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Volume 10 Issue 2 - May 2009

Financial Literacy in Times of Turmoil and Retirement Insecurity

On March 20, the MRRC co-hosted the conference Financial Literacy in Times of Turmoil and Retirement Insecurity along with the Brookings Institution, Wharton’s Pension Research Council and Boettner Center, and The Retirement Security Project. The Social Security Administration provided support for the conference. Held at the Brookings Institution, the conference focused on how workers and retirees can better manage saving for retirement, and how they can stay secure during retirement. Participants identified research and policy directions for the future.  Over 300 people from the public and private sectors attended the conference. Panel sessions were followed by lively questions and answers from the audience.

Jason Fichtner, Acting Deputy Commissioner, Social Security Administration offered welcoming remarks. Mark Iwry chaired the first panel on Financial Literacy, Planning, and Retirement Saving. Annamaria Lusardi began with her joint paper with Olivia Mitchell on financial literacy, retirement planning, and retirement well-being. Lusardi reviewed their research documenting the extent of financial illiteracy and critical items on the research and policy agenda to address this problem. Julie Agnew discussed her work on framing and financial literacy. Framing is how information is presented. Agnew finds large affects of information framing on financial behavior. Robert Willis proposed thinking of financial literacy in terms of cognitive ability as a part of human capital, in which individuals can invest. He noted that those with high levels of cognitive ability tend to have much higher wealth; however, they also lost more during the recent stock market crash. Discussant David Certner  commented that information may not be enough to change behavior and that it is critically important that we learn how to simplify complex financial information and communicate effectively.

The second panel, Financial Illiteracy and Retirement Expectations: Prospects for Longevity,  Decumulation, and Health, was chaired by Olivia Mitchell. Michael Hurd discussed his work with Susann Rohwedder documenting life-cycle wealth trajectories. Although they find that, in general, Americans are well prepared for retirement in the sense that they are not likely to outlive their ability to spend down their resources, they do find that about 20 percent are not prepared and could run out of assets before they die. He called attention to the problem of underannuitization. Ezro Luttmer presented on his research examining how well individuals understand Social Security benefits. Mailing of Social Security statements has improved Americans’ knowledge of their expected benefit. Knowledge about SSA rules and incentives is generally good, as well. There is poor information concerning the earnings test, however.  To wrap up the panel, Nick Maynard of the D2D Fund, reported on the production and value of financial entertainment. He demonstrated a video game, called Celebrity Calamity, which allows players to help a celebrity manage personal finances. Early evaluation shows success in increasing confidence and knowledge. Discussant Andrew Biggs underscored Hurd’s call for policy action to address low rates of annuitization. He called for increasing tax incentives for annuitization and educating Americans as to the insurance value of annutization. Noting that, although many people have a good understanding of Social Security benefits, Biggs suggested that information is far from perfect and  that simplification of Social Security benefits could help those who do not have good understanding. Finally, Biggs endorsed the value of  video games that could even help with very basic knowledge improvements.

Social Security Commissioner Michael Astrue next delivered the keynote address. He began by explaining that a large part of his job has been the day-to-day operations of the agency especially focused on addressing the disability case back-log. Nonetheless, the Commissioner noted that it had been suggested to him that he was in a good position to advocate for personal saving in the US.  He noted that we are now in what is undeniably a “teachable moment.” Astrue indicated that he was challenging personnel within the agency to think creatively of ways to communicate with the public.  He cited the example that was implemented two years ago to add a paragragh to the Social Security statement about the consortium of government agencies that have a financial literacy website, The SSA on-line estimator that links to actual earnings records is another innovation that can help people plan for retirement. There has also been a significant push to increase the numbers of Americans applying on-line for Social Security retirement benefits. Use of the on-line application is strongly correlated with use of the estimator, which is good news.

The luncheon panel gave government experts and government employees who are running financial education initiatives in the government and individual agencies a chance to describe inititiatives underway.  Panelists included: Dubis Correal spoke from the U.S. Department of Treasury’s Office of Financial Education; Debra Golding, with the U.S. Department of Labor;  Jeanne Hogarth from the Federal Reserve Board; Kristi Kaepplein from the Securities and Exchange Commission; John Gannon with FINRA (Financial Industry Regulatory Authority); and Ted Beck, who is on the President’s Advisory Council on Financial Literacy and also the National Endowment for Financial Education.

Robert Clark chaired a panel addressing Alternative approaches to Financial Literacy.   Shawn Cole posited that rigorous evaluation of financial education programs is critical to the cost effective allocation of scarce resources. Cole’s research has shown a positive effect of just general education on financial market participation.  He underscored the value of independent financial advice and better decision support.  Brigitte Madrian discussed lessons learned from the default enrollment savings programs and implications for savings policy. Defaults show large effects on savings rates. Financial decision making is difficult and easy to put off. Defaults are implicitly endorsed by those offering them, a judgment which is perceived in general as trusthworthy.  An important question is whether or not the increased savings in the default plans is actually new savings or  just displacing other parts of the household balance sheet, either reducing savings in other accounts, or  offset by higher credit card and mortgage debt. Much work needs to be done regarding setting optimal defaults. Madrian recommended simplification of savings options. Mark Iwry and David John described their work on a specific proposal called the automatic IRA. The proposal includes payroll deposits through the workplace, default enrollment in the plan, and IRAs. Contributions would be three percent of pay, and enrollees could opt out at any time.  John Phillips served as discussant. He noted that defaults seem very promising, particularly in the near term, as researchers try to find the best ways to improve financial literacy.  One of the reasons they are successful is they overcome many obstacles to savings, espcially the need to make complex decisions. He underscored the importance of having good data sources as we examine these questions and noted the value of the Health and Retirement Study (HRS) in this regard.

Annamaria Lusardi chaired the last panel, which addressed Marching Orders for Research and Policy.  Sheryl Garrett argued for improved quality standards for financial advisors and for moving to a fee-for-service model in the field. She reviewed a number of options for providing accessible financial advice that better serves the interests of those seeking the advice.  Michael Staten described the problem of growing numbers of Americans filing for bankruptcy, but also noted that it presents an opportunity for investigating the impact of financial education as part of mandatory credit couselling. Angela Hung called for validation and standardization of measures of financial literacy and described data on financial literacy in the RAND American Life Panel. Discussant William Gale urged caution, reminding us that it is not always clear what is the optimal course in financial matters. He suggested marching orders that include massive increases in funding for research to evaluate a range of issues related to financial literacy and personal saving, a need to examine whether we care about financial literacy as an end in itself, and whether to target changing people, outcomes, or both and determining best ways to do that.