In mid-March, I attended “Financial Literacy and the Educated American” at The American Academy of Arts and Sciences. It attracted a diverse group of academics, federal and state government officials and interested professionals from business and non-profit organizations.
The US Department of Labor and General Accounting Office, the Federal Reserve Bank of New York, Harvard University, Oxford University, Boston College and George Washington University, Vanguard and Putnam Investments, FINRA and AARP (and, of course, Sensible Financial®!) all sent representatives.
I came across a practical idea that you can apply in your own life. The President’s Advisory Council on Financial Capability has a new website – www.moneyasyougrow.org. The site has specific, simple and powerful ideas for parents or grandparents interested in teaching younger members of their families about money and finance. I think it’s worth a look.
In addition, I identified several themes:
- Many participants worry about Americans’ financial literacy and financial situations. Many Americans believe they have too much debt, much of it unpaid medical bills, credit card debt and student loans. Many workers worry about their insurance protection and their ability to pay their bills. Many take time off or spend time at work to deal with personal finance issues. Very few lower income households seem to be saving enough for retirement.
- We heard several ideas about how to improve financial literacy through education. Some think high schools should teach a financial literacy course. Others believe that high schools and colleges should include more personal finance issues in math and other courses.
- Unfortunately, no one has yet shown that financial education helps to improve either literacy or financial behavior. Until we can be confident that financial education works, high schools and higher education institutions are unlikely to do more of it.
- Several participants focused on “behavioral finance”. Behavioral finance focuses on people’s irrational thinking about money and financial issues. (Nudge, by Richard Thaler and Cass Sunstein, provides an interesting and accessible introduction. The approach runs somewhat counter to education and literacy. Instead, it tries to modify the financial environment so that incompletely rational people will make better choices.) If your 401(k) plan offers automatic enrollment or automatic increases in your contributions, you have seen this approach in action. The conference reports suggest it helps to increase plan participation and savings.
- One participant suggested that behavioral finance applications are less effective than adherents believe. In particular, 401(k) plan participants tend to “undo” some of the “extra” participation and savings by withdrawing more.
- In short, while the conference was very stimulating, I am sad to say that “the answer” is not yet in view.