Editor's Note: Although the audience for this speech at Boston's Federal Reserve Bank by Governor Elizabeth A. Duke (see right) includes leading academics in household finance and consumer financial education, industry practitioners, and policymakers, it is about us, the consumer. It is entitled Research, Policy, and the Future of Financial Education. We have edited out remarks about the conference itself.
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Today's topic is a daunting one: how to improve consumers' financial education. I hope to set the stage for your discussions by sharing my perspective on recent economic factors and trends in the financial services industry and the impact they have had on consumers, particularly those with low and moderate incomes. I will also give you my thoughts on the role of financial education in facilitating effective decisionmaking and suggest areas where additional research could help shape policies and practices to benefit individual consumers and lead to safe and sustainable economic growth.
The Case for Financial Education
I certainly don't need to impress upon this audience the importance of financial education. Today's consumers are making decisions among increasingly complex financial products and in the context of uncertain economic times. A working knowledge of basic financial terms and concepts can lead to better economic decisions and outcomes for individuals over the course of a lifetime. In addition, there is a clear relationship between individuals' financial decisions and the health of our entire economy.
The financial crisis and the slow recovery from it has obviously had a dramatic impact on the financial decisions made by American families. Many now have fewer financial resources and limited options. The pace and timing of their saving and investing life cycle has also been disrupted. For example, high unemployment levels among recent high school and college graduates, especially among young African Americans, means that this demographic likely won't be able to start saving and investing as early in life as previous generations.
In addition, starting salaries for recent college graduates have also declined, which means that young Americans who are employed will have fewer resources for saving and investing than their predecessors. Young people are living with their parents longer, which helps conserve their limited resources but likely places a strain on their parents' budgets.
Also troubling is research showing that many consumers who should be saving for retirement instead have been forced to take hardship withdrawals from their 401(k) plans. According to an analysis by Vanguard, hardship withdrawals increased by 49 percent between 2005 and 2010. Other types of withdrawals increased by 56 percent.
The increasing use of retirement savings for other purposes is particularly troubling given that the responsibility for saving for retirement has shifted away from employers to individual employees. Having a secure retirement is a high priority and a significant long-term goal for many Americans, so it is especially important that they have an understanding of what level of resources they will need in retirement and the investment options available to them.
Individuals who are approaching retirement age, in particular, are being forced to make changes to their plans for retirement. Social Security Administration data indicate that in 2009 and 2010, the proportions of men and women claiming social security benefits at age 62 began to rise again after several years of decline. Workers have either chosen to leave the work force early in the last few years or, more likely, have applied for social security benefits as early as possible because of the weak job market. Opting to receive a smaller social security annuity earlier in life is just one of many hard decisions Americans have had to make in order to balance their short-term and long-term financial needs.
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