While the low levels of financial literacy discussed in my previous blogs are troubling in and of themselves, what is most important are the potential implications of financial illiteracy for economic behavior. One example is offered by an article Hogarth, Anguelov, and Lee published in 2005, that demonstrates that consumers with low levels of education are disproportionately represented amongst the “unbanked,” those lacking any kind of transaction account.
To examine how financial illiteracy is tied to economic behavior, Olivia Mitchell (Wharton School) and I used the questions we have devised for a special module for the 2004 Health and Retirement Study, and linked financial literacy to retirement planning. We found that those who are more financially knowledgeable are also much more likely to plan for retirement. Specifically, planners are most likely to know about interest compounding, which is clearly a critical variable to devise saving plans. Even after accounting for several demographic characteristics, such as education, marital status, number of children, retirement status, race, and sex, we still found that financial literacy plays an independent role: Those who understand compound interest and display basic numeracy are much more likely to have planned for retirement. This is important, since lack of planning is tantamount to lack of saving.
Other authors have also confirmed the positive association between knowledge and financial behavior. For example, in a paper jointly written with Maarten van Rooji and Rob and Alessie, we find that respondents who are more financially sophisticated are more likely to invest in stocks. John Campbell, from Harvard University, in his article published in the Journal of Finance in 2006 has highlighted how household mortgage decisions, particularly the refinancing of fixed-rate mortgages, should be understood in the larger context of ‘investment mistakes’ and their relation to consumers’ financial knowledge. This is a particularly important topic, given that most US families are homeowners and many have mortgages. In fact, many households are confused about the terms of their mortgages. Campbell also finds that younger, better-educated, better-off white consumers with more expensive houses were more likely to refinance their mortgages over the 2001-2003 period when interest rates were falling.
His findings are confirmed by Brian Bucks and Karen Pence, from the Board of Governors, who examine whether homeowners know the value of their home equity and the terms of their home mortgages. They show that many borrowers, especially those with adjustable rate mortgages, underestimate the amount by which their interest rates can change and that low-income, low-educated households are least knowledgeable about the details of their mortgages.
Further evidence of biases is provided by Victor Stango and Jonathan Zinman from Dartmouth College, who thoroughly document the systematic tendency of people to underestimate the interest rate associated with a stream of loan payments. The consequences of this bias are important: Those who underestimate the annual percentage rate (APR) on a loan are more likely to borrow and less likely to save.
Saturday, March 1, 2008
Wednesday, February 27, 2008
Financial illiteracy and debt
With the November elections rapidly approaching, millions of Americans are examining each candidate’s views on the country’s economic situation. Americans with unmanageable levels of debt, which, according to TNS’ survey, include over one in four Americans, will be particularly interested in candidates’ plans to help alleviate that burden. While strengthening family finances is a complex problem, one key element is financial literacy. The TNS survey, which includes questions that Peter Tufano (Harvard Business School) and I devised, found disturbing patterns of financial illiteracy and indebtedness:
Only 35 percent of respondents were able to correctly estimate how interest compounds over time
More than half of respondents did not understand how minimum payments are calculated and applied to a principal balance
Almost none of the respondents understood the financial difference between paying in monthly installments versus one lump sum at the end of a certain time period
The survey also explored Americans’ comfort with their personal debts. Respondents were asked if they felt they had too little debt, just the right amount, or too much debt. A sizable fraction of respondents (26 percent) report having too much debt and another 11 percent didn’t know if they did. While firms bombard Americans with credit card solicitations, only two percent of American wished they could borrow more. People who felt they had “too much debt” tended to be younger, with lower incomes and larger families. Beyond this, the over indebted did not understand the basic working of interest rates (this line did not read well). There is a strong link between financial illiteracy and excessive debt. Those who severely underestimate the power of interest compounding don’t understand how quickly debts can grow. They end up with more debt than they can handle.
What these findings show us is that financial illiteracy is pervasive. There is a widespread lack of financial know-how in America. This epidemic is not only prevalent in the low-income demographic. Excessive amounts of debt and personal financial worries may make consumers hold back on their spending.
About the Research
The study is based on a representative national sample of 1000 people aged 18+ in the TNS 6th Dimension Access Panel. The internet-based survey was conducted during the week of November 5, 2007.
Only 35 percent of respondents were able to correctly estimate how interest compounds over time
More than half of respondents did not understand how minimum payments are calculated and applied to a principal balance
Almost none of the respondents understood the financial difference between paying in monthly installments versus one lump sum at the end of a certain time period
The survey also explored Americans’ comfort with their personal debts. Respondents were asked if they felt they had too little debt, just the right amount, or too much debt. A sizable fraction of respondents (26 percent) report having too much debt and another 11 percent didn’t know if they did. While firms bombard Americans with credit card solicitations, only two percent of American wished they could borrow more. People who felt they had “too much debt” tended to be younger, with lower incomes and larger families. Beyond this, the over indebted did not understand the basic working of interest rates (this line did not read well). There is a strong link between financial illiteracy and excessive debt. Those who severely underestimate the power of interest compounding don’t understand how quickly debts can grow. They end up with more debt than they can handle.
What these findings show us is that financial illiteracy is pervasive. There is a widespread lack of financial know-how in America. This epidemic is not only prevalent in the low-income demographic. Excessive amounts of debt and personal financial worries may make consumers hold back on their spending.
About the Research
The study is based on a representative national sample of 1000 people aged 18+ in the TNS 6th Dimension Access Panel. The internet-based survey was conducted during the week of November 5, 2007.
Saturday, February 16, 2008
Financial education: Learning from other countries
The experiences of other countries offer important lessons for the United States. While the increase in individual responsibility that is required in the pension system we’re transitioning to (moving from Defined Benefit to Defined Contribution pensions) provides incentives for individuals to become knowledgeable and informed, one has to be cautious about relying simply on individual initiative. For example, lack of understanding of critical components of pensions is a persistent feature, even in economies where personal retirement accounts have been in place for many years.
In Chile, which adopted personal retirement accounts more than 25 years ago, there is a remarkably low level of knowledge about pensions. Only 69 percent of participants in the Chilean system indicate that they receive an annual statement summarizing past contributions and projecting future benefit amounts while, in fact, every participant is sent a statement. Less than half of the participants know how much they contribute to the system, even though the contribution rate has been set at 10 percent of pay since the system’s inception. Understanding of what workers have accumulated and how their assets are invested is also scanty. For example, just one-third of respondents stated knowing how their own money is invested, and only 16 percent can correctly identify which funds they hold (compared to administrative records).
In Sweden, which implemented comprehensive pension reform during the 1990s, transforming the old public defined benefit plan into a defined contribution plan and implementing a broad public information campaign, the level of knowledge is also not high. The cornerstone of communication of information to plan participants in Sweden is the Orange Envelope. The envelope is sent out annually and contains account information as well as a projection of benefits. Overall, three-fourths of all participants say they have opened the envelope, though only half report reading at least some of its content. Relying on self-reports of participants, chapter twelve documents that half of participants rate their knowledge of pensions as poor. Moreover, the share of respondents who report having a good understanding of the pension system has decreased over time. Measuring actual knowledge of the pension system from surveys that ask respondents about components of the system confirms the evidence provided by self-reports. Many participants are still unaware of the key principles regarding how benefits are determined and many overstate the importance of individual accounts.
Another problematic area for U.S. investors, which is validated in looking at the experiences of other countries, is knowledge of commissions and fees. High fees can prevent investors from accumulating adequately for retirement. However, fees can be easily overlooked. The experience of Chile provides compelling evidence that this is the case; only a minuscule fraction of pension participants (around 2 percent) seem to know the fees that are charged on their accounts.
The experience of Sweden further shows that when individuals are confronted with a very broad range of funds in which to invest—as many as 800—there can be a substantial increase in information and search costs. In fact, fewer than 10 percent of new participants in Sweden make an “active choice” and choose their portfolios. The large majority invest in a default fund. Thus, it is critically important to design defaults in a way that promotes wise portfolio allocation.
Moreover, widespread evidence of illiteracy is not unique to the United States, but is present throughout OECD (Organisation for Economic Co-operation and Development) countries. Importantly, illiteracy in all countries is particularly severe among certain groups, such as women, those with low income and education, and the elderly. This suggests that these groups are particularly vulnerable to many of the changes that are occurring in modern economies. It also suggests that it is possible to share programs across countries and develop international cooperation in efforts to develop effective financial education programs.
These topics are covered in more detail in my forthcoming book: Overcoming the saving slump: How to increase the effectiveness of financial education and saving programs, to be published by the University of Chicago Press.
In Chile, which adopted personal retirement accounts more than 25 years ago, there is a remarkably low level of knowledge about pensions. Only 69 percent of participants in the Chilean system indicate that they receive an annual statement summarizing past contributions and projecting future benefit amounts while, in fact, every participant is sent a statement. Less than half of the participants know how much they contribute to the system, even though the contribution rate has been set at 10 percent of pay since the system’s inception. Understanding of what workers have accumulated and how their assets are invested is also scanty. For example, just one-third of respondents stated knowing how their own money is invested, and only 16 percent can correctly identify which funds they hold (compared to administrative records).
In Sweden, which implemented comprehensive pension reform during the 1990s, transforming the old public defined benefit plan into a defined contribution plan and implementing a broad public information campaign, the level of knowledge is also not high. The cornerstone of communication of information to plan participants in Sweden is the Orange Envelope. The envelope is sent out annually and contains account information as well as a projection of benefits. Overall, three-fourths of all participants say they have opened the envelope, though only half report reading at least some of its content. Relying on self-reports of participants, chapter twelve documents that half of participants rate their knowledge of pensions as poor. Moreover, the share of respondents who report having a good understanding of the pension system has decreased over time. Measuring actual knowledge of the pension system from surveys that ask respondents about components of the system confirms the evidence provided by self-reports. Many participants are still unaware of the key principles regarding how benefits are determined and many overstate the importance of individual accounts.
Another problematic area for U.S. investors, which is validated in looking at the experiences of other countries, is knowledge of commissions and fees. High fees can prevent investors from accumulating adequately for retirement. However, fees can be easily overlooked. The experience of Chile provides compelling evidence that this is the case; only a minuscule fraction of pension participants (around 2 percent) seem to know the fees that are charged on their accounts.
The experience of Sweden further shows that when individuals are confronted with a very broad range of funds in which to invest—as many as 800—there can be a substantial increase in information and search costs. In fact, fewer than 10 percent of new participants in Sweden make an “active choice” and choose their portfolios. The large majority invest in a default fund. Thus, it is critically important to design defaults in a way that promotes wise portfolio allocation.
Moreover, widespread evidence of illiteracy is not unique to the United States, but is present throughout OECD (Organisation for Economic Co-operation and Development) countries. Importantly, illiteracy in all countries is particularly severe among certain groups, such as women, those with low income and education, and the elderly. This suggests that these groups are particularly vulnerable to many of the changes that are occurring in modern economies. It also suggests that it is possible to share programs across countries and develop international cooperation in efforts to develop effective financial education programs.
These topics are covered in more detail in my forthcoming book: Overcoming the saving slump: How to increase the effectiveness of financial education and saving programs, to be published by the University of Chicago Press.
Sunday, February 10, 2008
Financial education: Does it work?
As additional evidence that financial illiteracy is considered a severe impediment to saving, both the government and employers have promoted financial education programs. Most large firms, particularly those with DC pensions, offer some form of education program. The evidence on the effectiveness of these programs is so far very mixed. Only a few studies find that those who attend a retirement seminar are much more likely to save and contribute to pensions. Clearly, those who attend seminars are not necessarily a random group of workers. Because attendance is voluntary, it is likely that those who attend have a proclivity to save and it is hard to disentangle whether it is seminars, per se, or simply the characteristics of seminar attendees that explain the higher savings of attendees shown in the empirical estimates. However, a study by Bernheim and Garrett published in 2003 argue that seminars are often remedial, i.e., offered in firms where workers do little or no saving. Thus, the effects of seminars may have been underestimated.
My own work uses data from the Health and Retirement Study and confirms the findings of Bernheim and Garrett. Consistent with the fact that seminars are remedial, she finds that the effect of seminars is particularly strong for those at the bottom of the wealth distribution and those with low education. Retirement seminars are found to have a positive effect mainly in the lower half of the wealth distribution and particularly for those with low education. Estimated effects are sizable, particularly for the least wealthy, for whom attending seminars appears to increase financial wealth (a measure of retirement savings that excludes housing and business equity) by approximately 18 percent. Note also that seminars affect not only private wealth but also measures of wealth that include pensions and Social Security wealth, perhaps because seminars provide information about pensions and encourage workers to participate and contribute. This can be important because workers are often uninformed about their pensions.
In a series of papers, Robert Clark and Madeleine D’Ambrosio have examined the effects of seminars offered by TIAA-CREF to a variety of institutions. The objective of the seminars is to provide financial information that would assist individuals in the retirement planning process. Their empirical analysis is based on information obtained in three surveys: participants completed a first survey prior to the start of the seminar, a second survey at the end of the seminar, and a third survey several months later. Respondents were asked whether they had changed their retirement age goals or revised their desired level of retirement income after the seminar. After attending the seminar, several participants stated they intended to change their retirement goals and many revised their desired level of retirement income. Thus, the information provided in the seminars does have some effect on behavior. However, it was only a minority of participants who were affected by the seminars. Just 12% of seminar attendees reported changes in retirement age goals, and close to 30% reported changes in retirement income goals. Moreover, intentions did not translate into actions. When interviewed several months later, many of those who had intended to make changes had not implemented them yet.
Other papers find more modest effects of education programs. Duflo and Saez, in a paper published in 2003, investigate the effects of exposing employees of a large not-for-profit institution to a benefit fair. This study is notable for its rigorous methodology; a randomly chosen group of employees were given incentives to participate in a benefit fair, and their behavior was compared with that of a similar group in which individuals were not offered any incentives to attend the fair. This methodology overcomes the problem mentioned before that those who attend education programs may already be inclined to save. This is clearly important, and findings from this study show that benefit fair attendance induced participants to increase participation in pensions, but the effect on saving was almost negligible. Perhaps the most notable result of this study is how pervasive peer effects are: not only benefit fair attendees but also their colleagues who did not attend were affected by it, providing further evidence that individuals rely on the behaviors of those around them to make financial decisions.
Given the extent of financial illiteracy, it is not surprising that exposing individuals to a benefit fair or offering workers one hour of financial education does little to improve saving. To be effective, programs have to be tailored to the size of the problem they are trying to solve. While it is not possible to transform low literacy individuals into financial wizards, it is feasible to emphasize simple rules and good financial behavior, such as diversification, exploitation of the power of interest compounding, and taking advantage of tax incentives and employers’ pension matches. Another potential role of financial education is to help individuals assess their abilities to make saving and investment decisions and perhaps make them appreciate the value of financial advice or equip them with tools to deal effectively with advisors and financial intermediaries.
So, my answer is : yes, financial education works, but we can make it more effective.
My own work uses data from the Health and Retirement Study and confirms the findings of Bernheim and Garrett. Consistent with the fact that seminars are remedial, she finds that the effect of seminars is particularly strong for those at the bottom of the wealth distribution and those with low education. Retirement seminars are found to have a positive effect mainly in the lower half of the wealth distribution and particularly for those with low education. Estimated effects are sizable, particularly for the least wealthy, for whom attending seminars appears to increase financial wealth (a measure of retirement savings that excludes housing and business equity) by approximately 18 percent. Note also that seminars affect not only private wealth but also measures of wealth that include pensions and Social Security wealth, perhaps because seminars provide information about pensions and encourage workers to participate and contribute. This can be important because workers are often uninformed about their pensions.
In a series of papers, Robert Clark and Madeleine D’Ambrosio have examined the effects of seminars offered by TIAA-CREF to a variety of institutions. The objective of the seminars is to provide financial information that would assist individuals in the retirement planning process. Their empirical analysis is based on information obtained in three surveys: participants completed a first survey prior to the start of the seminar, a second survey at the end of the seminar, and a third survey several months later. Respondents were asked whether they had changed their retirement age goals or revised their desired level of retirement income after the seminar. After attending the seminar, several participants stated they intended to change their retirement goals and many revised their desired level of retirement income. Thus, the information provided in the seminars does have some effect on behavior. However, it was only a minority of participants who were affected by the seminars. Just 12% of seminar attendees reported changes in retirement age goals, and close to 30% reported changes in retirement income goals. Moreover, intentions did not translate into actions. When interviewed several months later, many of those who had intended to make changes had not implemented them yet.
Other papers find more modest effects of education programs. Duflo and Saez, in a paper published in 2003, investigate the effects of exposing employees of a large not-for-profit institution to a benefit fair. This study is notable for its rigorous methodology; a randomly chosen group of employees were given incentives to participate in a benefit fair, and their behavior was compared with that of a similar group in which individuals were not offered any incentives to attend the fair. This methodology overcomes the problem mentioned before that those who attend education programs may already be inclined to save. This is clearly important, and findings from this study show that benefit fair attendance induced participants to increase participation in pensions, but the effect on saving was almost negligible. Perhaps the most notable result of this study is how pervasive peer effects are: not only benefit fair attendees but also their colleagues who did not attend were affected by it, providing further evidence that individuals rely on the behaviors of those around them to make financial decisions.
Given the extent of financial illiteracy, it is not surprising that exposing individuals to a benefit fair or offering workers one hour of financial education does little to improve saving. To be effective, programs have to be tailored to the size of the problem they are trying to solve. While it is not possible to transform low literacy individuals into financial wizards, it is feasible to emphasize simple rules and good financial behavior, such as diversification, exploitation of the power of interest compounding, and taking advantage of tax incentives and employers’ pension matches. Another potential role of financial education is to help individuals assess their abilities to make saving and investment decisions and perhaps make them appreciate the value of financial advice or equip them with tools to deal effectively with advisors and financial intermediaries.
So, my answer is : yes, financial education works, but we can make it more effective.
Tuesday, January 29, 2008
The Newly Created Advisory Council on Financial Literacy
President Bush announced last week the creation of the Advisory Council on Financial Literacy
More information is available on the White House web page:
http://www.whitehouse.gov/news/releases/2008/01/20080122-7.html
Operating under the guidance of the U.S. Treasury Department with the specific charge of keeping America competitive and assisting citizens in understanding and addressing financial matters, the 19-member council will focus exclusively on economic empowerment issues. Their duties will include advising the president and Treasury Secretary on such goals as improving financial education efforts for students and adults in the workplace, and establishing effective measures of
national financial literacy, and promoting effective access to financial
services, especially for those without access to such services.
This is a very important step. Financial literacy is sorely lacking in this country and it is urgent to address this issue. The hope is that the council will get to work right away!
More information is available on the White House web page:
http://www.whitehouse.gov/news/releases/2008/01/20080122-7.html
Operating under the guidance of the U.S. Treasury Department with the specific charge of keeping America competitive and assisting citizens in understanding and addressing financial matters, the 19-member council will focus exclusively on economic empowerment issues. Their duties will include advising the president and Treasury Secretary on such goals as improving financial education efforts for students and adults in the workplace, and establishing effective measures of
national financial literacy, and promoting effective access to financial
services, especially for those without access to such services.
This is a very important step. Financial literacy is sorely lacking in this country and it is urgent to address this issue. The hope is that the council will get to work right away!
Saturday, January 19, 2008
Finance Literacy and Women
The decision of how much to save for retirement is a complex one, as it requires collecting and processing information on a large set of variables including Social Security and pensions, inflation, and interest rates, to name a few, and also making predictions about future values of these variables. It is also necessary for the consumer to understand compound interest, inflation, financial markets, mortality tables, and more. Nevertheless, little research has asked exactly how households make saving decisions, how they overcome the difficulty of making those decisions, and whether they are financially literate enough to make well-informed choices. These topics are of paramount importance, particularly when older households are increasingly required to take responsibility for investing and allocating their pension wealth. This is a particular concern for women, who tend to live longer than men and have shorter work experiences and lower earnings.
To gain insight into how households make saving decisions, Olivia Mitchell and I devised a module on planning and financial literacy for the 2004 Health and Retirement Study. The module includes three questions on financial literacy, as follows:
1. 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: more than $102, exactly $102, less than $102?
2. Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, would you be able to buy more than, exactly the same as, or less than today with the money in this account?
3. Do you think that the following statement is true or false? Buying a single company stock usually provides a safer return than a stock mutual fund.
The first two questions, which we refer to as “Interest Rate” and “Inflation,” help evaluate whether respondents display knowledge of fundamental economic concepts and basic numeracy. The third question, which we refer to as “Risk Diversification,” evaluates respondents’ knowledge of risk diversification, a crucial element of an informed investment decision
The responses to these three questions among a sample of 785 women age 50+ in the 2004 HRS module on planning and literacy indicate widespread illiteracy. Only 61.9 percent of women correctly answered the interest rate calculation question. This is a relatively easy question, so it is surprising that so many were unable to respond correctly, particularly because these older women have most likely made numerous decisions involving interest rates over their lifetimes (e.g. credit card rates, mortgage financing rates, etc). Respondents were more accurate about the inflation question, with 70.6 percent answering correctly. By contrast, only 47.6 percent of the women respondents knew that holding a single company stock implies a riskier investment than a stock mutual fund.
Note also that only less than half of all respondents could answer correctly both the interest rate and inflation questions. This is a remarkably low ratio, taking into account the complex financial calculations that households on the verge of retirement have almost surely engaged in over their lifetimes. Also disturbing is the fact that only 29 percent of respondents could answer all three questions correctly.
These findings raise concerns about the ability of women to make sound saving and investment decisions over a long retirement period. In an environment where individuals rather than employers and governments are charged with handing retirement finances, it is essential that consumers become more financially literate in order to be more successful at retirement.
To gain insight into how households make saving decisions, Olivia Mitchell and I devised a module on planning and financial literacy for the 2004 Health and Retirement Study. The module includes three questions on financial literacy, as follows:
1. 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: more than $102, exactly $102, less than $102?
2. Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, would you be able to buy more than, exactly the same as, or less than today with the money in this account?
3. Do you think that the following statement is true or false? Buying a single company stock usually provides a safer return than a stock mutual fund.
The first two questions, which we refer to as “Interest Rate” and “Inflation,” help evaluate whether respondents display knowledge of fundamental economic concepts and basic numeracy. The third question, which we refer to as “Risk Diversification,” evaluates respondents’ knowledge of risk diversification, a crucial element of an informed investment decision
The responses to these three questions among a sample of 785 women age 50+ in the 2004 HRS module on planning and literacy indicate widespread illiteracy. Only 61.9 percent of women correctly answered the interest rate calculation question. This is a relatively easy question, so it is surprising that so many were unable to respond correctly, particularly because these older women have most likely made numerous decisions involving interest rates over their lifetimes (e.g. credit card rates, mortgage financing rates, etc). Respondents were more accurate about the inflation question, with 70.6 percent answering correctly. By contrast, only 47.6 percent of the women respondents knew that holding a single company stock implies a riskier investment than a stock mutual fund.
Note also that only less than half of all respondents could answer correctly both the interest rate and inflation questions. This is a remarkably low ratio, taking into account the complex financial calculations that households on the verge of retirement have almost surely engaged in over their lifetimes. Also disturbing is the fact that only 29 percent of respondents could answer all three questions correctly.
These findings raise concerns about the ability of women to make sound saving and investment decisions over a long retirement period. In an environment where individuals rather than employers and governments are charged with handing retirement finances, it is essential that consumers become more financially literate in order to be more successful at retirement.
Tuesday, January 8, 2008
Where do presidential candidates stand in terms of policies for financial literacy?
As people in New Hampshire cast their votes today, it is important to know where presidential candidates stand in terms of financial literacy policies. To that aim, together with the Networks Financial Institute we have sent the following letter to all presidential candidates:
Dear Presidential Candidate:
In recent days, the state of the economy has surpassed the war in the Iraq as the number-one concern of American voters. Networks Financial Institute at Indiana State University, in collaboration with Dartmouth College professor Annamaria Lusardi, is writing to ask how you, as President, would take steps to help more Americans make sound financial decisions.
The need to improve our citizens' financial literacy has gained recognition as Americans save less, spend the majority of their disposable income, and incur rising levels of debt. Data at both the national and state levels indicate that consumer financial knowledge is at an all-time low, which suggests our nation is now facing a financial literacy crisis. Consider the following:
i) the U.S. savings rate has been extremely low for several years;
ii) home foreclosures nationwide are rising very rapidly and are expected to continue to do so for the next year;
iii) the average American with at least one credit card owes nearly $9,000.
Aggravating the situation are a host of business and social factors including vigorous growth in the sub-prime lending industry, a proliferation of “pay day lending” companies and even an increasing array of credit products marketed to the “tween” demographic market. Our educational system has assumed that students will learn the necessary financial skills from their parents, while statistics show that the majority of our nation's adults lack sound financial skills themselves. Given these circumstances we would like to pose the following questions for your response.
First, the economic well-being of Americans increasingly depends upon making good decisions about complex subjects such as student loans, retirement saving, home ownership, and many others. Do you believe that the federal government has a role in improving the financial literacy of our citizens?
Second, educational research has shown that the foundation for learning core subjects like reading and math occurs during the early grades. Our research revealed that only 38% of elementary school teachers and only 52% of teachers in all grades across the nation address financial literacy in their classrooms, citing a lack of time and educational standards as their main obstacles. Do you support the development of national financial literacy standards to help educators prepare the next generation of consumers?
Thank you for addressing these questions.
Sincerely,
Elizabeth Coit
Networks Financial Institute
Annamaria Lusardi
Dartmouth College
I will post the replies as soon as we receive them.
Dear Presidential Candidate:
In recent days, the state of the economy has surpassed the war in the Iraq as the number-one concern of American voters. Networks Financial Institute at Indiana State University, in collaboration with Dartmouth College professor Annamaria Lusardi, is writing to ask how you, as President, would take steps to help more Americans make sound financial decisions.
The need to improve our citizens' financial literacy has gained recognition as Americans save less, spend the majority of their disposable income, and incur rising levels of debt. Data at both the national and state levels indicate that consumer financial knowledge is at an all-time low, which suggests our nation is now facing a financial literacy crisis. Consider the following:
i) the U.S. savings rate has been extremely low for several years;
ii) home foreclosures nationwide are rising very rapidly and are expected to continue to do so for the next year;
iii) the average American with at least one credit card owes nearly $9,000.
Aggravating the situation are a host of business and social factors including vigorous growth in the sub-prime lending industry, a proliferation of “pay day lending” companies and even an increasing array of credit products marketed to the “tween” demographic market. Our educational system has assumed that students will learn the necessary financial skills from their parents, while statistics show that the majority of our nation's adults lack sound financial skills themselves. Given these circumstances we would like to pose the following questions for your response.
First, the economic well-being of Americans increasingly depends upon making good decisions about complex subjects such as student loans, retirement saving, home ownership, and many others. Do you believe that the federal government has a role in improving the financial literacy of our citizens?
Second, educational research has shown that the foundation for learning core subjects like reading and math occurs during the early grades. Our research revealed that only 38% of elementary school teachers and only 52% of teachers in all grades across the nation address financial literacy in their classrooms, citing a lack of time and educational standards as their main obstacles. Do you support the development of national financial literacy standards to help educators prepare the next generation of consumers?
Thank you for addressing these questions.
Sincerely,
Elizabeth Coit
Networks Financial Institute
Annamaria Lusardi
Dartmouth College
I will post the replies as soon as we receive them.
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