Federal Reserve Governor Elizabeth Duke told an audience that while financial education has always been important in helping consumers make better economic decisions, the recent economic crisis has shifted the playing field, making financial education even more critical.
Duke spoke at a conference on the "Future of Life-Cycle Saving and Investing" co-sponsored by Boston University School of Management and the Boston Federal Reserve Bank.
Because of the financial crisis, many families have fewer financial resources and options. As a result the pace and timing of their saving and investing life cycle have been disrupted. For example, unemployment levels among recent graduates are high and starting salaries have declined. This means that the young will have to delay the start of saving and investing and they are living at home longer, often disrupting their parents' budgets.
Many consumers who should be saving for retirement are doing the opposite. A Vanguard study showed that hardship withdrawals from 401(k)s increased by 49 percent between 2005 and 2010 and other types of withdrawals increased by 56 percent.
At the same time, the responsibility for retirement savings is shifting from the employer to the employee and individuals are being forced to change retirement plans. The Social Security Administration reports that in 2009 and 2010, the proportions of persons claiming benefits at age 62 began to rise after several years of decline most likely because of the weak job market. "Opting to receive a smaller social security annuity earlier in life is just one of many hard decisions Americans have had to make in order to balance their short-term and long-term financial needs," Duke said. All of this makes it more important that individuals have an understanding of what they need in retirement and their investment options.
Disruptions make the always difficult task of managing one's longevity risk harder and require a level of financial knowledge other generations have not needed. Millions of older households will need to assess their pension distributions and make decisions about payout options for their defined benefit plans or about purchasing of annuities. Younger workers, who will probably not have pensions, will face complicated decisions about what they will need in retirement and how to get there; all done in a world of increasingly more complex retirement products.
"In short," Duke told the audience of educators, "your efforts to identify, address, and meet the financial education needs of consumers in all stages of the life-cycle have never been more urgent."
The financial crisis has changed all of our assumptions about the future and consequently consumer behavior is also changing. It is unclear whether these changes represent temporary or more permanent shifts in thinking and planning for the future but, as an example, consumers are continually changing their attitudes toward homeownership as the housing crisis evolves along with developments in the broader economy. FULL STORY
Consumers appear to be increasingly disconnected from mainstream financial services; more likely to use alternative products such as reloadable stored-value cards rather than credit cards. These don't carry the same federal protections as credit or debit cards and do not establish a relationship with a financial institution for other purposes such as checking accounts or auto loans.
"As more and more new products are introduced to the financial marketplace, it becomes more important for consumers to be able to evaluate and compare products' benefits and potential costs," Duke said.
The basic skills for navigating the financial world are developed in school so it is important to include skills in numeracy, language arts and decision making in curriculum and measure them by testing. "I also think that the work many of you are doing to make financial lessons more appealing to school aged children is extremely important given the competition for attention from media and web-based entertainment and games."
Financial education is a life-long endeavor. Consumers need clear and relevant financial information at critical "teachable" moments such as when buying a car or planning for retirement. Educators have to identify as many of these moments as possible and determine how to best support positive outcomes as those moments.
How financial education is delivered has a significant impact on its effectiveness. New technologies present exciting opportunities to deliver timely financial lessons and the technology such as apps for smart phones is making it possible to get information instantly. Duke said she is particularly interested in how technology can better serve lower-income populations who might be more interested in stretching their paycheck than in investing it.
Duke cited several studies that evaluated the effectiveness of specific education programs but said "the fact is that we have very limited data on how effective financial education is in improving financial well-being. The Financial Literacy and Education Commission, of which the Federal Reserve is a member, has only recently developed a core set of financial competencies, and has yet to establish the knowledge, skills, and behaviors that will meet these competencies." She suggested the need to answer some important research questions:
- What do people need to know to improve their long-term economic well-being and how does that vary by demographic groups?
- How do people obtain and process financial information? What sources do they use? Do outcomes vary by the source or timing of the information?
- Can we merely impart knowledge to improve outcomes or do we need to change consumer behavior as well? How can policymakers do this?
- How should we measure financial literacy to evaluate its impact on financial outcomes and predict future behavior and well-being?
Duke concluded by stressing the effect decisions about saving and investing have on the financial well-being of individual consumers and our national economic outcomes. Comprehensive, effective regulation of consumer products is the first step in ensuring positive outcomes for consumers, but consumers must also be equipped with the tools and information to make the best choices. For all the attention and resources that have been devoted to financial education we have very little information about the effectiveness of our effort.
