Financial Illiteracy: It’s Worse Than We Thought
Many members are unprepared for future financial challenges.
• American households face major financial challenges in the years ahead.
• CUs that focus too narrowly on education will miss opportunities to grow long-term market share.
• Board focus: Money Mission is a new program to educate 16- to 19-year-olds in the fundamentals of financial literacy.
Lost among the heated rhetoric of the recent midterm elections and the national blame game that is American politics is a disturbing truth with long-term consequences: American households will face major financial challenges, and many are woefully unprepared.
Two storms gathering on the horizon will severely test American households:
• The first storm is the fraying social compact between employers, employees, and government that’s placing the responsibility for long-range personal and household financial well-being squarely on individuals’ shoulders.
• The second storm involves a dramatically evolving economy and job market that will require more Americans to attain higher levels of education if they hope to achieve a sustainable middle-class existence.
The impending collision
These two storms are about to collide and wreak havoc on the middle class. Credit unions need to be strengthening their member education and financial literacy programs to help their members weather the storms. But limiting these programs to educating members about the credit union difference, managing a household budget, or buying a car is short-sighted and insufficient.
Credit unions that are too narrowly focused on education will miss opportunities to grow long-term market share. Instead, think of your financial literacy and education programs as investment “seedlings” that help members cope with serious economic and financial challenges.
Will these efforts pay immediate dividends? Probably not. But as credit unions truly fulfill their social mission while outflanking larger competitors, they can’t adopt a cause that’s more urgent and important than member education.
The need is greater than ever before, said Ted Beck, president/CEO of the National Endowment for Financial Education (NEFE), during testimony a few years ago before a subcommittee of the House Financial Services Committee. “This is because the responsibility for financial security has been transferred from institutions to individual Americans. The burden of carrying such responsibility has been incurred within a relatively short time frame, causing concern, frustration, even fear among members of the public.”
The recession and tepid recovery emphasize the urgency. The recession’s toll on jobs and households and the near collapse of the nation’s financial system underscored consumers’ vulnerability. And the national debate over government’s role in stimulating the economy and providing security for household finances too often ignores the gathering storms.
But as Congress debates creating jobs, the focus of public policy is still partisan and relatively short-term. Broader systemic changes are threatening households’ financial health. Education and financial literacy should be a national priority. These systemic changes focus on the general public’s financial illiteracy, but a more holistic approach linking literacy with jobs and postsecondary education is still rare.
The Fair and Accurate Credit Transactions Act of 2003 did mandate the creation of the Financial Literacy and Education Commission under the Treasury Department. This was a start. The commission’s 2010 report echoes Beck’s congressional testimony.
“The increasing complexity of the financial landscape, coupled with the economic difficulties many families currently face in the U.S., illustrate the need for improved knowledge, attitudes, and behaviors related to personal finance,” according to the report. “But as a December 2009 national study by the FINRA Investor Education Foundation showed, many people living in the U.S. struggle to make ends meet, don’t adequately plan ahead for emergencies and predictable life events, have difficulty managing mortgages and saving and investing products, and lack basic financial knowledge and decision-making skills. The national study found these problems to be especially prevalent in lower-income, less educated, and Hispanic and African-American populations.”
The commission developed clear definitions for financial literacy and financial education:
• Financial literacy is the ability to use knowledge and skills to manage financial resources effectively for a lifetime of financial well-being.
• Financial education is the process by which people improve their understanding of financial products, services, and concepts so they’re empowered to make informed choices, avoid pitfalls, know where to go for help, and act to improve their present and long-term financial well-being.
Given their closeness to members, credit unions are uniquely positioned to guide consumers through the complexities of modern financial life and position them for success. This includes traditional financial literacy and education programs, but it also entails nontraditional initiatives, such as helping members attain the level of education necessary to compete for higher paying jobs in the new economy.
Gone are the days when workers with only a high-school diploma could find a good-paying job, buy a home, and raise a family in a financially stable environment. The past decades have seen the U.S. manufacturing base shrink and the service sector grow, leaving millions of workers with their backs against the wall.
Many well-paying blue-collar jobs—and an expanding number of white-collar jobs—are being outsourced overseas. Workers are agreeing to significant pay cuts to keep their jobs and benefits. Compounding that problem is the reality that technology and a global economy have rendered many assembly-line manufacturing jobs obsolete, while postindustrial professional and managerial jobs will be in greater demand.
By 2018, almost two-thirds of the jobs available to Americans will require some postsecondary education—a certificate, two-year degree, bachelor’s degree or higher, according to a June 2010 report from Georgetown University’s Center on Education and the Workforce. That’s a drastic change from 1973 when 40% of the U.S. work force were high-school graduates and 32% were high-school dropouts. At that time, only 16% of workers had a bachelor’s degree or better. The trend isn’t theory; it’s reality.
Georgetown cites the iPod as an example of a postindustrial product. “Less than 20% of the value added in the manufacture of video and audio equipment from the U.S. comes from the blue-collar workers who manufacture it,” according to the Georgetown report. “By contrast, 80% of the value added comes from white-collar workers who design, market, finance, and manage the global production and dissemination of these products.”
But Georgetown also notes that nine of 10 workers with a high-school education or less already are clustered in occupations that either pay low wages or are in decline. During the next five years, 60 million Americans are at risk of being locked out of the middle class, “toiling in predominantly low-wage jobs that require high-school diplomas or less,” according to the Georgetown report.
One possible outcome within the next few years, predicts Georgetown, is three million or more U.S. jobs will go unfilled because workers lack education and training. The most immediate challenge is educating and assisting workers in their 30s, 40s, and 50s. An even greater challenge is increasing the financial knowledge and education of generation Y and the generations to follow. There’s no short-term fix. “This is a marathon, not a sprint,” according to the Credit Union National Association’s (CUNA) Financial Literacy Task Force report.
Pending retirement crisis
Preparing consumers for retirement is the most immediate problem given the millions of baby boomers who are fast approaching retirement age but are well behind their retirement goals. The average 401(k) balance in the U.S. is slightly less than $67,000, according to a June 2010 report from Boston College’s Center for Retirement Research. That figure is a bit misleading because it’s drawn down by the low savings of moderate- to low-income wage earners, the age cohort in which a worker resides, and years in the work force.
Wage earners with annual income of less than $60,000, for example, have a median 401(k) balance that’s less than $17,000, according to U.S. News & World Report. But wage earners in their 50s that fall into that income category have a median balance of almost $77,000. For more solidly upper-middle-class wage earners—those making more than $100,000 a year—the overall median 401(k) balance is just under $60,000. For people in their 50s who earn more than $100,000 annually, the average balance is almost $370,000. That’s still not enough.
Even the most optimistic numbers demonstrate that most American workers are not saving enough. About 18% of Americans with 401(k)s drew down their balances during the recent recession, according to AARP. And the dismal 401(k) picture isn’t complete without factoring in the decline of traditional defined-benefit pensions.
Along with Social Security, traditional company or government pensions have enabled many retired employees to enjoy a secure retirement. Boston College reports that 62% of workers had company-funded pensions in 1983 and only 12% had
401(k)s. By 2007 those figures had flip-flopped—17% had company-funded pensions and 63% had 401(k)s. And 401(k) balances are significantly affected by stock market fluctuations, which makes retirement planning trickier as employees age.
Most Americans at or near retirement are “consumed by fear,” says Anthony Webb, a research director at Boston College in a Miami Herald interview. “Instead of walking on the beach hand-in-hand in retirement, the reality is that they’re sitting around the kitchen table cutting coupons.”
Focus on youth
The longer-term challenge facing credit unions and their members will be the ability of young consumers and future members to weather the gathering storms and emerge with the financial security previous generations enjoyed. Credit unions providing the greatest assistance and earning the trust of future borrowers will:
• Expand their student loan programs.
• Develop financial literacy outreach programs with local schools and community groups.
• Increase their financial counseling and financial planning capabilities.
• Help younger members understand the complex relationship between basic financial education and the importance of a postsecondary education so they can compete for good jobs.
2. Money Mission, a financial literacy simulation.
There’s no shortage of quality financial literacy and financial counseling programs through CUNA and the state leagues. CUNA’s center for personal finance has an extensive portfolio of Web-based financial literacy programs for all ages, as well as for Hispanics. And CUNA recently supplemented that product line with Money Mission.
CUNA also offers the Financial Counseling Certification Program, modeled after CUNA’s Certified Financial Counselor Schools. And the National Credit Union Foundation will be placing an even greater emphasis on financial literacy and education.
Credit unions that have placed NEFE’s personal finance curriculum into U.S. high schools say students using the course have a greater understanding of financial matters than do their peers, and they have a high retention level of the data. This improves their ability to make the right financial choices once they’re in the workplace. The NavPoint Institute for Financial Literacy reports similar results.
Because credit unions exist primarily to serve consumer households, they have a considerable stake in how these major economic and social trends are re-molding the workplace and the consumer household. Their strategies to enhance their bottom line will require a depth and breadth of service to members well beyond the traditional financial product portfolio and beyond relatively simple financial literacy, counseling, and planning programs.
If they recognize the fast emerging financial challenges facing their members, credit unions have a unique opportunity to carve out a significant role in helping to re-educate consumers. In addition to enhancing members’ financial knowledge, credit unions can prepare them for an economic future that is unsettling for many, but with the right training and knowledge can still be bright.
CUNA signed an agreement with the Wisconsin Credit Union League to be the national distributor of Money Mission—a new state-of-the-art, interactive, Web-based simulation game. The addition of Money Mission supplements CUNA’s portfolio of Web-based personal finance modules—Home & Family Finance Resource Center and the online coach, Anytime Advisor.
Money Mission is designed to educate 16- to 19-year-olds in the fundamentals of financial literacy. The program has unique features that differentiate it from others currently available to credit unions, including:
• An immersive, animated interface with a look and feel designed specifically for the game and its targeted teen demographic;
• An innovative approach to simulation design, offering stock market prices and cost-of-living changes;
• A wide range of life-event and financial-management choices players must make using customizable characters called “avatars” who maneuver their way through the fictional city of MissionHeights; and
• Fourteen entertaining animated lessons that teach players essential financial principles.
CUNA and the leagues also believe Money Mission enhances credit union advocacy efforts as federal and state lawmakers increasingly recognize the importance of financial education to American households and the gaps between state and school district budgets and available resources.
A unique feature of Money Mission is that a percentage of each subscription goes toward a scholarship fund available to college-bound high-school seniors.