Presented by Networks Financial Institute and

the Federal Reserve Bank of Chicago

With the national and global economies in turmoil and the presidential election just weeks away, Networks Financial Institute at Indiana State University (NFI) and the Federal Reserve Bank of Chicago presented a symposium addressing financial literacy on October 7, 2008, in Chicago. Connecting Financial Education to Consumers convened several of the nation’s leading financial literacy practitioners and thought leaders to examine the current state of financial literacy and its relationship to economic problems ranging from the housing foreclosure crisis to retirement planning. In addition, the symposium identified various financial literacy programs and resources and examined their effectiveness.

The State of Adult Financial Literacy

NFI executive director Elizabeth Coit opened the symposium by sharing results of two surveys NFI undertook in 2007.  The first, conducted among 805 adult consumers nationwide, assessed adults’ baseline knowledge of financial literacy topics, the types of information and resources sought for personal finance education and adults’ perceived barriers to attaining financial literacy education. NFI also conducted a survey among 609 U.S. financial institutions, government organizations, higher education, commercial and non-profit entities.

The surveys reveal discrepancies between financial education institutions’ and adults’ self-reported satisfaction with the availability and quality of financial education resources. While approximately 90 percent of institutions surveyed rated financial education as important for consumers, just 40 percent have offered financial literacy programs to consumers for 10 or more years. Among adult consumers surveyed, 65 percent indicate that financial literacy knowledge is important and 80 percent say that teaching financial literacy is important, yet 65% nationwide admit to receiving no financial education in the prior twelve months. 

Comparing the two surveys, Coit noted three primary implications for financial education providers interested in addressing financial literacy. First, while financial education providers believe they are effectively educating consumers, more than 40 percent of adult consumers rate their financial literacy as poor. Secondly, there is a lack of awareness among consumers regarding the need for financial education. The majority of adults surveyed feel comfortable with their current level of financial knowledge. Finally, there are issues of perceived accessibility with regards to learning about financial matters. The majority of consumers surveyed report relying not on banks or other financial literacy practitioners, but on friends and family, for financial information. Consumers cite financial planners as the most valuable sources of financial education and human resources professionals, credit counselors and brokers as the least valued sources of financial education.

Financial education providers and consumers also cite different barriers to accessing financial education. Financial educators report consumer awareness of available resources as the biggest impediment interfering with access to financial education. Affordability of financial education is the most frequently cited barrier by consumers. Coit noted that the surveys of consumers and financial educators reveal a need for enhanced communication and collaboration between financial education practitioners and the consumers they serve. 

Growing the middle class through asset building, protection and preservation

Morning keynote speaker John Bouman, president and director of advocacy of the Sargent Shriver National Center on Poverty Law, discussed the role of asset building to achieve economic stability and upward mobility. Bouman noted that asset building is not a new concept, but an approach rooted in earlier successes such as the GI Bill and Homestead Act. Assets beyond annual income are what create financial stability, upward mobility and middle class status. These behaviors include savings, investing for retirement, establishing good credit, home ownership and access to capital.

The Shriver Center Community Investment Unit has developed an organic approach to building financial literacy through grassroots programs including student-run banks, children’s savings accounts, anti-predatory lending programs and financial literacy outreach.

Asset preservation initiatives such as consumer protection services are another important resource for financial stability, according to Bouman. High-cost financial products such as check cashing services, payday lending outlets, refund anticipation loans and predatory mortgage schemes are among the products and services that pose a financial threat to today’s consumers.

Bouman noted that financial educators may further serve consumers’ financial education needs by delivering products that can assist in such asset building and protection. In addition to affordable loans, he advocated that financial institutions promote direct deposit of tax refunds, free and second-chance checking accounts, and fixed rate mortgage loans.

His report noted that 17 states have implemented coalitions to promote asset building, engaging the services of non-profit and government agencies. Additionally, seven states also have included financial education as a requirement before high school graduation, although there is no standard curriculum for this requirement. Supporting the need for financial education in schools, Bouman cited a survey of 13,000 college students indicating that nearly half had accumulated more than $5,000 in college debt and one third had accumulated credit card debt in excess of $10,000. Properly run student banks within schools are one means to students learning good decision making skills before being exposed to credit cards after high school. Additionally, school-run banks provide workforce development education and exposure to mainstream banking.

Financial literacy also can be deployed beyond the school environment. Financial Links for Low-Income People (FLLIP) is a program of the Sargent Shriver Center that represents a coalition of banks, credit unions, government agencies, bank regulators, adult educators and grassroots organizations to provide financial management education to low-income persons in Illinois. Programs such as Your Money & Your Life, offered by the University of Illinois extension program, employ real-life money management exercises that connect to participants’ daily lives. Pilots recently conducted indicate that participants achieved significant knowledge gains including higher savings rates, increased tracking of spending and more opening of bank accounts. Among the unbanked, the programs have helped to reduce reliance on payday loan and currency exchange services while increasing the use of mainstream banking services.

John Bouman concluded his remarks by noting that financial literacy is important throughout life and provides an important measure of control and self-determination. He noted that the link between financial literacy and other quality of life assets including health, community and relationships makes financial education an important tool in creating a sense of the possible, particularly for the underserved. (Download Full Presentation)

Financial Literacy and Decision Making

 Annamaria Lusardi, Professor of Economics, Dartmouth College, presented research revealing that discrepancies in self-perceived financial education levels also exist across age, educational achievement levels, and other demographics. While the elderly perceive their financial knowledge as higher than other age groups, research indicates that they are actually less knowledgeable than other age categories. Lusardi noted that this overconfidence in financial knowledge puts the elderly at risk for a range of monetary scams. Other groups representing the lowest levels of financial literacy included women; individuals divorced, widowed or separated; and ethnic minorities.

Beyond age, educational status also presents risks when it comes to saving and spending decisions. While over 70 percent of college-educated consumers demonstrate knowledge of the benefits of risk diversification, just over 30 percent of consumers without a high school education understand the concept of diversification.  Only 36 percent of adult consumers correctly answered questions regarding the power of compounded interest.  Lusardi noted that a lack of financial knowledge creates very real scenarios that cost consumers as they make everyday transactions. For example, only seven percent of consumers were correctly able to answer a question regarding the lowest-cost method of financing an appliance purchase.

Lusardi remarked that a lack of financial literacy presents implications that can last a lifetime. Lower levels of economic literacy make individuals less likely to plan for retirement and more likely to borrow at higher costs. As retirement approaches, many individuals do not invest any time in planning how to fund their retirement years. Lusardi referred to a study that found among consumers 50 years of age and older, only 31 percent had attempted to learn how much they would need to save for retirement. Only 21 percent had developed a retirement plan and just 18 percent had followed the plan.

Lusardi advised participants that the critical word in the phrase financial literacy is “literacy.” “You must be literate with money to live in the new world. It is more tragic to lose retirement savings than to lose a job in today’s environment,” she noted.  Quick-fix one-hour seminars on financial decision making will not deliver the intended changes in behavior. Lusardi advocates an intervention strategy equivalent to the scope of the problem, while noting that any solution must be simple to implement. “We must make saving as easy as borrowing,” Professor Lusardi noted. She advised practitioners to convey financial literacy concepts in terms easy for consumers to understand, integrating stories and real-life applications. She advised making the approach graphic, pointing to the success of the food pyramid and terror-alert color categories as means of educating consumers. (Download Full Presentation)

Generation Warfare. Finances and the Baby Boomer Generation

Nationally recognized financial authority and syndicated Chicago Sun-Times columnist, Terry Savage discussed how the overall economy influences consumers’ financial behaviors.  Referencing the recent downfall of several investment banks and holding companies, the chaos in the stock market and the graying of the Baby Boomer generation, Savage noted that the next generation is more likely to adapt the prudent, frugal financial behaviors of the generation that followed the Great Depression, as opposed to the free-spending boomer generation that came of age during the soaring stock market period in the 1980s.

Nothing that the current problems in the economy are not a sudden phenomenon but reflective of problems that have escalated over time, Savage cited the steady decline in savings rates; since June 2005, the U.S. savings rate has been zero or lower.  Savage also noted that the current economic downturn differs significantly from prior recessions, such as the 1981-1982 period when record high interest rates existed in an environment with a relative lack of unsecured credit and a comparatively robust savings rate of 11 percent.

The aging of the baby boomer generation will have a significant economic impact on the future prosperity of not only the boomers themselves but the generations following them. Since, in 2030, 52 percent of every tax dollar collected is projected to be needed to fund Medicare, Savage points out that individuals will be required to work longer to fund life spans that continue to lengthen. This increased boomer longevity will translate into higher health care costs. Savage urged symposium participants to purchase long term care insurance.

Despite recent volatility in the stock market, Savage advised that continual investing in the market remains the key to wealth. “There has never been a 20-year period in which you would have lost money in a diversified portfolio of large American stocks with dividends reinvested,” she stated.

Panels on Critical Issues

In addition to these speakers, panels of expert practitioners, policymakers and thought leaders addressed the home foreclosure crisis, preparation for retirement, and meeting the financial needs of financially underserved populations, all timely economic and societal issues with strong ties to financial literacy.

Addressing the Foreclosure Crisis 

In a session moderated by Chicago Fed business economist Robin Newberger, Michael Collins, founder of Policy Lab Consulting Group, LLC, and co-founder of MortgageKeeper Referral Services along with Chuck Stanley, Vice President of Client Education and Counseling Operations for Money Management International (MMI) provided insight into the ongoing foreclosure crisis and possible approaches to mitigating the problem.

A shift in risk distribution between 1995 and 2005, an industry trend away from fixed term mortgages to adjustable rate products and the democratization of credit created a reinforcing loop that helped build the crisis. Simultaneously, consumers had easy access to credit, home values appreciated rapidly and new loan products emerged in the market; conditions were ripe for a storm in the housing market. Once the storm struck, however, homeowners were not equipped to respond.

A lack of consumer financial literacy played a central role in escalating the foreclosure crisis escalate. Collins cited research showing that 53 percent of a group of homeowners going through the foreclosure process say they did not know their lenders could provide options. He stressed the emotional aspect of the problem; 26 percent of a foreclosure survey group indicate they are too depressed to reach out for help. Yet Collins’ studies have shown that intervention services can decrease the cost of foreclosure to financial institutions. Collins equates the incremental effect of each hour of counseling to a 4.1% lower probability that the homeowner would complete the foreclosure process.

Collins shared studies regarding the effectiveness of financial literacy in helping homeowners move out of the foreclosure crisis.  Collins referenced a study of Section 8 housing participants comparing those that received financial literacy counseling against those who received no financial literacy education. After four months, those who received financial literacy counseling moved their average credit score from 570 to 590 – an amount that could equate to thousands of dollars over the life of an installment loan. The project also saw a doubling in savings rates among those that received financial literacy education.

Collins described a “zip code effect” that impacts homes in neighborhoods plagued by foreclosures. A Chicago consumer survey measuring the attitudes of those going through the foreclosure crisis found that foreclosures in a given neighborhood finds that homeowners in neighborhoods with foreclosures are less likely to make home repairs or recommend home ownership to their friends.

The “silver lining” of the foreclosure debacle, according to Collins, may be the sense of precaution that the foreclosure crisis prompts renters to take. He noted that even an outside observance of the foreclosure experience will likely prompt renters to seek more information before they purchase a home.

The solution for addressing consumers’ financial illiteracy during the housing crisis may best be achieved by dealing with consumers’ sense of being overwhelmed and engaging the stressed consumer in counseling services while providing information and education. Finally, Collins noted that more stringent regulatory parameters and consumer information policies are very likely to be an outcome of the foreclosure experience. He stated that while no panacea solution exists, carefully implemented disclosures coupled with financial literacy tools and information can result in consumers reconsidering high-cost/high-risk credit. (Download Collins Presentation)

As a practitioner involved in counseling individuals going through the home foreclosure crisis, Chuck Stanley shared some of the trends used in counseling those caught in the financial crisis. He advocates an integrated approach to financial counseling using debt and budget counseling services to assist consumers in handling unsecured debts; mortgage and delinquency counseling to help homeowners qualify for a workout program or mitigate their losses; for seniors, reverse mortgage counseling services that includes options to generate additional income; and pre-filing bankruptcy and pre-discharge education for consumers going through the bankruptcy process.

Stanley points to a 29 percent spike between 2007 and 2008 for debt counseling sessions, indicating a strong consumer demand for this service. MMI will conduct 110,000 mortgage delinquency sessions in 2008, representing a 197 percent increase over 2007. Addressing the financial status of those going through mortgage delinquency counseling, Stanley states that while average income has risen 27 percent since 2005, the increase in income is overwhelmed by increases in debt and expenses. Additionally, today’s clients are significantly past due when they seek help and tend to have larger mortgage payments. (Download Stanley Presentation)

Financial Planning for Retirement – Creating a Perception of Risk

Panelists Angela Lyons, associate professor at the University of Illinois at Urbana-Champaign provided a brief research overview to set the stage for practitioners John Grable, professor at Kansas State University, and  Francois Gadenne, co-founder, chairman and executive director of  the Retirement Income Industry Association (RIIA).  Lyons discussed research’s findings and knowledge gaps pertaining to measuring impacts on retirement planning outcomes.  Additionally, she cited the challenges of reconciling outcomes from economic and finance theory with “rules of thumb” from the financial planning industry, and understanding consumer financial behavior and decision making.  While research methodologies have not yielded consensus on “right” financial outcomes or investment recommendations and shows gaps in understanding financial behaviors of consumers, front-line practice does show anecdotal evidence of benefits to consumers.    

Grable discussed research and anecdotal evidence regarding the role of financial education in helping consumers plan for retirement and presented findings from his paper “The Retirement Puzzle:  Why Do Some People Just Not Get It?,” positing that a fundamental problem may not be the education itself; but the method of conveying the information.  Grable critiqued the “top-down” strategy of talking heads telling young to  middle-age working adults to start saving immediately, invest aggressively, get out of debt and reduce consumption behaviors. The majority of young and middle-aged people are not proactive in planning; Grable reasons that these consumers don’t perceive accurately the risks of failing to plan for retirement.

This perceived lack of risk is exacerbated by a false sense of knowledge. Grable invoked Kansas State University research revealing that 82 percent of young people believe they have above-average financial knowledge, when their scores on basic financial questions indicate otherwise. Additionally, only 45 percent of the surveyed young consumers had ever checked their credit history and 40 percent reported having no financial goals. This low perception of risk, overconfidence in financial acumen and lack of goals make it easy for young and middle-aged people to opt out of retirement planning.

Advocating an alternative to the traditional education approach and instead turn toward changing the perception of retirement risk, Grable pointed to the relative success of efforts to engage young and middle-aged consumers in the dangers of climate change. The global warming communicators have leveraged a communication strategy that focuses on positioning climate change as a threat. The strategy has succeeded in getting individuals to change their behavior – partially out of fear, but also out of concern for others in society. He reasons that the same approach can be used to create a perceived threat associated with a lack of retirement planning. He concluded by noting that such a strategy will be contingent upon bridging a credibility gap between the educators and those receiving the education.

Following Grable’s remarks, Francois Gadenne presented research and models regarding the innovation of retirement planning products that are relevant to today’s consumers. Gadenne recommended a “generic” retirement management planning process, as opposed to the many sophisticated and complex programs available today. His approach focused on two key factors. First, a retirement management planning process must build a floor for the retirement income/expense risk of the investor. The floor also would address the “soft” aspects of retirement planning including human and social capital. Secondly, the process would create an upside from financial capital. Professionals would need to know how to set allocation among risk transfer approaches including investments, insurance and mortality credit, hedging and options and duration-matched, risk-free assets. (Download Full Presentation)

Reaching the Financially Disadvantaged

Louisa Quittman, director of community programs at the Office of Financial Education, U.S. Department of the Treasury discussed how increased choices in the market have outpaced consumers’ financial knowledge and understanding. The U.S. Treasury created the Office of Financial Education in 2002 to promote financial literacy through public outreach, shared standards and partnerships. The Office has since launched the Financial Literacy and Education Commission as well as the private-sector President’s Advisory Council on Financial Literacy.

Quittman outlined the elements the Treasury has identified as essential to a successful financial education program. These elements include content that focuses on basic knowledge and is tailored to the target audience; delivery through local distribution channels that incorporate follow-up opportunities; specific program goals; demonstration of impact on participants’ attitudes, knowledge or behaviors; and sustainable solutions that can be easily replicated.

Findings from the Office’s first six years indicate that partnerships, simplicity and a collaborative approach are important in operating successful financial literacy outreach programs. Quittman advised that practitioners encourage more experiments, adapt best practices and share findings. (Download Quittman Presentation)

Una Okonkwo Osili, associate professor of economics at Indiana University-Purdue University at Indianapolis and Anna Paulson, a senior financial economist at the Federal Reserve Bank of Chicago, presented research addressing how to engage with financially disadvantaged groups. Noting that bank crises are relatively common on the global level (113 have been reported in 93 countries since 1980), Osili and Paulson’s research compares the effect of prior banking crises situations on U.S. immigrants’ behaviors to determine if prior experience with a financial crisis impacted consumer confidence and subsequent financial decisions. A total of 7,500 immigrants representing 105 countries were studied between 1996 and 2000, and between 2001 and 2003. The study indicates that banking crises have a larger impact on the less educated and a smaller impact on immigrants from countries with deposit insurance and/or better developed financial markets. (Download Presentation).

Mary Ruth Herbers, senior director of programs for the Center for Economic Progress in Chicago, rounded out the panel discussion on meeting the needs of the underserved. Herbers presented an overview of the Center for Economic Progress’ effort to promote financial empowerment and self-sufficiency through the provision of tax and financial services. Since 1999, the Center has provided low-cost financial services including checking accounts, savings accounts and tax preparation assistance. New initiatives currently in the field include pre-paid debit cards that allow unbanked taxpayers to receive their refunds more quickly and avoid check cashing services. Like many of the organizations represented at the symposium, the Center for Economic Progress has leveraged partnerships with other community-based grassroots entities including the National Community Tax Coalition; Herbers cited other coalition programs in Minnesota, Texas, Florida, New York and Delaware. (Download Herbers Presentation)