Monday, April 29, 2013

The economic importance of financial literacy for students

I testified before the Subcommittee on Children and Families of the U.S. Senate Committee on Health, Education, Labor and Pension last Wednesday, April 24, on the economic importance of financial literacy for students. The full text is rather long (as I discovered at the hearing from the watch in front of me that started to count down from 5 minutes..). I provide an abridged version below, but if interested, the whole text is here and you can also watch the hearing:

Ms. Chairwoman and members of the Subcommittee on Children and Families:

Thank you for the opportunity to speak to you about the economic importance of financial literacy for students.

I am the director of the Global Center for Financial Literacy at the George Washington University. As part of my research, I develop tools for testing financial knowledge, conduct studies into financial literacy levels, and assess what the results of those studies mean for the United States.

I am here today to tell you that the vast majority of Americans do not have the financial knowledge they need to fully participate in the economy or to make informed decisions about their own financial futures. This reality has implications for their lives and for the economic health of the country.

According to the 2009 National Financial Capability Study, only 30 percent of the population can do a simple 2 percent calculation and has a basic understanding of inflation and risk diversification, concepts that are important in financial decision-making. The second wave of that study is about to be released. It shows no improvement in the level of financial knowledge between 2009 and 2012.

Financial illiteracy is not only widespread, but it is particularly severe among specific groups of the population, including people aged 18 to 25. These youths just out of school and young adults beginning their careers are less financially knowledgeable than the general population.

When we focus on high school students, the findings are even more sobering. Data collected bi-annually by the Jump$tart Coalition for Personal Financial Literacy show that only 7 percent of high school students can be considered financially literate. These statistics have troubling implications. Studies show that Americans who are not financially literate are less likely to participate in financial markets or to invest wisely. They are less likely to save and plan for the future. At the same time, they are more likely to rely on high-cost methods of borrowing. This is a serious problem. Remedying it is difficult, but adding financial literacy to the curriculum in schools would be a good start. Academic research points to four reasons why we should launch financial literacy efforts in schools:

1)      The first reason stems from the fact that financial illiteracy is widespread. That means young people with poor financial knowledge are unlikely to learn from their parents, other adults, or peers. Only a small fraction of students currently have access to adults and peers who are financially literate.

2)      The second reason to include financial literacy in school has to do with equality. A failure to understand financial concepts is especially prevalent among certain demographics in the population. Data from the Jump$tart Coalition and other surveys show that white male students from college-educated families disproportionately account for the small percentage of students who are financially literate. This is a distinction that persists over the life cycle. Women, African Americans, Hispanics, and individuals with low educational opportunities continue to display very poor levels of financial literacy—much lower than their counterparts—at middle age, before retirement, and into retirement.

This finding is strikingly similar and robust across countries. In a study that compares financial literacy in eight countries—Germany, Italy, Japan, the Netherlands, New Zealand, Russia, Sweden, and the United States—Olivia Mitchell from the Wharton School and I found that women and those with low levels of education display disproportionately poor financial knowledge. This is the case at all stages of the life cycle, from youth to old age.

3)      Another reason to focus on financial literacy in school is that it is a necessary skill for navigating today’s complex world. This is so evident that the Organisation for Economic Co-operation and Development (OECD) last year added financial literacy to the topics it evaluates in its Programme for International Student Assessment (PISA). Financial knowledge now joins mathematics, science, and reading in those tests administered to 15-year-olds around the world.

The PISA tests gauge whether students are prepared for future challenges, whether they can analyze, reason and communicate effectively, and whether they have the capacity to continue learning throughout their lives. These assessments are conducted every three years to help us understand if students near the end of compulsory education have acquired the knowledge and skills essential for full participation in society. Given these objectives, financial literacy seems to be an essential addition.

4)      The fourth reason why high school is a powerful place to teach financial knowledge is a simple one: Young people need to understand how to make wise financial decisions before—not after—they are faced with life-changing decisions. Most notable among those decisions is whether or not to invest in higher education. Education beyond high school has a tremendous effect on future financial security.

At the same time, whether and how to finance higher education has changed dramatically in recent years. The cost of a college education has increased rapidly in the United States, surpassing the increase in both wages and inflation. This means that young people who pursue degrees often start their careers with substantial amounts of debt.

There is now a great deal of material available to help teachers and schools add financial literacy into school curricula and to improve the quality of that education. For example, we have national standards for financial literacy from the Jump$tart Coalition for Personal Financial Literacy and, more recently, the Council for Economic Education. The OECD also issued guidelines for financial education in high school, and its International Gateway for Financial Education serves as a global clearinghouse on financial education, providing access to a comprehensive range of information, data, resources, research, and news on financial education issues and programs around the globe.  

Other countries, such as the United Kingdom, recently added financial literacy in their schools.

Young people—not only in the United States but also around the world—face a new economic environment with more complex financial markets. They will have more individual responsibility in investing in their own education and in planning for their own financial security during their working lives and after retirement. And they will be doing this, among other things, on a global scale.

If they are going to do this well, they must be equipped with the right tools and skills. Just as it was not possible to contribute and thrive in an industrialized society without basic literacy—the ability to read and write—so it is not possible to successfully navigate today’s world without being financially literate.

There is a cornerstone of economic theory: Where you have well-informed consumers, you will find vigorous competition and efficient markets. In other words, financial literacy is not only good for Americans because it allows them full participation in society, but financial literacy is also essential for business, the economy, the country and, in this age of globalization, the world.

Thank you for this opportunity. I would be pleased to answer any questions.

Sunday, April 28, 2013

Receiving the Odom Visionary Leadership Award

I received the William E. Odom Visionary Leadership Award last Tuesday, April 23, at a ceremony hosted by the Jump$tart Coalition for Personal Financial Literacy. I was a very special evening which will stay forever in my memory.

I had prepared a speech to deliver at the dinner and I provide the text below. Thank you all for your support and for supporting financial literacy.

I am delighted to be here this evening to receive this wonderful honor. When Laura Levine called to tell me about the Odom Award, I was very happy. And contrary to the findings reported in the studies about happiness, I can tell you that my happiness lasted for days and days.

In fact, that happiness lasted until I realized I’d have to give a speech. I was at this event two years ago... sitting at the table of Carrie Schwab when she sang for her award. And I know that John Rogers gave a wonderful speech last year. How do I follow that?   

Like every good Italian, I called my mother. Her first recommendation? No singing or dancing on the stage. That killed my plans for arias from Tosca or any pirouettes. But my mother had some good suggestions. She said, “Why don’t you speak about that PISA project you always tell us so much about? Why don’t you talk about your passions, for example the new center that takes so much of your attention?"
So let me start with PISA, the Programme for International Student Assessment. As most of you know, in 2012 PISA added financial literacy to the topics it measures, together with math, science, and reading. I chaired the group of experts that the OECD brought together to design PISA’s new financial literacy assessment module.

It was a challenging assignment to design questions to measure financial literacy among 15-year-olds in many different countries. But the group brought a rich level of expertise to the task. We had representatives from Treasury departments and from central banks. We had regulators and representatives from the institutions in charge of financial literacy in their countries.

I want to read to you what PISA gauges:
Are students well prepared for future challenges? Can they analyze, reason, and communicate effectively? Do they have the capacity to continue learning throughout life? Every three years the OECD Programme for International Student Assessment answers these questions and more. It assesses to what extent students near the end of compulsory education have acquired some of the knowledge and skills essential for full participation in society.

This could as well serve as a brief description of financial literacy, a skill essential for full participation in society. And as PISA treats it, it is like the other topics we teach in school, math, reading, science.

Over the last 3 years, the Financial Literacy Experts Groups has met in different cities around the world. Our first meeting was in Boston and since then we have been to Paris, Budapest, Melbourne, and Heidelberg. I’d like to say it was a happy project marked by exotic global travel … but in truth it was one of the hardest projects I have ever undertaken. We spent days locked up in hotel conference rooms designing the Financial Literacy Framework. We wrote – and rewrote – the assessment questions many, many times.

Just so you have a sense of how committed we are: We are the only PISA group that asked for an additional meeting so that we could take a final look at the data, examine the findings and, most importantly, discuss how to disseminate this work. Once the data is out, we hope it will drive a big push for financial literacy in schools. Financial literacy makes a difference in the life of young people and we hope we can make a difference with our work and equip the young generations with the skills they need to for full participation in society.

One good feature about working in financial literacy is that it is not hard to be passionate about it. Working with other people who have a passion for this subject is the most rewarding part of what I do. 
My family teases me about the PISA project. I first mentioned it to my parents – and the measurement issues associated with it – during a rather quick phone call while I was on my way to the airport to catch my flight to a PISA meeting. The next day I got two e-mails. My little sister congratulated me … then commented that we are in trouble if an economist is being asked to take measurement of the leaning tower. My older sister, the more pragmatic one, asked if I could please arrange a visit to the tower. They were clearly thinking of a different PISA!

I hope it is clear that in the eyes of my parents I can do anything, even studying or fixing the leaning tower. I think I ended up on the PISA project that was better suited to my skills/talents, but I do believe that one of the reasons why I am here on the podium today is because I was raised in an Italian family with very supportive parents.

And I am grateful to my parents for encouraging me to seek my passion. I found it in financial literacy. I have been working on financial literacy issues for the past 10 years… not only research but also trying to disseminate the results of the research to a much wider audience than academics. I am very proud of the Global Center for Financial Literacy that I am building at the George Washington University School of Business. My collaborators are here today and we are united in this mission to spread financial literacy.  I am also working with many people and institutions who are here today, FINRA Investor Education Foundation, the Council for Economic Education, and the Jump$tart Coalition for Personal Financial Literacy.

I received an e-mail a few weeks ago from a bank in Arizona asking for material we have written. I had no idea who these people were. It turns out that the mother of my colleague, Kristen, had been talking about our center to her friends and one of these friends was contacting us to ask how to help.
When your parents talk about what you do and can relate to what you do, I think you are in a good job! And I don’t just mean Italian parents but also American parents.  

But we need more than passion for our research. We also need funding. Back in 2005, I submitted a letter of interest to a foundation for a new project on financial literacy. One afternoon, while in my office at Dartmouth, I received a phone call. It was the CEO of that foundation. In all of my time as a professor and in the many grants I had submitted, the CEO of a funding agency had never called me. I thought, "This is an organization I want to work with.”

My wish came true. I have been working with the National Endowment for Financial Education and Ted Beck ever since. We turn to him not just for funding, but also for his advice and wisdom. In keeping with my Italian tradition, I think of him as our godfather!

Thank you very much for this award … and for allowing me to take the stage. It was a good thing that I followed my mother’s advice and did not sing and dance. But, if you are interested in the other PISA, please let me know. I’m pretty sure I can arrange a tour.