the long list of documents and files that people are
normally offered by pension providers.<o:p></o:p></div>
<br />
<div class="MsoNormal" style="margin: 0in 0in 0pt;">
The final point I would like to make is that the decisions
that people have to make about their pensions are hard, and decisions about
whether to take pensions as a lump sum or an annuity are particularly
difficult. But people have to make these types of decisions and more so with defined
contribution pension plans. Financial products that are similarly complex, such
as reverse mortgages, are now available to consumers, and people are faced with
the choice of whether or not to annuitize their housing wealth. Another
important decision is when to start withdrawing Social Security benefits, a
decision which requires the same skills needed to make a decision about taking a
pension as a lump sum or an annuity. We need to do a better job equipping
people to make these decisions. It is going to be hard to even provide
information when financial illiteracy is so widespread. Building a robust
pension system starts with adding financial literacy in school, so that
individuals have at least basic financial knowledge. Without such a knowledge
base, it is going to be very hard (and expensive) to help people make financial
decisions. The workplace is another ideal place for providing financial
education. In a world in which individuals are asked to take on the
responsibility and risks connected with their own financial security, it is
imperative that we find ways to equip them with the skills and the knowledge
needed to make these important decisions. <o:p></o:p></div>
Annamaria Lusardihttp://www.blogger.com/profile/05956062460452648142noreply@blogger.com1tag:blogger.com,1999:blog-7736446773245191504.post-65803761876683086472015-05-13T16:54:00.001-04:002015-05-13T16:54:53.551-04:00The cost of sofas and mutual fundsThis is the original and longer version of the blog I wrote for the Wall Street Journal. You can see the posted blog at: <a href="http://blogs.wsj.com/experts/2015/05/04/how-an-economics-professor-ignored-her-own-finances/">http://blogs.wsj.com/experts/2015/05/04/how-an-economics-professor-ignored-her-own-finances/</a><br />
<div class="MsoNormal" style="margin: 0in 0in 10pt;">
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;"></span><br />
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;">Starting out as an assistant professor more than 20 years
ago was truly exciting, even though the move was full of problems and it took
months to settle into a new place. The day I showed up in the Human Resources
office to enroll in health and pension plans, I was handed a bunch of brochures
and asked to fill out a stack of forms. I spent most of the time focused on the
health plans and their varied coverage. </span></div>
<div class="MsoNormal" style="margin: 0in 0in 10pt;">
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;">When I turned to the pension plans, I had to choose
among three providers and a long list of investment funds, from money markets
to stock funds. I am not exaggerating when I say I took less time to choose
where to put my retirement savings than I did to buy a sofa that morning. As an
economist, I thought I should know about investment. I selected a global stock
fund, looking at nothing else but where it was invested.</span></div>
<div class="MsoNormal" style="margin: 0in 0in 10pt;">
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;">Months later, my colleagues in the economics department
told me about the Supplementary Retirement Account (SRA) that the college
offered. That’s where I could put money, tax-free, for retirement. Signing up
for it was extraordinarily cumbersome. I needed my employee ID (a number I
still cannot remember, let alone find easily) and was rushed to fill out all of
the information in 20 minutes before the online system closed for security
reasons. It took me several attempts to sign up and, again, little attention
was devoted to where the money was invested.</span></div>
<div class="MsoNormal" style="margin: 0in 0in 10pt;">
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;">I blame the harsh life of an assistant professor
that I paid so little attention to my retirement savings and investment
decisions. It was not until I received tenure and started my research work on
financial decisions that I revisited what I had done with my personal finances.
Changes were much needed. I began contributing the maximum amount to the SRA, I
opened a Roth IRA and I moved all of my savings from high-fee international
funds to index funds and built a more diversified portfolio.</span></div>
<div class="MsoNormal" style="margin: 0in 0in 10pt;">
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;">Smart choices matter in finance. Small investment
mistakes we make early in life, such as ignoring fees or failing to take
advantage of tax-favored investments, compound over time and become large. I
tell my investment-choice story to students in the personal finance course I
teach to show them that finance truly is personal—and we must make time for it.
I still have that sofa I bought in my first year as an assistant professor. If
I had taken time to compare mutual funds in the same way I compared the cost of
sofas, I would have the money today to refurnish my entire house.<o:p></o:p></span></div>
Annamaria Lusardihttp://www.blogger.com/profile/05956062460452648142noreply@blogger.com2tag:blogger.com,1999:blog-7736446773245191504.post-15435701613874514122015-04-19T15:34:00.000-04:002015-04-19T15:53:11.507-04:00Financial Savvy Key to a Secure Retirement <span style="font-family: "Times New Roman","serif"; font-size: 12pt;">I have started
to write a blog for Forbes, and I hope you will follow my blogs there. I
provide the link below. However, I will keep posting the blogs here as well as
I sometimes write a longer text than what is published online.<o:p></o:p></span><br />
<span style="font-family: "Times New Roman","serif"; font-size: 12pt;"></span><br />
<span style="font-family: "Times New Roman","serif"; font-size: 12pt;">http://www.forbes.com/sites/pensionresearchcouncil/2015/04/17/financial-savvy-key-to-a-secure-retirement/<o:p></o:p></span><br />
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-bidi-font-size: 11.0pt;"></span><br />
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-bidi-font-size: 11.0pt;">Over
the last 40 years, we as individuals have been given increasing responsibility
for ensuring our own financial well-being in retirement. But it’s gotten quite
complex, with an alphabet soup of retirement saving vehicles – from 401(k) to
403(b) plans to IRA and Roth IRAs – and our responsibilities loom large. Not
only must we figure out how much to save and how to invest our retirement assets,
but we also must take advantage of a variety of tax-favored assets, employer
matches, payout options, and much more. <span style="mso-spacerun: yes;"> </span></span><br />
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-bidi-font-size: 11.0pt;"><span style="mso-spacerun: yes;"></span><o:p></o:p></span><br />
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-bidi-font-size: 11.0pt;">In
my </span><a href="http://www.pensionresearchcouncil.org/publications/pdf/JEL_FinLit_LusardiMitchell2-12-14.pdf"><span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-bidi-font-size: 11.0pt;"><span style="color: blue;">research</span></span></a><span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-bidi-font-size: 11.0pt;">,
I investigate how well-equipped we are to make such complex financial decisions.
For instance, how much do we know about the power of compound interest, so we
can appreciate how critical it is to save early and grow our money tax free? Do
we know how to diversify risk? Such knowledge provides a firm foundation for
good financial decision-making over the entire lifetime. <o:p></o:p></span><br />
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-bidi-font-size: 11.0pt;"></span><br />
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-bidi-font-size: 11.0pt;">To
gain an understanding of the level of financial literacy in the population,
Olivia S. Mitchell and I designed and fielded three key questions which have
now been used in a large number of national and international surveys. We have
also administered the survey to a variety of employees at large companies, to
see exactly what they know – and don’t know. <span style="mso-spacerun: yes;"> </span></span><br />
<br />
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-bidi-font-size: 11.0pt;">Try
the quiz yourself (right answers are in bold)</span><br />
<br />
<div class="MsoNormalCxSpMiddle" style="line-height: normal; margin: 1em 0px 0pt; mso-add-space: auto; text-align: justify;">
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-bidi-font-size: 11.0pt; mso-font-kerning: 0pt;">1. The Interest Rate question (Numeracy)<o:p></o:p><br />
</span><span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-bidi-font-size: 11.0pt; mso-font-kerning: 0pt;">Suppose you had $100 in a savings
account and the interest rate was 2% per year. After 5 years, how much do you
think you would have in the account if you left the money to grow?<o:p></o:p></span><br />
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-bidi-font-size: 11.0pt; mso-font-kerning: 0pt;">
<b style="mso-bidi-font-weight: normal;">More than $102</b><o:p></o:p><br />
Exactly $102<o:p></o:p><br />
Less than $102<o:p></o:p><br />
Do not know<o:p></o:p><br />
Refuse to answer</span><br />
</div>
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-bidi-font-size: 11.0pt; mso-font-kerning: 0pt;">
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-bidi-font-size: 11.0pt; mso-font-kerning: 0pt;">2. The Inflation question<o:p></o:p></span></span><br />
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-bidi-font-size: 11.0pt; mso-font-kerning: 0pt;">
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-bidi-font-size: 11.0pt; mso-font-kerning: 0pt;">Imagine that the interest rate on your savings account
was 1% per year and inflation was 2% per year. After 1 year, how much would you
be able to buy with the money in this account? </span></span><br />
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-bidi-font-size: 11.0pt; mso-font-kerning: 0pt;"><span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-bidi-font-size: 11.0pt; mso-font-kerning: 0pt;"><o:p></o:p></span>
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-bidi-font-size: 11.0pt; mso-font-kerning: 0pt;">More than
today</span></span><br />
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-bidi-font-size: 11.0pt; mso-font-kerning: 0pt;"><span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-bidi-font-size: 11.0pt; mso-font-kerning: 0pt;"><o:p></o:p></span>
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-bidi-font-size: 11.0pt; mso-font-kerning: 0pt;">Exactly the
same<o:p></o:p></span>
</span><br />
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-bidi-font-size: 11.0pt; mso-font-kerning: 0pt;"><span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-bidi-font-size: 11.0pt; mso-font-kerning: 0pt;"><b style="mso-bidi-font-weight: normal;">Less than today<o:p></o:p></b></span></span><br />
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-bidi-font-size: 11.0pt; mso-font-kerning: 0pt;">
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-bidi-font-size: 11.0pt; mso-font-kerning: 0pt;">Do not know</span></span><br />
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-bidi-font-size: 11.0pt; mso-font-kerning: 0pt;"><span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-bidi-font-size: 11.0pt; mso-font-kerning: 0pt;"><o:p></o:p></span>
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-bidi-font-size: 11.0pt; mso-font-kerning: 0pt;">Refuse to
answer</span></span><br />
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-bidi-font-size: 11.0pt; mso-font-kerning: 0pt;"><span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-bidi-font-size: 11.0pt; mso-font-kerning: 0pt;"></span></span><br />
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-bidi-font-size: 11.0pt; mso-font-kerning: 0pt;"><span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-bidi-font-size: 11.0pt; mso-font-kerning: 0pt;"><o:p></o:p></span>
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-bidi-font-size: 11.0pt; mso-font-kerning: 0pt;">3. The Risk Diversification question</span></span><br />
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-bidi-font-size: 11.0pt; mso-font-kerning: 0pt;"><span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-bidi-font-size: 11.0pt; mso-font-kerning: 0pt;"><o:p></o:p></span>
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-bidi-font-size: 11.0pt; mso-font-kerning: 0pt;">Please tell me whether this statement is true or false:
“Buying a single company’s stock usually provides a safer return than a stock
mutual fund.” </span></span><br />
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-bidi-font-size: 11.0pt; mso-font-kerning: 0pt;"><span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-bidi-font-size: 11.0pt; mso-font-kerning: 0pt;"><o:p></o:p></span>
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-bidi-font-size: 11.0pt; mso-font-kerning: 0pt;">True<o:p></o:p></span></span><br />
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-bidi-font-size: 11.0pt; mso-font-kerning: 0pt;">
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-bidi-font-size: 11.0pt; mso-font-kerning: 0pt;">False<span style="mso-tab-count: 1;"></span></span></b></span><br />
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-bidi-font-size: 11.0pt; mso-font-kerning: 0pt;"><span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-bidi-font-size: 11.0pt; mso-font-kerning: 0pt;">Do not know<o:p></o:p></span>
</span><br />
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-bidi-font-size: 11.0pt; mso-font-kerning: 0pt;"><span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-bidi-font-size: 11.0pt; mso-font-kerning: 0pt;">Refuse to answer</span></span><br />
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-bidi-font-size: 11.0pt; mso-font-kerning: 0pt;"><span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-bidi-font-size: 11.0pt; mso-font-kerning: 0pt;"></span><br /></span><span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-bidi-font-size: 11.0pt;">Our
findings in the US and around the world proved to be shocking! Only one-third of
Americans can answer all three questions correctly. And while one might expect that
the more experienced would be substantially more financial literate, this is
not the case. In fact, older adults are not much savvier than the young,
despite their having had to make many financial decisions including about
retirement savings. We also find that financial illiteracy is particularly
severe among certain demographic groups, such as the low paid, women, and young
adults. </span><span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-bidi-font-size: 11.0pt;">Moreover,
when we take our financial literacy survey abroad, the results are not much
better! Respondents in Australia and Germany do perform better, while thus far
we see respondents in Eastern Europe and Russia are the least financially
savvy. But all of us have a long way to go.<o:p></o:p></span><br />
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-bidi-font-size: 11.0pt;"></span><br />
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-bidi-font-size: 11.0pt;">I
worry a great deal about such low levels of financial literacy, because retirement
planning requires a modicum of financial sophistication -- and planning is a
strong predictor of retirement wealth. According to our research, those who
plan accumulate up to three times the amount of wealth of non-planners. The
data shows the link to financial literacy is very strong; it is those who are
financially literate that plan for retirement. And without basic financial
skills, people get into trouble young, taking out payday loans and overdrawing
their credit cards, and they stay in trouble later, by failing to pay down
their mortgages and borrowing against their retirement accounts. </span><br />
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-bidi-font-size: 11.0pt;"><o:p></o:p></span><br />
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-bidi-font-size: 11.0pt;">Granted,
raising our nation’s financial savvy will require costs and effort.
Nevertheless, there are costs of ignorance, including not saving, not being
able to retire, and being poor during one’s later years.<o:p></o:p></span>Annamaria Lusardihttp://www.blogger.com/profile/05956062460452648142noreply@blogger.com1tag:blogger.com,1999:blog-7736446773245191504.post-74615942010005523322015-04-18T23:24:00.000-04:002015-04-18T23:27:30.441-04:00Three Key Concepts Every Personal-Finance Class Should Teach I have started to write a blog for the Wall Street Journal, and I hope you will follow my blogs there. I provide the link below. However, I will keep posting the blogs here as well as I write a longer text than it is published because there is a hard word limit at the WSJ. <br />
<br />
<a href="http://blogs.wsj.com/experts/2015/04/15/three-key-concepts-every-personal-finance-class-should-teach/">http://blogs.wsj.com/experts/2015/04/15/three-key-concepts-every-personal-finance-class-should-teach/</a><br />
<br />
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<span style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;">More than ever before, we must make financial
decisions that are important and consequential. How much should we contribute
to retirement accounts and how should we invest our retirement savings? Should
we enroll in a health insurance plan with a low or high deductible? What do we
need for our children’s education? Household finances have become sufficiently
complex that simple intuition or the advice of family and friends is not enough
to guarantee good choices.</span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;">There are courses in corporate finance and
specialized curricula for managing firms’ finances, but what is available when
we serve as our own Chief Financial Officer (CFO)? Fortunately, personal
finance is a subject making its way into schools, from high schools to colleges
to graduate programs. Online courses are also springing up, and some employers
have started to offer financial education programs to their employees.<o:p></o:p></span></div>
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;">What should the content of such courses be? As
member of the Board of Directors of the Council for Economic Education, <span style="color: black; mso-themecolor: text1;">I served as an adviser on the National
Standards for Financial Literacy. </span>From these standards, we can identify some
of the crucial concepts that everybody needs to make informed financial
decisions. I am going to focus on just three, the Big Three as I tell my
students.<o:p></o:p></span><br />
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<span style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;">One fundamental principle of personal finance is the
power of interest compounding. This knowledge is key for saving, borrowing, and
investing decisions. It enables us to understand, for example, why it is
important to start to save early. And we need to do calculations to see
results. If I borrow at 20 percent on my credit card, how long does it takes
before my initial debt doubles? If expenses and fees reduce my rate of return
by one percentage point, how is my wealth affected over a 30-year horizon?<o:p></o:p></span></div>
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;">Because financial decisions are inherently about the
future, we must consider how money’s purchasing power changes over time. We
must also acknowledge that the future is uncertain. That brings into play two
more building blocks: knowledge of inflation and risk. Distinguishing between
real and nominal values is essential to keeping a stable standard of living
over a lifetime. Indeed, personal finance is where we can fully appreciate the
critical role the Fed and its monetary policy play, especially when it comes to
low and stable inflation and its implications for financial planning.<o:p></o:p></span><br />
<br />
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<span style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;">Knowledge of risk and risk diversification is at the
basis of portfolio choice. We can formally prove that the old adage “do not put
all of your eggs in one basket” is, indeed, good advice. Even more, we can
learn how to implement it well. Moreover, we can protect ourselves and our
wealth from the many sources of risks: interest rate risk, health risk, and the
risk of living too long! <span style="color: red;"><o:p></o:p></span></span></div>
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;">The Big Three are the stanchions of a personal
finance course we launched three years ago at the George Washington University
School of Business. While I cannot say whether this course will lead to smarter
financial decisions, students’ eagerness to enroll, performance on the tests,
and comments when they complete it give me much hope.<o:p></o:p></span></div>
Annamaria Lusardihttp://www.blogger.com/profile/05956062460452648142noreply@blogger.com1tag:blogger.com,1999:blog-7736446773245191504.post-55147088182123606752015-01-10T17:50:00.002-05:002015-01-10T17:57:49.432-05:00Highlights from 2014: Notes from my travels<span style="font-family: Calibri;"><o:p><span style="font-family: Times New Roman;">
</span><span style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;">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.<o:p></o:p></span></o:p></span><br />
<span style="font-family: Calibri;"><span style="font-family: Times New Roman;">
</span></span><br />
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<span style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;">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. <span style="mso-spacerun: yes;"> </span>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.</span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;">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. <span style="mso-spacerun: yes;"> </span>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.<span style="mso-spacerun: yes;"> </span>So watch out young
people (young women)!</span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;">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. </span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;">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.<span style="mso-spacerun: yes;"> </span></span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;">These are some observations from my travel last year
and I hope to keep writing while sitting on airplanes…<o:p></o:p></span></div>
<span style="font-family: Times New Roman;">
</span></span>Annamaria Lusardihttp://www.blogger.com/profile/05956062460452648142noreply@blogger.com1tag:blogger.com,1999:blog-7736446773245191504.post-62648926538321397752015-01-01T15:26:00.002-05:002015-01-09T23:22:40.310-05:00Financial Literacy Highlights of 2014: The PISA data<!--[if gte mso 9]><xml>
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</xml><![endif]-->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.<span style="mso-spacerun: yes;"> </span>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.
<br />
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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 href="http://www.gflec.org/">www.gflec.org</a>). <span style="mso-spacerun: yes;"> </span>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.</div>
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<br /></div>
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<span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><span style="mso-list: Ignore;">1)<span style="font: 7.0pt "Times New Roman";">
</span></span></span>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.).</div>
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<span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><span style="mso-list: Ignore;">2)<span style="font: 7.0pt "Times New Roman";">
</span></span></span>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.</div>
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<span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><span style="mso-list: Ignore;">3)<span style="font: 7.0pt "Times New Roman";">
</span></span></span>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!).</div>
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Let me return to July 9, 2014, the day of the PISA data release.<span style="mso-spacerun: yes;"> </span>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.<span style="mso-spacerun: yes;"> </span>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.</div>
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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.<span style="mso-spacerun: yes;"> </span>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!</div>
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<span style="font-family: "Calibri","sans-serif"; font-size: 11.0pt; line-height: 115%; mso-ansi-language: EN-US; mso-ascii-theme-font: minor-latin; mso-bidi-font-family: "Times New Roman"; mso-bidi-language: AR-SA; mso-bidi-theme-font: minor-bidi; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin; mso-hansi-theme-font: minor-latin;">Happy new year.</span><br />
Annamaria Lusardihttp://www.blogger.com/profile/05956062460452648142noreply@blogger.com1tag:blogger.com,1999:blog-7736446773245191504.post-36373773485420865292014-07-19T22:36:00.000-04:002014-07-19T22:36:30.676-04:00Hosting the US release of the the Programme for International Student Assessment (PISA) financial literacy data
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 135%;">I have not written for a long time and
the reason is because of new data (only economists say these things). <span style="mso-spacerun: yes;"> </span>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!).<o:p></o:p></span><br />
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<span style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 135%;">I am Anna Lusardi the Academic Director
of the Global Financial Literacy Excellence Center, or GFLEC.<span style="color: red;"> </span>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.</span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 135%;"><o:p></o:p></span> </div>
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 135%;">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. <o:p></o:p></span><br />
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<span style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 135%;">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.<o:p></o:p></span></div>
<br />
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<span style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 135%;">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.<span style="mso-spacerun: yes;">
</span><span style="mso-spacerun: yes;"> </span><o:p></o:p></span></div>
<br />
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<span style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 135%;">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.<span style="mso-spacerun: yes;"> </span>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. <span style="background: yellow; mso-highlight: yellow;"><o:p></o:p></span></span></div>
<br />
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<span style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 135%;">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.<span style="mso-spacerun: yes;"> </span>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.<o:p></o:p></span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 135%;">For most of us here today, it is hard <u>not</u>
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.<o:p></o:p></span></div>
<br />
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<span style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 135%;">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.<o:p></o:p></span></div>
<br />
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<span style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 135%;">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.<o:p></o:p></span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 135%;">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 <span style="color: black;">Global Financial Literacy Research project, which is </span>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.<o:p></o:p></span></div>
<br />
<span style="font-family: "Times New Roman","serif"; font-size: 12pt; mso-ansi-language: EN-US; mso-bidi-language: AR-SA; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-US;">Please take note of the title of PISA’s latest volume,
“Students and Money: Financial Literacy Skills for the 21<sup>st</sup>
century.” Just as it was not possible to live in an industrialized society
without the ability to <i>read </i><span style="mso-bidi-font-style: italic;">and
<i>write</i></span>, so it is not possible to thrive in today’s world without
being <i>financially literate</i><span style="mso-bidi-font-style: italic;">.<span style="mso-spacerun: yes;"> </span></span></span>Annamaria Lusardihttp://www.blogger.com/profile/05956062460452648142noreply@blogger.com3tag:blogger.com,1999:blog-7736446773245191504.post-11481055116694273882013-12-24T16:47:00.002-05:002013-12-24T16:48:33.412-05:00Financial literacy in school is common senseOn 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:<br />
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“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.” </div>
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<br /></div>
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<span style="mso-spacerun: yes;"> </span>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.</div>
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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.</div>
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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.</div>
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<span style="mso-spacerun: yes;"> </span>The morale of this
story can be summarized as follows:</div>
<div class="MsoListParagraphCxSpFirst" style="mso-list: l0 level1 lfo1; text-indent: -.25in;">
<span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><span style="mso-list: Ignore;">1)<span style="font: 7.0pt "Times New Roman";">
</span></span></span>It is never too early to talk about money to
children;</div>
<div class="MsoListParagraphCxSpMiddle" style="mso-list: l0 level1 lfo1; text-indent: -.25in;">
<span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><span style="mso-list: Ignore;">2)<span style="font: 7.0pt "Times New Roman";">
</span></span></span>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);</div>
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<span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><span style="mso-list: Ignore;">3)<span style="font: 7.0pt "Times New Roman";">
</span></span></span>It Santa Klaus were to do an IPO, we will be
ready to invest. For the moment, indexed funds will have to do;</div>
<div class="MsoListParagraphCxSpLast" style="mso-list: l0 level1 lfo1; text-indent: -.25in;">
<span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><span style="mso-list: Ignore;">4)<span style="font: 7.0pt "Times New Roman";">
</span></span></span>The new year will not be as bad if we have
financial literacy in school. </div>
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Here is the article. The online version was titled: Five
reasons why 2013 was better than it seemed</div>
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http://www.ft.com/intl/cms/s/0/ef24e98c-67c9-11e3-8ada-00144feabdc0.html#axzz2oDtaYRZc</div>
Annamaria Lusardihttp://www.blogger.com/profile/05956062460452648142noreply@blogger.com8