National Strategies for Addressing Financial Literacy

Source: AARP Press Center | July 21, 2005

I want to thank Dan Iannicola and Shaun Mundy for outlining our two countries' national strategies to address financial literacy. It's encouraging to see that both governments take this problem seriously.

Lois Vitt and Janet Hill also have done magnificent work presenting the current state of financial education in the U.S. and the UK respectively. We at AARP (specifically our Economic Security Group) commissioned Lois' report because we recognize this challenge and want to be a part of the solution. On both sides of the Atlantic, we clearly have a lot of work to do…but also the will and the expertise to get it done.

The American dancer Fred Astaire once said: "Old age is like everything else. To make a success of it, you've got to start young." To ensure economic security in old age, the planning has to begin at an early age, when—let's face it—it's pretty tempting to use extra money to splurge on a new toy.

At the same time that we bring this message of long-term financial planning to young people, we mustn't forget about those for whom the problem isn't long-term at all. There are millions of aging boomers who are well behind the retirement planning curve and running out of time. So in addition to introducing financial education into the school curriculum, we have to find effective ways to reach an older population.

This isn't your father's retirement. It used to be simple. You worked for one company your whole career; they paid into your pension fund; you retired with a comfortable sum that allowed you to enjoy the golden years.

Given that these defined benefit pensions have given way to the risk and uncertainty of the defined contribution system, it's inconceivable to me that we would also consider introducing the same risk and uncertainty into Social Security, as the proposed private accounts would do. So many Americans don't have the time or resources to handle a private investment portfolio; why would we eliminate the one guaranteed, worry-free, lifelong benefit and force people to manage their Social Security assets as well?

Now suddenly, people are being asked to more responsibility for their own retirement planning. Which is fine in theory, except that they're being thrust into a very complex consumer market, one involving all kinds of jargon, paperwork and fine print, and one where the consequences of a misstep can be truly disastrous. Confronted by an overwhelming and confusing information glut—20,000 investment adviser firms in the U.S.; more than 8,000 different mutual funds—a lot of people are simply throwing up their hands and tuning out.

Consumer choice is undeniably a good thing, but there is such a thing as too much of a good thing. Health plans…utilities... long-distance phone service—suddenly we have a menu of options for all these things, and it can frankly become a bit much.

A psychologist named Barry Schwartz wrote a book called The Paradox of Choice in which he describes this phenomenon. He relates a story of going to buy a new pair of jeans and being bombarded with different varieties—easy fit, button fly, stonewashed, etc. "I just want regular jeans," Schwartz told the saleswoman. "You know, the kind that used to be the only kind."

I think a lot of people feel that way about their investments: 401(k)... Roth IRA... no-load mutual fuinds... give me the kind that used to be the only kind.

AARP did some research last year in which we measured American consumers' money-managing skills. 38 percent of Americans and nearly half of seniors scored poorly both in terms of financial product ownership and prudent financial behavior. They are, as we put it in the study, lost.

There is some good news to report about financial education. The topic is at least on the national radar screen. There has been, as Lois Vitt says "a sea change from the complacency" that existed as recently as 5 years ago. Even if not everyone has a 401(k), they at least are familiar with the concept and vaguely aware of its importance.

We must continue the partnerships and the programs that have worked. There have been documented successes with employers offering financial education to their employees. And financial counseling in conjunction with the purchase of a new home has also worked in many cases.

Financial education must be well-targeted to the most vulnerable populations—immigrants and ethnic minorities; women (as you'll hear about in the next session); adults over 50, for whom retirement is on the horizon; and adults under 30, for whom retirement is a lot closer than it seems.

As we outlined in AARP's "Report to the Nation on Consumers in the Marketplace", we need to attack this problem on the demand and the supply side. Yes, consumers must learn to become better financial managers, but the burden shouldn't be entirely on them. The information they receive must also be clear, well-labeled and transparent. And to prevent fraud, exploitation and predatory lending, policymakers must ensure strong oversight and enforcement of our investor protection laws and regulations.

When it comes to financial education, we've got to do more than print a few more pamphlets. We can't take the throw-it-on-the-wall-and-see-what-sticks approach. We have to be thorough and strategic. We have to take advantage of so-called "teachable moments." We must use different methods for different types of people—some acquire most of their information through their church; the Internet is a good medium for reaching some consumers but not others.

At the end of the day, however, we won't achieve true financial literacy without a genuine shift in societal habits and mores. Our low savings and high household debt rates aren't just economic happenstance; they are the direct result of an instant gratification culture.

Think about how the baby boomers have approached the finances of homeownership, compared to their parents. The generation that lived through the depression was painstakingly cautious (sometimes to a fault), averse to debt and obsessed with paying off the house. Meanwhile, the boomers treat their house like an ATM. The refinancing craze of the last few years has seen Americans take out nearly $500 billion in home equity.

We're on a borrow-and-spend binge that is unsustainable in the long run. Unscrupulous lenders are all but handing out cash on the street. Before long, they'll be offering credit in utero. You can go down the street to Starbucks and charge your four-dollar latte without even having to sign.

So while we must have better information with specific instructions about wise investing, I think we need to be working on the right brain as well as the left brain. We have to address the "why" of financial management, not just the "how."

We're losing the information battle to people who urge us to eat all our dessert but none of our vegetables. They have celebrity spokespeople, catchy slogans, and homespun images that associate debt with taking your child to a ballgame. We need our own aggressive public service campaign—using efforts like EBRI's "Choose to Save" as a model - to encourage savings and discourage unwise debt. It's a tough love message that's not easy to sell, but it worked with smoking and it can work here too.

We could co-opt the tagline employed—ironically enough—by a prominent credit card company. A nest egg for retirement... The security of a rainy day fund... A little something to pass on to your children and grandchildren... Now that's priceless.

Thank you very much.