On May 23, the Senate Committee on Banking, Housing, and Urban Affairs held a hearing on improving financial literacy. Chair Richard Shelby (R-AL) said, “Being literate in financial matters is critical to the success and freedom of this country…for Americans in any stage of life from those still in school to those managing their retirement it is critical to know how to understand credit, navigate the overly complex tax code, build wealth and assets and plan for contingencies. There is no stage in life where Americans can afford to be uninformed or uneducated on their personal financial matters.”
Sen. Daniel Akaka (D-HI) drew attention to the serious nature of the problem, testifying that in 2005, one bankruptcy petition was filed for every 60 households a 23 percent increase over 2004. He also told the committee that the personal saving rate of Americans was negative last year, leaving millions of working families susceptible to predatory lending, including high interest payday loans, high cost refund anticipation loans, and fraudulent credit counseling services.
Chair of the Federal Reserve Ben S. Bernanke and Chair of the Securities and Exchange Commission (SEC) Christopher Cox informed the committee about recent federal government initiatives to improve financial literacy. In May 2003, the Federal Reserve and its 12 reserve banks began participating in a multimedia initiative, “There’s a Lot to Learn about Money.” The initiative is designed to drive consumers to a toll-free number and/or website where they can access national, regional, and local financial education resources. Mr. Cox’s testimony included information on an upcoming “senior summit” where regulators and financial industry professionals will meet to discuss strategies for better protecting senior citizens from harmful investment advice. The SEC also is working closely with state regulators to protect older Americans from “ubiquitous ‘free lunch’ seminars aimed at convincing seniors to purchase complex and perhaps inappropriate financial products.”
Both Mr. Bernanke and Mr. Cox highlighted the very low levels of financial literacy among youth. They each cited statistics from the Jump$tart Coalition’s recent survey of over 5,500 high school students. The coalition found that fewer than half of respondents could demonstrate an understanding of the effect of inflation on savings. The survey also recorded a gap in financial literacy between minority and non-minority students: white students scored an average of 55 percent, African Americans scored 44.7 percent, and Hispanics scored 46.8 percent.
Chair Richard Shelby (R-AL) asked Mr. Bernanke if the complexity of the market and the increasing number of choices expand the risks associated with financial illiteracy. Mr. Bernanke said that the plethora of choices “makes shopping [for sound financial advice and products] much more difficult and really increases the premium on good financial literacy.” Ranking Member Paul Sarbanes (D-MD) asked Mr. Bernanke what more could be done to improve the work of the Financial Literacy and Education Commission, approved as part of the Fair and Accurate Credit Transactions Act of 2003 (P.L. 108-159) (see The Source,11/26/03), to improve financial literacy and education. He answered that the commission has been useful in identifying problems, but more work must be done to develop a “coherent national policy.” Mr. Bernanke also commended the commission’s recent work in producing a national strategy document.
President of the Women’s Institute for a Secure Retirement (WISER) Cindy Hounsell testified that low levels of financial literacy were particularly devastating for women. She told the committee that “women have unique retirement problems. The biggest risk is longevity, and with it, the risk of outliving assets. Women should be saving more money than men because they will need money to support themselves for about four more years than men on average.” Ms. Hounsell highlighted the difficulty of asking women to save more because two-thirds of working women make less than $30,000 annually and are much less likely to have a pension than men.
Ms. Hounsell went on to tell the committee “that people need better guidance for decision-making about determining when to retire, how much spendable income will be needed, where the money will come from, and how to make it last… many people make the mistake of retiring early—reducing their pension and Social Security benefits without having considered the future costs of medical insurance and prescription drugs.” Ms. Housell urged more outreach, emphasizing education targeting lower-income individuals; information to women about the consequences of spending lump-sum retirement distributions they receive upon leaving a job; the need for long-term care, widowhood, divorce, and other contingency planning; and continuing legal education for judges and lawyers regarding pension division at divorce.
Sara Telik, CEO of the Certified Board of Financial Planners, and Steven Brobeck, executive director of the Consumer Federation of America, testified that a lack of commitment to sound financial principles and planning, and poor resources are serious problems, too. Mr. Brobeck said, “Knowledge, though essential, is simply not enough. Consumers must value this knowledge and apply it, and there must be accessible opportunities for utilizing these skills.” He went on to give an example, saying, “Knowledge of payday loans is not sufficient if one does not have less expensive options available.” Ms. Telik analogized the current financial literacy problem to maintaining a healthy weight saying, “There is abundant and excellent information on exercise and diet… But all this interest and effort are having frustratingly few effects—largely because the effects depend on postponing gratification or denying gratification…Our problem is how to get people to deny themselves instant gratification and replace it with difficult behaviors designed to achieve goals that may not be reached in decades.”
