MyMoney Resources - Researcher

Economists are beginning to investigate the causes and consequences of financial illiteracy to better understand why retirement planning is lacking and why so many households arrive close to retirement with little or no wealth. Our review reveals that many households are unfamiliar with even the most basic economic concepts needed to make saving and investment decisions. Such financial illiteracy is widespread: the young and older people in the United States and other countries appear woefully under-informed about basic financial concepts, with serious implications for saving, retirement planning, mortgages, and other decisions. In response, governments and several nonprofit organizations have undertaken initiatives to enhance financial literacy. The experience of other countries, including a saving campaign in Japan as well as the Swedish pension privatization program, offers insights into possible roles for financial literacy and saving programs.

We compare the saving behavior of two cohorts: the Early Baby Boomers (EBB, age 51-56 in 2004) and the HRS cohort (age 51-56 in 1992). We find that EBB have accumulated more wealth than the previous cohort but they benefited from a large increase in house prices, which lifted the wealth of many home-owners. In fact, there are many families among EBB, particularly those headed by respondents with low education, low income, and minorities, which have less wealth than the previous cohort. Lack of wealth can be traced to lack of retirement planning. Notwithstanding the many initiatives aimed at fostering planning in the 1990s, a large portion of EBB still do not plan for retirement even though most respondents are close to it. The effect of planning is remarkably similar between the two cohorts; those who do not plan accumulate much lower amounts of wealth - from 20 to 45 percent depending on the location in the wealth distribution- than those who do plan. Thus, for both the EBB and the HRS cohort, lack of planning is tantamount to lack of saving irrespective of the many changes in the economy between 1992 and 2004.

The Financial Literacy and Education Improvement Act created, in December 2003, the Financial Literacy and Education Commission. Responding to the act’s mandate that GAO assess the Commission’s effectiveness, this report reviews its progress in (1) developing a national strategy; (2) developing a Web site and hotline; and (3) coordinating federal efforts and promoting partnerships among the federal, state, local, nonprofit, and private sectors. To address these objectives, GAO analyzed Commission documents, interviewed financial literacy representatives, and benchmarked the national strategy against GAO’s criteria for such strategies. GAO found that the National Strategy for Financial Literacy served as a useful first step in focusing attention on financial literacy, but it is largely descriptive rather than strategic. The Commission Web site generally serves as an effective portal to existing federal financial literacy sites but has not been tested. Coordinating federal efforts has been challenging, in part because the Commission must achieve consensus among 20 federal agencies, each with its own viewpoints, programs, and constituencies, and because of the Commission’s limited resources. GAO recommended that the Commission (1) incorporate additional elements into the national strategy to help measure results and ensure accountability, (2) conduct usability tests of and measure customer satisfaction with its Web site, (3) independently review for duplication and evaluate the effectiveness of federal activities, and (4) expand upon current efforts to cultivate sustainable partnerships with nonprofit and private entities.

This presentation reviews the state of federal spending and discusses the role of improved financial literacy as part of a three-pronged strategy (1) Improve Financial Reporting, Public Education, and Performance Metrics (2) Strengthen Budget and Legislative Processes and Controls (3) Fundamental Reexamination & Transformation for the 21stCentury (i.e., entitlement programs, other spending, and tax policy). The slides describe GAO's work on advancing financial literacy, including a review of the Financial Literacy and Education Commission, and participation the Fiscal Wake Up Tour.