Financial Literacy: Implications for Retirement Security and the Financial Marketplace

Olivia Mitchell and I organized a conference at Wharton last Thursday and Friday, April 29–30, titled “Financial Literacy: Implications for Retirement Security and the Financial Marketplace.” This seems a good way to end Financial Literacy Month and reflect on the importance and role of financial literacy.

There are 3 ingredients to a successful conference: (1) good people, (2) good papers, and (3) good food. We provided a good lunch and we had dinner, surrounded by Chinese art, in a large hall in the University of Pennsylvania museum. But the people and papers were more than good, and I left Philadelphia with a lot of ideas and projects I want to pursue.

Our keynote speaker, who opened the conference, was Michelle Greene, the Deputy Assistant Secretary for Financial Education and Financial Access at the U.S. Treasury. She told the audience about the initiatives and the approach of the office she heads at the U.S. Treasury. Several things resonated with me. She stressed the importance of evidence-based policies and cited several studies, from the FINRA Financial Capability Survey to the FDIC Survey of Unbanked and Underbanked Households. She also stressed that the U.S. Treasury wants to put financial education where it works and where it is most needed. In my view, these criteria are not only critically important but also offer a way for research to make a real difference and to impact policy. She discussed the work that the Treasury is doing with state and local governments and with the private and nonprofit sectors. This is a reminder that while we need a national financial literacy policy, a lot of work is done at the local level, thus a grassroots approach when dealing with financial literacy is important. The U.S. Treasury is also coordinating the many federal agencies that are doing financial education programs. I was particularly pleased to know that the White House has joined the Financial Literacy and Education Commission and, in particular, that the White House Council on Women and Girls has become involved in financial literacy. As I have mentioned in many of my blogs, there is a real need to focus attention on women and girls and to address the existing gender gap in financial literacy. Michelle also mentioned that the website has been revamped. This is the website to go to obtain financial information, and, again, I cannot stress enough the importance of having a trusted and independent source of information to rely on.

The papers that were presented at the conference spanned many topics. Some documented individuals’ financial mistakes. While the experience with subprime mortgages has made us acutely aware of the problem of financial errors, evidence about the use of credit cards and payday loans adds reasons to worry about the behavior of households who use high-cost methods of borrowing. Families have also started to borrow from their 401(k) plans, i.e., they are now borrowing from themselves and the money they have put away for retirement. And financial literacy seems to be a contributing factor: those with low levels of financial literacy are found to be more likely to borrow from themselves. Low literacy is also found to keep people from investing in the stock market. While one has to understand and be aware of the risks of investing in stocks, it is problematic to shy away from the stock market, particularly when investing for the long run. Moreover, when selecting a pension fund from a menu of possible offerings, those with low financial literacy are shown to rely more on the advice of employers, friends, and coworkers than on cost fundamentals. Those with low financial literacy are also more sensitive to how information is framed when interpreting the relative benefits of different investment choices. Given the choices that people have to make on their DC (defined contribution) pensions, these are worrisome findings.

Other papers documented other aspects of financial literacy. For example, when surveyed individuals are asked to rank their own financial knowledge, many give themselves high rankings, yet responses to a set of financial literacy quiz questions result in relatively low scores for many individuals. This type of overconfidence can negatively influence financial behavior.

Still other papers looked at the effectiveness of financial education initiatives provided by employers or by counseling agencies. Paraphrasing Michelle Greene’s message, we need these studies and rigorous evaluations of financial education programs to be able to allocate our resources to where they are needed, to where programs are proven to work!

The conference did not focus on the U.S. experience only. The retirement commissioner from New Zealand described some of the successful strategies that have been used to promote financial literacy among Kiwis (I mean the citizens of New Zealand, not those delicious fruits). The OECD has been a pioneer in promoting financial literacy and financial education programs and has worked on this topic since 2003. They have been not only a major force behind many important initiatives but are also working on promoting financial literacy in many emerging nations, from India to China to Latin America. Most importantly, they are serving as the coordinator of the activities that many countries are engaging in and serve as a clearinghouse for data and information. The World Bank has recently joined that effort and is devoting resources and expertise to promoting financial literacy among developing countries; in my view, an important and necessary effort.

In the closing panel, one representative of the Social Security Administration remarked that “he had not heard yet that financial literacy hurts.” I would very much agree that there are no obvious downsides to financial literacy.

We ended the conference with a quote that Michelle Greene had included in her presentation slides. She cited President Obama, who said, “If you work hard your whole life, you ought to have every opportunity to retire with dignity and financial security.” We hope that the government, academics, the financial community, and not-for-profit institutions will all work to make that opportunity possible.