Tuesday, November 4, 2014

FINANCIAL EDUCATION | Top U.S. Priority

The cover of the first issue of The Journal of
Financial Education
, now on Volume 40. Art
work © 1973 by Brigid Marlin.
The New York Times today has a story on what State Treasurers are doing to educate people in their state about financial matters and help them establish and manage a bank account.

The cost of financial illiteracy is becoming stark as more baby boomers retire. From now till 2030, the people at Pew estimate 10,000 baby-boomer Americans are turning 65 every day.

The new retirees may discover that because of the financial meltdown of 2008 they don't have enough money to retire on. To stretch out withdrawals from their  savings, they may have to stay at their jobs longer than they planned, or sign up for low-paid work with few barriers to entry, like a greeter job at Walmart,

Financial institutions don't make it easy. Incentives for the people who deal with customers are not always structured to give the customer the best deal. The classic case was in 2008 when a retail unit of a financial firm was issuing, and pressing clients to buy, collateralized debt obligations at the same time as traders for the firm's own account were selling them short.

Forty years ago when I was a young professor at Baruch College, City University of New York, I created The Journal of Financial Education to help create a place where new ideas for teaching finance could be discussed. Volume 40 of the journal has just appeared. I couldn't be prouder. The new editors are Richard Fendler and Milind Shrikhande of Georgia State University. The journal is now run by Professor Jean Heck of St. Joseph's University in Philadelphia.

The problem is that finance professors are asked more often to teach about how to make money on Wall Street rather than how to keep Wall Street regulated in favor of the consumer, or how to educate the consumer to maneuver among financial alternatives.

For the past quarter-century we have had the National Endowment for Financial Education to help people manage their money better. It has workshop materials for people who are teaching financial literacy. But at the same time we also have people selling financial products that are riskier than they appear, and a lot of the safeguards against predatory financial-product sellers have been eroded.

America needs to do more on both fronts:
  • Return to a tighter financial regulatory environment, back to the system that was put into place by the Glass-Steagall Act in 1933. 
  • But the first line of defense against predation is better public understanding of how the financial markets works. We will continue to see millions of people lose their savings in bad investments or not save enough because they didn't plan ahead, until the average level of financial literacy is raised.
Interestingly, financial literacy is rated higher than the United States in Brazil, Mexico and Australia. Pakistan and Indonesia rank at the bottom - see chart!