Working paper

This paper highlights the extent and effects of financial illiteracy on American households, reviews previous efforts to promote financial literacy, and discusses new directions for such initiatives. None of the traditional approaches to financial literacy – employer-based, school-based, credit counseling, or community-based – has generated strong evidence that financial literacy efforts have had positive and substantial impacts.

Making portfolio allocation decisions can be difficult for American households who lack interest or experience in financial matters. Service providers and 401(k) plan sponsors have introduced new plan design approaches and investment products, such as target-date funds, that can simplify savings and investment choices for defined contribution (DC) plan participants.

Abstract: The lack of property tax escrow accounts among subprime mortgages causes borrowers to make large lump-sum tax payments that reduce liquidity. Different property tax collection dates across states and counties create exogenous variation in the time between loan origination and the first property tax due date, affording the opportunity to estimate the causal effect of loan-level exposure to liquidity reductions on mortgage default.

Abstract: The widespread use of credit scoring in the underwriting and pricing of mortgage and Consumer Credit has raised concerns that the use of these scores may unfairly disadvantage minority populations. A specific concern has been that the independent variables that comprise these models may have a disparate impact on these demographic groups. By "disparate impact" we mean that a variable's predictive power might arise not from its ability to predict future performance within any demographic group, but rather from acting as a surrogate for group membership.

Abstract: While a substantial literature has examined the causes of mortgage foreclosure, there has been relatively little work on the consequences of foreclosure for the borrowers themselves. Using a large sample of anonymous credit bureau records, observed quarterly from 1999Q1 through 2010Q1, we examine the credit experiences of almost 350,000 borrowers before and after their mortgage foreclosure.

Doorways to Dreams Fund (D2D) is working to develop and test video games attractive to low-income and minority adults that will provide training in critical financial skills to improve financial decision-making. During the last year, D2D has conceived, developed and delivered the third and fourth titles in its growing library of financial literacy casual video games: Farm Blitz and Bite Club. In Farm Blitz, players take on the role of a farmer who must harvest crops to generate earnings, manage debt, save money, and weather unexpected emergencies.

The authors conducted a field experiment to evaluate the effect of receiving information about the retirement savings decisions of one's peers. Non-participants and low savers in one firm's 401(k) plan received letters enabling them to enroll or increase their plan contribution rate by returning a simple reply form. Some employees were randomly assigned to receive peer information: a statement about the fraction of their coworker peers who were participating in the plan or a statement about the fraction of their coworker peers who were contributing at least 6% of their salary to the plan.

This paper investigates the effectiveness of both videos and narratives in improving people's understanding of five basic concepts in financial planning: (1) compound interest; (2) inflation; (3) risk diversification; (4) tax treatment of retirement savings vehicles; and (5) employer matches of defined contribution savings plans. To that end the authors have administered a quiz about these concepts in the American Life Panel to establish a baseline of what respondents understand about these concepts.

A substantial fraction of children receiving Supplemental Security Income (SSI-child) benefits for disability apply to move directly onto the SSI-adult program without attempting to enter the labor market. Thus, most SSI-children are aging into what is likely to be a permanent life on the SSI-adult program or, in the event of denial of SSI-adult benefits, turning to other forms of social welfare. Once this transition is complete, very few seek employment while receiving SSI-adult or other benefits.

We study retirement savings decisions and outcomes in Oregon University System’s Optional Retirement Plan (ORP). During our sample period, 32% of ORP participants choose to invest through HIGH, which markets itself as providing personal face-to-face financial service. The other participants choose to invest through three lower-service providers, with 51% investing through LOW. Consistent with lower levels of financial literacy driving demand for financial advisors, we find that younger, less highly educated, and less highly paid employees are more likely to invest through HIGH.