And another pearl of wisdom from the Fed's uberthinkers, in this case Elizabeth Duke: "the recent increase in gasoline prices has affected consumer choices in housing and other purchases, big and small. Family incomes have not kept pace with rising costs and many families, particularly those with low-to-moderate incomes, are actually facing the decision between buying gas to drive long distances to work and paying their mortgage. During the housing boom, when gas prices were much lower, potential homebuyers moved steadily farther away from employment centers in search of more affordable homes. This was referred to as the "drive till you qualify" method of home buying. Foreclosures remain high in these areas where the cost of driving to work has become so great." At least America's poor can still afford to buying deflating iPads... And after all didn't they said QE2 was a success for everyone? Or maybe the recent Philly Fed finding that lower and middle class families are actually suffering under the QE2 mandate, much in line with expectations of everyone who is not a Princeton economics professor or alumnus, are finally being validated. Oh well, this is nothing that a little QE3 can't fix. And some more thoughts from a Ph.D. in Captain Obviousness: "the collapse of housing prices and resulting worker immobility has changed consumers' appetite for homeownership. In Fannie Mae's 2010 Own-Rent Analysis, the percentage of respondents who said they were more likely to rent their next home than buy climbed from 30 percent in January to 33 percent in December of the same year." It's insight like that that explains why those Fed governors get paid the big Bernankebux.
Full Duke Speech:
Research, Policy, and the Future of Financial Education
I would like to thank Eric Rosengren, President of the Federal
Reserve Bank of Boston, for inviting me to speak to you today. This is
the third in a series of conferences on the Future of Life-Cycle Saving
and Investing cosponsored by Boston University School of Management and
the Boston Reserve Bank. The audience here includes leading academics in
household finance and consumer financial education, industry
practitioners, and policymakers. The work you do every day is critically
important to the financial well-being of American consumers and to the
overall functioning of our economy.
Today's topic is a daunting one: how to improve consumers'
financial education. I hope to set the stage for your discussions by
sharing my perspective on recent economic factors and trends in the
financial services industry and the impact they have had on consumers,
particularly those with low and moderate incomes. I will also give you
my thoughts on the role of financial education in facilitating effective
decisionmaking and suggest areas where additional research could help
shape policies and practices to benefit individual consumers and lead to
safe and sustainable economic growth.
The Case for Financial Education
I certainly don't need to impress upon this audience the
importance of financial education. Today's consumers are making
decisions among increasingly complex financial products and in the
context of uncertain economic times. A working knowledge of basic
financial terms and concepts can lead to better economic decisions and
outcomes for individuals over the course of a lifetime. In addition,
there is a clear relationship between individuals' financial decisions and the health of our entire economy.
The financial crisis and the slow recovery from it has obviously
had a dramatic impact on the financial decisions made by American
families. Many now have fewer financial resources and limited options.
The pace and timing of their saving and investing life cycle has also
been disrupted. For example, high unemployment levels among recent high
school and college graduates, especially among young African Americans,
means that this demographic likely won't be able to start saving and
investing as early in life as previous generations.
In addition, starting salaries for recent college graduates have also declined, which means that young Americans who are
employed will have fewer resources for saving and investing than their
predecessors. Young people are living with their parents longer, which
helps conserve their limited resources but likely places a strain on
their parents' budgets.
Also troubling is research showing that many consumers who should be saving
for retirement instead have been forced to take hardship withdrawals
from their 401(k) plans. According to an analysis by Vanguard, hardship
withdrawals increased by 49 percent between 2005 and 2010. Other types
of withdrawals increased by 56 percent.
The increasing use of retirement savings for other purposes is
particularly troubling given that the responsibility for saving for
retirement has shifted away from employers to individual employees.
Having a secure retirement is a high priority and a significant
long-term goal for many Americans, so it is especially important that
they have an understanding of what level of resources they will need in
retirement and the investment options available to them.
Individuals who are approaching retirement age, in particular,
are being forced to make changes to their plans for retirement. Social
Security Administration data indicate that in 2009 and 2010, the
proportions of men and women claiming social security benefits at age 62
began to rise again after several years of decline. Workers have either
chosen to leave the work force early in the last few years or, more
likely, have applied for social security benefits as early as possible
because of the weak job market.1 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.
The recession has clearly disrupted the future expectations and
financial plans of millions of Americans, but even in the best of
circumstances, effectively managing one's longevity risk requires a
level of financial knowledge well beyond that required of any previous
generation. The pending retirement of Baby Boomers means that millions
of older households will need to assess pension distributions and make
decisions about payout options for their defined benefit plans. Those
with defined contribution plans will need to make decisions about the
purchase of annuities or rates of withdrawal from these plans.
Younger workers, a majority of whom will not have pensions, will
need to make complicated decisions about their target amounts of
retirement savings, portfolio allocation, and asset management using
401(k) plans, individual retirement accounts, and other, non-tax
Financial products have also become more complex, adding a
significant degree of difficulty to the important task of managing one's
own retirement savings. Consumers need information and education to
understand their saving and investment options, to make the best choices
for themselves and their families, and to help them implement and
monitor these choices over time.
In short, 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.
Changing Consumer Behaviors and Information Needs
The financial crisis has changed all of our assumptions about the
future. Naturally, consumer behavior is changing as a result, though it
is unclear whether these changes represent temporary or more permanent
shifts in thinking and planning for the future.
For example, the collapse of housing prices and resulting worker
immobility has changed consumers' appetite for homeownership. In Fannie
Mae's 2010 Own-Rent Analysis, the percentage of respondents who said
they were more likely to rent their next home than buy climbed from 30
percent in January to 33 percent in December of the same year.
Similarly, the recent increase in gasoline prices has affected
consumer choices in housing and other purchases, big and small. Family
incomes have not kept pace with rising costs and many families,
particularly those with low-to-moderate incomes, are actually facing the
decision between buying gas to drive long distances to work and paying
their mortgage. During the housing boom, when gas prices were much
lower, potential homebuyers moved steadily farther away from employment
centers in search of more affordable homes. This was referred to as the
"drive till you qualify" method of home buying. Foreclosures remain high
in these areas where the cost of driving to work has become so great.
But, even independent of recent economic trends and the
increasing complexity of financial products, consumers' need for
financial information and education is changing.
Evolving Education Needs
There is growing evidence that the changing financial services
landscape has disconnected young and other vulnerable consumers from
mainstream financial services, making them more prone to using
alternative financial products. For example, some consumers prefer using
reloadable stored-value cards to opening a deposit account at a bank or
This choice could have significant implications for a consumer's
financial well-being, both good and bad. These cards, with their Visa
and Mastercard branding, make it easy for consumers to make purchases
online, but do not carry the same robust federal protections as debit or
credit cards and their use does not establish a relationship with a
financial institution that can serve as the entry point for other
financial services such as 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. Many
consumers seek the advice of friends and family when making financial
decisions. Online social networks are increasingly playing this role as a
source of financial information, particularly among younger consumers.3 At the same time, it is crucial that they also have access to accurate, comprehensive, and unbiased financial information.
Starting Financial Education Early
Successfully navigating the volumes of financial information out
there, whether from advertisements, advisors, or social media, requires
critical skills based on a foundation of numeracy, language arts, and
decisionmaking that is first developed in school. It is important that
these skills be included in curriculum and measured in student
achievement tests. If our schools can't spare the resources to provide
financial literacy as a subject unto itself, I believe that the concepts
required for sound financial decisionmaking should, at a minimum, be
incorporated into existing subject areas. Math problems can involve
consumer financial calculations. Social studies classes can help
students understand the real world financial issues and decisions they
will face as young adults. 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.
More broadly, financial education is a life-long endeavor. Sound
financial decisions are made when consumers have access to information
that is clear and culturally relevant and that is provided at critical
"teachable" moments, such as when a consumer is financing education,
buying a car, starting a family, purchasing a house, or planning for
retirement. These are just a few examples. As academicians,
practitioners, and policymakers, we need to identify as many of these
moments as possible and determine how best to support positive financial
outcomes for consumers at those moments.
There's a saying among communications professionals that "the medium is
the message." In that vein, I believe that how we deliver financial
education has a significant impact on how effective the lessons will be.
New technologies present exciting new opportunities to deliver timely
financial lessons. Mobile payments and financial services are growing at
a rapid pace.4
Financial management "apps" for smart phones abound, making it possible
for consumers to get just-in-time information. The developments in
mobile financial services have only begun to exploit the potential of
this technology to provide tools for consumer financial decisionmaking. I
will be particularly interested to see how technology can be used to
better serve lower-income populations who may be more focused on
stretching their paychecks to meet monthly expenses than on investing.
If you can have an app to track what you eat, certainly you could use
one to track what you spend.
Evaluating the Effectiveness of Financial Education
Until now, we have had a limited understanding of which methods
work best with respect to financial education. For years, one of the
correlates of higher scores on the JumpStart Financial Literacy test was
participation in the Stock Market Game, an enrichment program offered
in many schools. The FINRA Education Foundation sponsored a study to
determine just what it was about the game that made a difference. Not
surprisingly, the answer is that the game seems to develop math skills.5
Entertainment-based financial education also seems to be
effective in capturing attention and instilling knowledge among youths.
Young people who played one of the Doorway to Dreams (D2D) financial
education games reported increases in financial knowledge, aspirations,
Among young adults, financial education was found to be most relevant when it was tied to financial outcomes.7
For example, in a Federal Reserve study conducted with Army Emergency
Relief, young enlisted service members who participated in a financial
education program seemed to make better car-buying decisions. These
soldiers had higher down payment-to-loan ratios and shorter-term loans
than a comparison group who did not take the financial education
These are notable examples, but 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.
In order to develop an effective financial course of study, we
need to find the answers to some important research questions. I believe
the answers to these questions will be quite important:
What do people need to know in order to improve their long-term
economic well-being? How does this content vary across demographic
groups, such as by income, employment status, age, or culture?
How do people obtain and process financial information? What
sources do they use? Do outcomes vary by the source or timing of the
Is instilling financial knowledge enough to improve consumer
outcomes, or do we need to fundamentally change consumer behavior as
well? How can we as policymakers influence financial behaviors?
How should financial literacy be measured to evaluate the impact
of financial education on financial outcomes and predict future
behavior and well-being? Should these measures vary across demographic
groups and the context in which consumers make financial decisions?
Undoubtedly some of the research shared at this conference will
shed light on these questions and also raise others. I look forward to
learning from your work and to implementing and supporting programs that
have demonstrated results.
Decisions about saving and investing have a profound effect on
the financial well-being of individual consumers. Collectively, those
same decisions shape our national economic outcomes. Changes in the
financial products offered to consumers and in the economic
circumstances of those consumers have added even more complexity to the
financial decisions faced by consumers. Comprehensive, effective
regulation of consumer products is the first step in ensuring positive
outcomes for consumers. But consumers must also be equipped with the
necessary quantitative and decisionmaking tools, and supported with the
right information at the right time in order to make the best possible
choices. While much attention and many resources have been devoted to
financial education, we still have surprisingly little information about
the effectiveness of financial literacy efforts. I hope that the dialog
facilitated by this conference and future research will focus on
understanding the best who, what, when, where, and why of financial
education that will help American consumers make better decisions and
achieve better financial futures. The outcomes of this conference will
help us develop the tools to do that. I commend you for your efforts and
wish each of you success here and in the future.
Our own thoughts on first steps in improving consumer's financial education? Cease all Fed speechs in perpetuity. Effective immediately