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[Senate Hearing 109-1050]
[From the U.S. Government Publishing Office]

                                                       S. Hrg. 109-1050

           IMPROVING FINANCIAL LITERACY IN THE UNITED STATES

=======================================================================

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                                   ON

  THE NEED TO IMPROVE AMERICANS' FINANCIAL LITERACY AND EDUCATION TO 
 ENSURE ALL AMERICANS HAVE TOOLS AND RESOURCES TO MAKE SOUND FINANCIAL 
                               DECISIONS

                               __________

                              MAY 23, 2006

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs

Available at: http://www.access.gpo.gov/congress/senate/senate05sh.html

                                ------

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48-320 PDF                  WASHINGTON : 2009
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Washington, DC 20402-0001

            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  RICHARD C. SHELBY, Alabama, Chairman

ROBERT F. BENNETT, Utah              PAUL S. SARBANES, Maryland
WAYNE ALLARD, Colorado               CHRISTOPHER J. DODD, Connecticut
MICHAEL B. ENZI, Wyoming             TIM JOHNSON, South Dakota
CHUCK HAGEL, Nebraska                JACK REED, Rhode Island
RICK SANTORUM, Pennsylvania          CHARLES E. SCHUMER, New York
JIM BUNNING, Kentucky                EVAN BAYH, Indiana
MIKE CRAPO, Idaho                    THOMAS R. CARPER, Delaware
JOHN E. SUNUNU, New Hampshire        DEBBIE STABENOW, Michigan
ELIZABETH DOLE, North Carolina       ROBERT MENENDEZ, New Jersey
MEL MARTINEZ, Florida

             Kathleen L. Casey, Staff Director and Counsel
     Steven B. Harris, Democratic Staff Director and Chief Counsel
                       Aaron D. Klein, Economist
                    John East, Legislative Assistant
              Dean V. Shahinian, Democratic Senior Counsel
           Sherry E. Little, Senior Professional Staff Member
   Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator
                       George E. Whittle, Editor

                                  (ii)

                            C O N T E N T S

                              ----------                              

                         TUESDAY, MAY 23, 2006

                                                                   Page

Opening statement of Chairman Shelby.............................     1

Opening statements, comments, or prepared statements of:
    Senator Sarbanes.............................................     3
    Senator Allard...............................................     3
    Senator Stabenow.............................................     4
    Senator Bunning..............................................    20
    Senator Carper...............................................    21
    Senator Menendez.............................................    23

                               WITNESSES

Daniel Akaka, A U.S. Senator from the State of Hawaii............     1
Ben S. Bernanke, Chairman of the Board of Governors, Federal 
  Reserve System.................................................     5
    Prepared statement...........................................    39
    Response to written questions of Senator Bunning.............    66
Christopher Cox, Chairman, U.S. Securities and Exchange 
  Commission.....................................................     9
    Prepared statement...........................................    50
    Response to written questions of Senator Bunning.............    67
M. Cindy Hounsell, President, Women's Institute for a Secure 
  Retirement.....................................................    25
    Prepared statement...........................................    55
Sarah Teslik, Chief Executive Officer, Certified Financial 
  Planner Board of Standards, Inc................................    27
    Prepared statement...........................................    60
Stephen Brobeck, Executive Director, Consumer Federation of 
  America........................................................    30
    Prepared statement...........................................    61

                                 (iii)

 
           IMPROVING FINANCIAL LITERACY IN THE UNITED STATES

                              ----------                              

                         TUESDAY, MAY 23, 2006

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10:01 a.m., in 
room SD	538, Dirksen Senate Office Building, Senator Richard 
Shelby (Chairman of the Committee) presiding.

          OPENING STATEMENT OF CHAIRMAN RICHARD SHELBY

    Chairman Shelby. The committee will come to order.
    Senator Akaka, we are pleased to have you here today. I 
will make my written statement a part of the record so we can 
move on.
    Chairman Shelby. Your written testimony will be made part 
of the record, without objection, and you proceed as you wish. 
Welcome to the committee again.

               STATEMENT OF SENATOR DANIEL AKAKA

    Senator Akaka. Thank you very, very much, Mr. Chairman, for 
having this hearing. I will make a brief statement and ask that 
my full statement be included in the record.
    Chairman Shelby. Without objection.
    Senator Akaka. I am delighted to be here, Mr. Chairman, 
because we share a common purpose of improving financial 
literacy for Americans.
    Mr. Chairman, I have appreciated your interest in this 
issue. Your efforts to make Americans financially literate and 
your including me in this hearing today, I really appreciate 
that.
    I want to thank Sherry Little and your entire staff for all 
of the contributions on this issue. I also want to convey my 
deep appreciation for all of the work that my good friend, the 
Ranking Member, Senator Sarbanes, has done for many years on 
financial literacy.
    I want to take this moment to thank Steve Harris, Aaron 
Klein, and your entire staff for their tireless work to help 
make Americans more financially literate. In addition, Senators 
Enzi and Stabenow have been leading advocates on this issue 
whose efforts I have greatly appreciated.
    I also want to thank Chairman Bernanke and the staff of the 
Federal Reserve, along with Chairman Cox and the staff of the 
Securities and Exchange Commission, for all of their efforts to 
help improve the financial decision making of Americans.
    In April, the SEC participated, along with the National 
Association of Securities Dealers, in an event in Honolulu 
intended to help the armed forces and service personnel be 
better equipped to invest and manage their resources and avoid 
predatory lenders.
    Mr. Chairman, we are all here because too many Americans 
lack basic financial literacy. A sample of economic statistics 
presents some disturbing realities. In 2005, one bankruptcy 
petition was filed for every 60 households. Meanwhile, the 
personal savings rate was negative last year. Millions of 
working families are susceptible to predatory lending because 
they are left out of the financial mainstream. The unbanked 
rely on alternative financial service providers to obtain cash 
from checks, pay bills, send remittances, utilize payday loans, 
and obtain credit. Many of the unbanked are low- and moderate-
income families that can ill afford to have their earnings 
unnecessarily diminished by their reliance on these high-cost 
and often predatory financial services.
    The 2005 Retirement Confidence Survey found that a majority 
of workers believe they are behind schedule on their retirement 
savings and their debt is a problem. A lack of preparation for 
retirement is of particular concern since more workers are more 
dependent on defined contributions rather than defined benefit 
pension plans and need to be better stewards of their financial 
futures.
    Reductions in employer-provided retirement and health 
benefits demand that we come up with more retirement dollars. 
Clearly, there is a great need for larger nest eggs, smarter 
investing, and better debt management. Without a sufficient 
understanding of economics and personal finance, individuals 
are not able to appropriately manage their finances, evaluate 
credit opportunities, and successfully invest for long-term 
financial goals in an increasingly complex marketplace. It is 
essential that we improve education, consumer protections, and 
empower individuals and families through economic and financial 
literacy in order to build stronger families, businesses, and 
communities.
    Mr. Chairman, I fought successfully to include my 
Excellence in Economic Education Act in the No Child Left 
Behind law. EEE supports teacher training, evaluations, 
research, and other K	12 activities in the No Child Left Behind 
legislation. I have been able to obtain approximately $1.5 
million a year for the program in the last three appropriation 
cycles. It is our schools effectively teaching economics and 
personal finance. Students can be prepared for the challenges 
they will face as business leaders, workers, heads of 
households, parents, and voting citizens. There is no better 
time than in childhood to instill the knowledge and skills 
needed to make good decisions throughout their lives.
    I am also working to include a provision of my colleague's 
LIFE--L-I-F-E--bill which addresses financial literacy needs 
for the college population in the Higher Education Act. 
Economic education and financial literacy are a vitally 
important component of increasing financial literacy. However, 
we need to attack predatory lending, bring people into 
mainstream financial institutions, and encourage the 
dissemination of improved personalized and relevant financial 
disclosures. Too many Americans, Mr. Chairman, are taken 
advantage of by unscrupulous lenders through refund 
anticipation loans, payday loans, and other predatory loan 
products. We need to develop more mainstream financial products 
and services that will provide viable alternatives to fringe 
financial services such as payday loans. That is why, Mr. 
Chairman, I introduced S. 1347, which would encourage the 
development of consumer-friendly small loans at credit unions 
and banks. This demonstration program will have a maximum 
interest rate of 18 percent and must include financial literacy 
opportunities for participants.
    I am very proud of the Windward Community Federal Credit 
Union in Kailua, Hawaii, for developing an affordable 
alternative to payday loans to help the marines and other 
members that they serve. We need to further encourage more of 
these alternatives so that working families have access to 
affordable small loans. We must also ensure that consumers 
receive improved personalized and relevant disclosures so they 
may make better debt management decisions. My bill, S. 393, the 
Credit Card Minimum Payment Warning Act, would mandate that 
credit card billing statements include how many years and 
months it will take to pay off the full balance if consumers 
only make the minimum payments.
    A recent Government Accountability Office report confirms 
that providing credit card users with detailed personalized 
information is possible and would help consumers make better 
debt management decisions.
    Again, I want to thank you, Mr. Chairman, for allowing me 
to participate today. We have a lot of work left to do to help 
improve the financial skills and well-being of our Nation. This 
is a daunting task, and I look forward to continuing to work 
with you and this committee.
    Thank you very much, Mr. Chairman.
    Chairman Shelby. Thank you, Senator Akaka.
    Senator Sarbanes.

             STATEMENT OF SENATOR PAUL S. SARBANES

    Senator Sarbanes. Well, Mr. Chairman, I just want to thank 
Senator Akaka for his extensive contributions in this area.
    Chairman Shelby. Absolutely.
    Senator Sarbanes. He has been focused on this issue for a 
long time. There are very important provisions included in law 
that deal with efforts to enhance financial literacy, and I am 
very appreciative of the leadership he has shown in this field. 
It has been a very significant and important contribution. I 
appreciate the testimony this morning.
    Chairman Shelby. Absolutely.
    Senator Akaka. Thank you very much.
    Chairman Shelby. Senator Allard, do you have any comments?

               STATEMENT OF SENATOR WAYNE ALLARD

    Senator Allard. I don't. It is good to see you this 
morning, Senator.
    Senator Akaka. Good to see you.
    Senator Allard. Thanks for your comments.
    Chairman Shelby. Senator Stabenow.

              STATEMENT OF SENATOR DEBBIE STABENOW

    Senator Stabenow. Thank you, Mr. Chairman. Just welcome to 
Senator Akaka. Thank you so much for your leadership, and I 
appreciate your referencing my authoring, along with Senator 
Enzi, this particular title, literacy title that we now have in 
law. I have been very anxious to see how things have been 
progressing. There is no question about it that at the core of 
the American dream is the ability for people to make wise 
decisions on buying a home, sending the kids to college, being 
able to have safety and security in retirement and so on. And 
so we share that goal, and I think we made a major step forward 
when we passed the Fair and Accurate Credit Transactions Act in 
2003, and we have had other efforts on behalf of this 
Committee. And I think it is something hopefully we will 
continue to aggressively pursue.
    Thank you.
    Chairman Shelby. Thank you, Senator Akaka, for appearing 
here today.
    Senator Akaka. Thank you very much, Mr. Chairman.
    Chairman Shelby. And thank you for your contribution.
    Chairman Shelby. I will call the next panel up: the 
Honorable Ben Bernanke, Chairman of the Board of Governors of 
the Federal Reserve System; the Honorable Christopher Cox, 
Chairman of the Securities and Exchange Commission. And while 
you are taking your seats, I will recognize Senator Sarbanes 
for any statement he wants to make.
    Senator Sarbanes. Thank you very much, Mr. Chairman.
    First of all, I want to express my appreciation to you for 
calling this hearing on the critical need to increase America's 
financial literacy and education efforts. I think it is another 
instance of effective oversight which this Committee under your 
leadership has been very much engaged in. We have talked about 
that, and I think it is a very important dimension of our 
responsibilities.
    I think it is a testimony to the importance of this issue 
that we have such distinguished witnesses before us at the 
Federal Reserve Chairman, Ben Bernanke, and the SEC Chairman, 
Christopher Cox. They have both been leading champions in the 
efforts to increase financial knowledge among all Americans, 
and there is a second panel to follow of leading experts in the 
field, and we look forward to their testimony. I want to thank 
all of the witnesses for joining us today.
    Financial literacy is a phrase we often here. I am not sure 
we fully understand it, but it is analogous in financial 
matters to basic literacy, the ability to read and understand 
what is read in our everyday lives. We are keenly aware from 
our efforts to improve our schools and raise students' ability 
to read that there are higher and lower levels of literacy. 
Numerous statistical studies support the proposition that in 
the field of personal finances, substantial numbers of people 
are financially illiterate.
    In the last Congress, I was able to work with you, Mr. 
Chairman, and Senator Enzi, who has been a leader for many 
years on this issue, both in the State of Wyoming and 
nationally, on getting legislation through that established a 
Presidential Commission on Financial Literacy and Education. A 
number of other Senators, including Senator Stabenow and 
Senator Akaka, who was just with us, were involved in this 
legislation. We sought to highlight the issue and to better 
coordinate the many programs that exist across the country 
under a more unified national strategy.
    Mr. Chairman, this Commission is chaired by the Secretary 
of the Treasury, and I regret that Secretary Snow could not be 
with us this morning. I understand he is out of the country. 
The Treasury, as chair of the Commission, did release a report 
some 9 months after the statutory deadline, and I have to 
express some disappointment in the report because I think it 
fails to articulate a coherent national strategy.
    Fortunately, the law requires that the report be updated 
annually, and it is my hope that in the future the Commission 
can produce the national strategy that will better enable us to 
coordinate and improve our financial literacy efforts.
    There are many programs across the country, Federal, State, 
and local level, governments, nonprofits, for-profit companies. 
The Maryland Bankers Association, for example, has a very 
active program in financial literacy, and comparable efforts 
exist in other parts of the country.
    It is clear that people need different types of financial 
information at various stages in their lives. Young people, 
retirees--the information they need is quite different.
    I do want to recognize that Chairman Bernanke and Chairman 
Cox are keenly aware of this. The Fed and the SEC have both 
provided great service in their specific financial literacy 
programs, and in working with the Commission in an effort to 
create a more unified and strategic approach in dealing with 
this problem. I personally want to thank both Chairmen and the 
staffs at each agency for the hard work they have done in 
trying to implement the legislation that was passed in 2004.
    Mr. Chairman, I think it is imperative that we push ahead 
on this. I think you can make a very substantial contribution 
to improved activities in the financial area. We are concerned 
about a lot of problems. I am not going to go through them all, 
but, you know, the savings rate has fallen below zero now, as I 
understand it. I guess that is still the case. If people become 
more financially literate, I think they will begin to 
understand its importance, and that has a very significant 
contribution to make, not only to the personal financial well-
being but also to the Nation's financial well-being.
    So, I welcome the two Chairmen. I look forward to their 
testimony and the testimony to follow from the panel of expert 
witnesses.
    Chairman Shelby. Thank you, Senator Sarbanes.
    Welcome again, Chairman Bernanke, Chairman Cox. Your 
written testimony will be made part of the record. You may 
proceed as you wish. Chairman Bernanke.

 STATEMENT OF BEN S. BERNANKE, CHAIRMAN, BOARD OF GOVERNORS OF 
                   THE FEDERAL RESERVE SYSTEM

    Mr. Bernanke. Thank you, Mr. Chairman. I would like to read 
a short version of the testimony----
    Chairman Shelby. Can you bring the mike up closer to you, 
Mr. Chairman? Thank you. Proceed.
    Mr. Bernanke. Chairman Shelby, Senator Sarbanes, and 
Members of the Committee, I am pleased to be here to discuss 
financial literacy and financial education.
    Improving Americans' financial literacy, always important, 
is becoming increasingly critical. In recent years, 
technological advances have dramatically transformed the 
provision of financial services in our economy. For example, 
the expanded use of credit-scoring models, by reducing the 
costs of making loans and by increasing the range of assets 
that can be securitized, has facilitated greater extension of 
credit to a larger group of borrowers. Indeed, we have seen an 
increasingly wide array of products being offered to consumers 
across a range of incomes.
    At the same time, the range of potential providers of 
credit and other financial services has also increased, 
including expanded market presence of non-bank entities, such 
as payday lenders and finance companies.
    Greater availability of credit, the so-called 
democratization of credit, and of other financial services has 
important benefits, but these developments have also increased 
the level of financial knowledge that consumers need to 
navigate the financial marketplace successfully.
    Informed financial decision making is also vital for the 
healthy functioning of financial markets. Like any other 
businesses, financial service firms will provide better 
products at better prices when they are subject to market 
pressures imposed on them by informed consumers. Market 
competition among financial providers for the business of 
informed consumers is, in my judgment, the best mechanism for 
promoting the provision of better, lower-cost financial 
products.
    Research suggests that financial education can help 
consumers make better choices. For example, for many decades 
various nonprofit organizations have offered home-buying 
programs and credit counseling. The evidence suggests that 
financial counseling can improve consumers' management of their 
credit. One study that analyzed nearly 40,000 affordable 
mortgage loans targeted to lower-income borrowers found that 
counseling before the purchase of a home reduced delinquency 
rates by 19 percent on average. This study also documented a 34 
percent reduction in mortgage delinquency rates among borrowers 
who received individual counseling rather than classroom or 
telephone instruction.
    My written testimony describes a number of other studies 
that document the positive effects of financial education and 
knowledge on financial outcomes.
    The Federal Reserve System has long recognized the value of 
economic and financial education for producing better informed 
citizens and consumers. Our efforts and initiatives in this 
area may help to illustrate some of the approaches that 
Government agencies might use in supporting financial literacy 
and financial education, so if I may, I would like to describe 
them briefly.
    First, one important means by which the Federal Reserve 
helps consumers make better informed financial decisions is 
through its consumer protection rule writing. For example, 
pursuant to the Truth in Lending and Truth in Saving Acts, our 
regulations require the disclosure of specific information on 
terms and fees associated with credit and deposit accounts. 
This information, and in particular the standardization of 
these disclosures across products and providers, allows for 
better comparison shopping.
    Of course, one of the challenges of creating effective 
disclosures is presenting information so that it is as 
accessible and understandable as possible. We conduct focus 
groups and consumer testing to inform the rule-writing process. 
The Federal Reserve also publishes numerous brochures that 
explain the terminology and consumers' rights in 
straightforward terms or provide useful information on 
particular areas of concern, such as predatory lending and 
identity theft. We have found that counselors and educators 
often use our brochures in teaching their audiences about 
financial products and services.
    Second, the Federal Reserve System has also worked to 
promote awareness of the importance of financial education and 
literacy. For example, in May 2003, the Board and the 12 
Reserve banks participated in a national campaign to call 
attention to the issue. This multimedia initiative, entitled 
``There's a Lot To Learn about Money,'' included a public 
service announcement and a toll-free number for obtaining 
financial education resources. Consumers were also directed to 
our financial education website, 
www.federalreserveeducation.org, which includes links to a wide 
variety of financial education resources at the national, 
regional, and local levels.
    A third piece of the Federal Reserve's financial education 
effort is its collaboration with a wide range of educational 
and community organizations. Staff members from the Federal 
Reserve Board advise national organizations, such as the 
Jump$tart Coalition for Personal Financial Literacy, the 
Conference of Mayors' DollarWi$e Campaign, Operation HOPE, the 
American Savings Education Council, and America Saves on the 
development of policies, programs, and partnerships.
    The Federal Reserve Banks also join with regional 
organizations to address financial education needs. For 
example, the Federal Reserve Bank of Cleveland has worked with 
community financial educators to form regional networks that 
combine resources and share best practices. The Federal Reserve 
Bank of Chicago sponsors ``MoneySmart Week,'' partnering with 
banks, businesses, Government agencies, schools, community 
organizations, and libraries to host activities designed to 
help consumers learn how to manage money. The Federal Reserve 
Banks of San Francisco and Minneapolis have worked with leaders 
in the Native American community to develop financial education 
materials.
    As part of its broader economic education effort, the Fed 
also runs a national competition for high school students 
called the ``Fed Challenge.'' I have included an appendix to 
this testimony describing some of the Federal Reserve's 
significant programs and collaborative efforts in financial and 
economic education.
    Fourth, the Federal Reserve promotes and engages in 
research relevant to financial literacy. For example, the Board 
conducts the triennial survey of consumer finances to gain 
insight into U.S. families' assets, borrowing, retirement 
saving, and use of financial institutions. Many researchers and 
practitioners use this unique data set in analyzing trends in 
consumer finances and consumer behavior.
    In another initiative, Federal Reserve researchers are 
collaborating with the Department of Defense to conduct a 3-
year longitudinal study of the effect of military-sponsored 
financial education on the financial decisions of soldiers and 
their families.
    Since 1999, the Federal Reserve System's biennial Community 
Affairs Research Conference has generated and highlighted new 
research on the efficacy of financial education. And at the 
district level, the Federal Reserve Bank of Chicago maintains 
the Financial Education Research Center, which provides access 
to online resources for researchers, educators, and program 
developers, and economists at the various Federal Reserve Banks 
are conducting a variety of studies on the effects of financial 
education.
    Fifth, and finally, the Federal Reserve seeks to improve 
the financial literacy of its own workforce. The Board offers a 
comprehensive financial education program to help employees 
plan their retirements and better use their benefits. We also 
offer regular seminars on topics ranging from budgeting and 
saving, to buying a home or investing for children's education. 
We view our employee education program as a win-win 
proposition. Research has determined that such programs benefit 
employers as well as employees. For example, one study found 
that workplace financial education programs contribute to 
improved worker performance, increased job satisfaction, and 
decreased absenteeism.
    Although progress has been made in improving the financial 
literacy of Americans, substantial challenges remain. Some of 
the most difficult problems involve the financial education of 
our young people. Findings by the Jump$tart Coalition, which 
has administered financial literacy tests to high school 
students annually for the past nine years, illustrate the 
issue. According to Jump$tart, student performance on these 
tests has not improved since the inception of the survey.
    Another concern is that the test results also show a gap in 
financial literacy between minority and non-minority students. 
Clearly, there is still much work to do to understand how to 
improve the financial literacy of young people. On the other 
hand, the Jump$tart survey does confirm the importance of 
financial literacy in that students who score higher on the 
test tend to make better financial decisions, such as avoiding 
bounced checks.
    Because financial literacy leads to better outcomes for 
individual consumers and for our economy generally, continued 
effort in this area is highly desirable. The good news is that 
there are many opportunities for cooperation and collaboration 
among public, private, academic, and community institutions. 
Advances in technology also offer great promise for improving 
the quality and delivery of financial information and for 
sharing of research and best practices. There remains, however, 
a great deal more to do.
    In closing, I would like to reaffirm the Federal Reserve's 
strong commitment to increased financial literacy and improved 
financial education. We look forward to continuing our 
collaboration with the many partners who share these 
objectives.
    Thank you, Mr. Chairman.

  STATEMENT OF CHRISTOPHER COX, CHAIRMAN,               U.S. 
               SECURITIES AND EXCHANGE COMMISSION

    Mr. Cox. Thank you very much, Chairman Shelby, Ranking 
Member Sarbanes and Members of the Committee. Thank you for 
giving me the opportunity to join with Chairman Bernanke and 
all of you this morning to testify about the importance of 
financial literacy and the Securities and Exchange Commission's 
efforts to protect and educate our Nation's investors. I 
commend each of you for raising awareness regarding this 
critical issue.
    Let me start with the particular challenge we face in 
educating our young people about personal finance and the 
benefits of savings and investment. I believe it is crucial 
that today's young people are encouraged to look a few years 
down the road and learn the greatest lesson of investing: start 
early. For aspiring young investors, the SEC offers a range of 
informative publications that emphasize factors to consider 
before investing. They provide important questions to ask 
before investing. Many of our materials explain how a small 
difference in fees can translate into a large difference in 
return over time. We also repeatedly remind young or new 
investors of the benefits of paying off high-interest credit 
card debt before beginning any investment program. Overall we 
have published hundreds of educational brochures, investor 
alerts, and short topics of interest to investors. While some 
of the most popular materials are available in print, all of 
our materials are also available on the Internet through the 
investor information section on our website.
    Also, since we serve on the board of the Jump$tart 
organization, our information, available in Spanish and in 
English, is incorporated into many K-12 curriculums. Anyone who 
can read a newspaper can understand our educational materials. 
Everything we produce is available free of charge and not 
copyrighted, so the widest possible dissemination is 
encouraged.
    We have also begun Beta testing of our podcasting 
initiative to deliver investor education through this means. 
Podcasting, as I think you all know, is a method of publishing 
audio over the Internet. It allows individuals to listen to our 
SEC broadcasts directly on their computers or download them for 
listening at their leisure on their iPod, MP3 player or other 
portable listening device. Individuals can get started by 
listening to our introductory podcast called ``Welcome to Your 
Money,'' or they can learn how to determine whether a hot stock 
tip is actually a good investment by listening to the episode 
called ``Hot Stock Tips.'' Users can download these podcasts, 
as I said, just as they would download music and customize 
playlists in exactly the same way. That way they have the 
flexibility to listen to these things and replay them as they 
see fit, whenever it suits their needs.
    If this outlet for dissemination is successful, which I 
think it will be, we plan to expand significantly the library 
of financial information available through podcasting.
    Now I would like to turn to the topic of our Nation's 
retirees, the largest and fastest-growing segment of our 
population. As you may know, I have spent a good deal of my 
time since becoming the Chairman of the SEC working to ensure 
that America's seniors are protected against those who would 
cheat them out of their life savings. That is why I recently 
announced that the SEC will convene a Seniors Summit of 
regulators and of organizations that are concerned with senior 
issues, to publicly discuss what steps can be taken to better 
protect this increasingly vulnerable segment of our society.
    I have also announced that we are working with State 
regulators and the NASD to evaluate the ubiquitous ``free 
lunch'' seminars aimed at convincing seniors to purchase 
complex and often unsuitable investments. Building on work that 
we first started in Florida, we are expanding our joint efforts 
to examine these free lunch programs in other jurisdictions.
    We have also created a page on our website aimed 
specifically at seniors. We are providing critical information 
on investments that are commonly marketed to them. It also 
provides key information about how to detect and avoid 
fraudulent schemes aimed at this segment of the population.
    We have other specialized educational tools, and they are 
not all aimed at seniors. For example, we have our ``Just for 
Teachers'' web page. The information here helps teachers with 
their own investments, and it also helps them in preparing 
classes for their students. We are quite aware that they have 
the need to make sure that their students have the resources 
necessary so that they understand personal finance in the 
classroom. All of these materials for teachers are available 
online. In addition, teachers can request a free teacher care 
package consisting of the SEC's educational brochures on mutual 
funds, variable annuities and other investing topics, and all 
of this will be mailed to the teachers.
    We have contacted teachers in every State to let them know 
the resources we have to assist in financial education, and we 
have mailed over 4,000 teacher care packages to educational 
professionals all across America.
    We are also committed to improving the financial literacy 
of America's troops, the men and women of our Armed Forces and 
their families. The SEC's Office of Investor Education and 
Assistance has teamed with the NASD Investor Education 
Foundation and the Department of Defense, on a multifaceted 
financial education program serving members of the military and 
their families. We presented our educational materials to 
enlisted men and women on military bases and on ships all over 
America. We have also built a web page dedicated to our 
military personnel and their families that contains helpful 
resources for service members.
    Finally, I would like to address the elephant in the room 
when we talk about financial education, and I am not talking 
about any of the Republican Senators on the majority side. Even 
armed with an outstanding financial education, very few 
investors are able to slog through the swamp of legalese known 
as corporate annual reports and mutual fund prospectuses. 
Current disclosures simply do not give investors the chance to 
read the key facts about a potential investment in plain 
English, nor to easily extract the particular information they 
want from these cumbersome mounds of paper. Until now, data has 
been held captive to the document in which it was originally 
published, but that will change once each piece of information 
is given its own life through data tagging.
    With interactive data, every investor will be able to focus 
on the disclosure they want with just a few clicks of their 
mouse. All of the information they seek is called up instantly 
to one piece. Since mutual funds are the investment of choice 
for retail investors, that is where we are beginning with our 
interactive data initiative, and that is where we feel it will 
make its first big splash. I am pleased that the Investment 
Company Institute, which represents the mutual fund industry, 
has recently volunteered its time and talent to completing the 
technical work necessary to allow mutual fund investors to 
enjoy the benefits of interactive data.
    The goal of interactive data is simple--to supply investors 
with information they can actually use. The Commission is also 
working toward this goal by requiring clear and concise, plain 
English disclosures in all of the information that is filed 
with us and distributed to investors for their benefit. Since 
the day I began at the Securities and Exchange Commission, I 
have been focused on translating these filings that appear to 
be written mostly for attorneys and accountants into plain 
English that ordinary investors can read and understand. 
Through our plain English movement, the Commission is committed 
to making disclosures more meaningful and intelligible to 
average investors.
    In summary, Mr. Chairman, encouraging financial literacy is 
a high priority for my colleagues on the Commission and for our 
professional staff. We seek to accelerate our educational 
efforts, and we believe that technology, combined with plain 
English disclosure, offers an unprecedented opportunity to give 
Americans the power to become the most informed investors in 
human history.
    Thank you for giving me the opportunity to be here to 
testify today about financial literacy, and I am happy to take 
any questions that you have.
    Chairman Shelby. Thank you, Chairman Cox.
    I will start with you, Chairman Bernanke. As you pointed 
out, as the American financial marketplace becomes more and 
more complex, is it not given that the complexity of 
marketplace and the choices that people have out there expands 
the problem and risk associated with financial illiteracy?
    Mr. Bernanke. Yes, Chairman. Henry Ford once said that you 
could buy any color Model T you want as long as it was black. 
That made car shopping pretty simple, I think, in those days.
    Chairman Shelby. But that is a far cry from our financial 
market.
    Mr. Bernanke. Yes, sir. Now we have a wide variety of 
products, a wide variety of providers, which generally is a 
good thing because it allows people to find the product they 
need for their own personal best use, but it also makes 
shopping much more difficult, and it increases the premium on 
having good financial literacy to understand what is going on 
in the marketplace.
    Chairman Shelby. I understand that each of the Federal 
Reserve Banks across the country has its own areas of expertise 
and its own unique perspective on this issue, financial 
literacy. How do you--as Chairman--how do you bring all of that 
together and put it in the context of what the Federal Reserve 
can do? Because you are not only a bank regulator, but also, of 
course, the Chairman of the Central Bank.
    Mr. Bernanke. Yes, Mr. Chairman. We have a division of 
Consumer Community Affairs at the Board in Washington, which 
oversees and coordinates the activities of the 12 Reserve 
Banks. As you mentioned, each of the Reserve Banks has a 
variety of programs that it gets involved in, which is very 
useful because some of the most effective programs are local 
and regional, and given that these banks are distributed around 
the country, they are better able than Washington is to take 
advantage of some of these cooperative coalitions with local 
nonprofits, banks, and others. But we do try to coordinate. We 
do try to oversee their activities, try to avoid duplication. 
We have a clearinghouse, for example, at Chicago for research 
done across the system, and in general we have made attempts to 
work together as much as possible.
    Chairman Shelby. Mr. Chairman, something is troubling to me 
and to a lot of people, especially the consumers of America, 
and that is the credit card situation. You get a credit card 
bill and the emphasis is on paying the minimum. Paying the 
minimum, which is a real problem for a lot of people that lack 
literacy in financial matters, but especially for our young 
people. Our young people have become hooked on heavy debt as a 
result of credit card purchases and so forth.
    What is wrong with some type of mandate that you put up 
there, if you pay the minimum? How long will it take you to pay 
this debt off? In other words, basically, you are just renting 
money, are you not, instead of paying the debt off? A lot of 
people do not understand or they do not get out in the weeds to 
understand. How do we approach that? I think this is a real 
problem.
    Mr. Bernanke. It is an issue, Mr. Chairman, and the concern 
is that when people are paying the minimum, that they are 
suffering a form of negative amortization. Their interest is 
being put back into the principal and it is compounding, and 
they are not really getting ahead.
    At the Federal Reserve we have tried to deal with that 
issue through guidance, through working with the banks, and 
trying to ensure that they have adequate minimums and adequate 
disclosures to avoid this problem. We currently only have a 
couple of banks that are doing large credit card operations 
and----
    Chairman Shelby. Can you deal with this issue without 
legislation, which is, I guess the bottom line?
    Mr. Bernanke. Well, speaking for the Federal Reserve, we 
found that through guidance and supervisory oversight, we have 
been able to get satisfactory practices from the banks that we 
supervise.
    Chairman Shelby. What do you deem to be satisfactory 
practices in this area?
    Mr. Bernanke. It should be the case that people understand 
the implications of paying the minimum, and that paying the 
minimum leads to ever-increasing balances, ever-increasing 
burdens on the credit card holder.
    Chairman Shelby. Would that include understanding something 
prominent in the bill describing how long it will take you to 
pay off the bill's minimum? In other words, the information for 
non-sophisticated financial consumers, which is most of us.
    Mr. Bernanke. Writing disclosures about the implications of 
paying the minimum is a very useful practice and we try to 
encourage that.
    Chairman Shelby. You think you can do that without 
legislation?
    Mr. Bernanke. We are currently conducting a top-to-bottom 
review of our responsibilities under the Truth in Lending, so-
called Regulation Z, and we will be looking at credit and 
disclosures as part of that review, and try to decide whether 
supervisory guidance or changes in regulation are needed.
    Chairman Shelby. Will you get back to us on this? Will 
you----
    Mr. Bernanke. Yes, Mr. Chairman.
    Chairman Shelby. To both sides. Senator Sarbanes and I are 
very interested in this issue.
    Mr. Bernanke. Yes, sir.
    Chairman Shelby. Thank you.
    Chairman Cox, I like what you are talking about and what 
you are doing at the SEC as far as bringing financial 
statements in line to where people can understand them, really 
understand them. Because as you well know from your background 
and your experience, financial statements are basically not 
written where people can understand them. So I commend you for 
the road you are going down. I hope you will stay on that road, 
because there is nothing better than an informed financial 
consumer, or any consumer. And if you do not understand 
something, I do not know how you make prudent investments. That 
is not only for the young people, it is also for the average 
American including myself, and especially for a lot of the 
seniors that you referenced earlier. Because we have directly 
and indirectly about 100 million Americans investing in the 
markets either directly or through mutual funds. I just believe 
that they need to understand, and a lot of them do not, and 
people are taking advantage of them.
    Mr. Cox. Mr. Chairman, we will not let up. You need not 
worry. We are very, very keen on making sure that the SEC, as 
the investors advocate, fulfills its mission of helping people 
make their investment choices with better information. We do 
not need to dumb down the information. That is not what plain 
English is all about. That is not what clarity of financial 
presentations is about.
    Chairman Shelby. It is clarity, right?
    Mr. Cox. That is right. We are trying to address the needs 
of busy people. If you are investing your money, your after-tax 
hard-earned savings, presumably that is because you have a job, 
you do something else for a living besides study these 
financial statements. So we have to take busy people in their 
real-life circumstances and give them the tools they need to 
make decisions reasonably quickly after the kind of study that 
can reasonably be expected of a financial customer, but they 
should not have to take three weeks off from work and take a 
special course and hire three assistants to go through the 
information that comes to them in the mail or that they see on 
the Internet.
    Chairman Shelby. Chairman Cox, the SEC's Office of Investor 
Information, it is my understanding, is responsible for a lot 
of the SEC's public education efforts. That office has worked 
to decrease identity theft by making people more knowledgeable 
about identifying and reporting this serious crime, which is 
rampant in America and all over the world. Could you share with 
the Committee some ways that we can improve our efforts to stop 
the attacks on people's wealth and their privacy in this 
country, to stop identity theft?
    Mr. Cox. Mr. Chairman, this is, obviously, part of a public 
education effort and a basic element of financial literacy. 
People, through good financial and, in particular, online 
hygiene, can take many steps to protect themselves. We want to 
be sure that the simplest of those steps is explained in plain 
English. Through our website we devote materials and 
information to this. At the same time, the SEC, through its 
enforcement arm, is going to take every effort that we can, to 
the extent that identity theft is part and parcel of securities 
fraud, to crack down on this.
    Chairman Shelby. The SEC also has a role in policing the 
behavior of financial market participants, central here. How 
has the use of the SEC's policing powers and the SEC's role in 
promoting transparency, helped thwart those who engage in the 
target groups, what you term affinity fraud?
    Mr. Cox. Mr. Chairman, affinity fraud crops up in a number 
of contexts.
    Chairman Shelby. What do you mean by affinity fraud?
    Mr. Cox. First explaining basic terms I think would be a 
good thing. Affinity fraud is simply the efforts of scam 
artists, people who are trying to rip you off, to prey upon you 
by appearing to be a part of your group. It could be a church 
group, a civic group, a nonprofit organization. It could be 
based on national origin--immigrants from a particular country, 
any number of things. In that way it is possible for crooks to 
insinuate themselves into circles where they will be more 
implicitly trusted. For that reason, we have tried to keep an 
eye----
    Chairman Shelby. Keep it inside a group or something like 
that.
    Mr. Cox. Exactly. These kinds of scams have been a target 
of special enforcement efforts. Affinity fraud and fraud 
against seniors are often closely connected.
    Chairman Shelby. OK, thank you.
    Senator Sarbanes.
    Senator Sarbanes. Thank you very much, Mr. Chairman.
    I want to just pick up on the fraud against seniors point 
that you just made. Ms. Hounsell, who is on the second panel, 
talks about the elderly being targets of fraudulent activities, 
and, in particular ,why women are at particular risk for 
economic insecurity in their retirement years. As I understand 
it, you have been focusing very intently on the question of 
securities fraud against seniors, and I wonder if you could 
just elaborate on that a little bit here this morning?
    Mr. Cox. I would be very pleased to do so. We have been 
focused, the SEC has been focused, along with State regulators, 
on the marketing of investments specifically to seniors, with a 
view to ensuring that the people who are making the sales 
pitches are closely supervised. Some of the rules that the SEC 
administers and enforces are focused on making sure that sales 
reps, when they are making these presentations, are doing so 
under the supervision of the organizations for whom they work, 
and a failure to supervise is a violation of our rules and 
generally of our laws.
    In this way we have been able in the early going, 
unfortunately, to determine that a great many of these special 
seminars to which seniors are invited, often with the lure of a 
free lunch, many of these things are abusive. In fact, we are 
close to 100 percent hit rate on the ones that we have visited 
where we are finding problems. So I am sorry to report that it 
was a very good idea for us to focus in this area, because each 
rock we turn over seems to have something crawl out from 
beneath it.
    Senator Sarbanes. I urge you on in that effort. I think it 
is extremely important and people are simply being exploited, 
and it is really outrageous when you think about it.
    Chairman Bernanke, I notice in your written testimony of 
the Fed evaluating the DoD's education efforts to see what 
works and what does not work--actually, we may be considering 
here in the near future legislation to protect members of the 
Armed Forces from unscrupulous practices regarding the sales of 
insurance, financial and investment products. There have 
obviously been some clear abuses. But that raises this issue of 
how do we evaluate the quality of all of these various programs 
that address financial literacy. There have been some studies 
that have said, you know, the program is not really very good. 
Someone is running a program. Everyone says, ``That is 
terrific,'' then they evaluate the results of the program, and 
they find out that it is not really producing results.
    How important is this evaluation process to making all of 
this work?
    Mr. Bernanke. Senator, it is obviously very important to 
try to determine which of these many different programs and 
approaches is actually producing results. This DoD study I 
think is a rare opportunity for us to do something approaching 
a controlled medical-type study, if you will, with control 
groups, with following people over a number of years, with 
looking at different types of practices and so on. I think it 
is going to be an excellent opportunity to learn more about 
what kinds of programs are actually effective.
    Senator Sarbanes. I think it is important to sift through 
all of these programs and begin to differentiate the ones that 
do work and seem to have an important impact, and then set them 
out as sort of the models to be pursued by others.
    I want to ask both of you. You are both on the Commission. 
We thought that the Commission, once put into effect, the 
Financial Literacy and Education Commission could become a 
significant actor in developing a national strategy that 
coordinated all of the Federal agencies, interacted with the 
State and local governments and the private sector. Up to now 
my perception is we are not getting there. And I would like to 
ask both of you--you are members of the Commission, although 
you do not chair the Commission, as I noted at the outset--what 
can we do to enhance the work of the Commission in terms of 
moving toward developing a coordinated national economic 
strategy?
    Mr. Bernanke. Well, the Commission had three products. A 
toll-free number and a website have been produced. And the 
Commission has delivered the report. I think the report is 
useful in calling attention to a number of the key issues and 
laying out some of the problems that we have to address. I 
think we need to do more work collectively to develop a 
national strategy, and I note, as you did earlier, that this is 
going to be an ongoing process of annual update and 
collaboration. So I think we have made a start, but I think we 
have more work to do to develop a more coherent national 
strategy.
    Senator Sarbanes. Chairman Cox?
    Mr. Cox. I would agree with that. I think the effort is 
gaining steam. As you know, the strategy document was due to 
Congress in July 2005. It was actually delivered in April 2006. 
In part, that was because of the charter that Congress gave. It 
required the involvement, collaboration, and ultimate agreement 
of 20 different agencies, but I would say that all of that 
effort, all of that energy was well worth it. Having agreed 
upon and delivered to the Congress the strategy and now begun 
to execute on it, I think we are much better situated than we 
were before.
    As Chairman Bernanke says, we have a website that is up and 
running that is www.mymoney.gov. In addition, there is a toll-
free number that you can call for information, 1-888-MY-MONEY. 
These are not too hard to remember. We are getting, I hope, 
some advertising for this just now in this hearing.
    There is really no limit to the amount that each of these 
20 agencies can do in this respect, but by focusing the effort, 
as Congress has done, I think you have helped us get a handle 
on it and ensured that we will move forward much more 
aggressively in the future.
    Senator Sarbanes. How often does the Commission meet?
    Mr. Cox. To my knowledge, this is an ongoing and regular 
collaboration at the staff level.
    Senator Sarbanes. It is staffed by an office in the 
Treasury Department, am I correct in that respect?
    Mr. Bernanke. That is correct.
    Mr. Cox. And the Chair of it is, of course, the Secretary 
of the Treasury. The Commission members themselves meet on a 
formal basis quarterly.
    Senator Sarbanes. Mr. Chairman, on occasion we have the 
Secretary of the Treasury here. As I indicated at the outset, I 
regret that he was unable to be part of this panel today as had 
originally been planned, and I intend the next time he comes 
before us, regardless of the subject matter of his appearance--
--
    Chairman Shelby. Sure.
    Senator Sarbanes.----to explore this issue with him, 
because, obviously, if we do not have strong leadership from 
the Chairman, or from the agency that is chairing the 
Commission, it is hard for everybody else, no matter how 
committed they are to the effort, to carry through in achieving 
some of these results.
    But I thank both Chairman Cox and Chairman Bernanke for 
their testimony this morning, and I also, again, repeat the 
appreciation I expressed at the outset for the efforts each are 
making in their own agencies, along with their dedicated staff, 
to try to deal with this question.
    Thank you very much.
    Chairman Shelby. Thank you.
    Senator Allard.
    Senator Allard. Thank you, Mr. Chairman. I appreciate the 
fact that we are making this effort to get investors educated, 
and I particularly want to applaud Chairman Cox for his efforts 
on plain action English, I guess, is what you call your 
program. I think that is badly needed and certainly helpful for 
all of us, I think.
    And I looked over the national strategy of financial 
literacy, and one of the things that struck me is that there 
are a number of action items listed, but I did not see any 
clear delineation of outcomes; and as you recall, Chairman Cox, 
a number of years ago--I think about 1993, 1994--we had the 
Government Results from Procedures Act legislation we passed 
out of here. It is now defined by this President as the PART 
Program and where they look at outcomes for a number of 
agencies.
    My question is, in line with the President's PART analysis, 
how does the Commission intend to evaluate the efficiency and 
success of its efforts based on outcomes? It is not to put in 
place--and in your testimony you have covered procedures and 
actions, but I am one who likes to see outcomes. No need to 
have a commission if we cannot show results from it.
    Mr. Cox. I would like to suggest at least one measure, 
because this is one of the measurements that has caused us to 
focus on the need for education in the first place, and that is 
information that we had put together by the nonprofit Jump$tart 
Coalition. They have gone out and surveyed the baseline level 
of financial literacy that we're addressing. What they have 
found, I think, is shocking in our country. They found that, on 
average, the high school seniors that they put these questions 
to could answer only 52 out of 100 questions right, testing 
basic financial literacy. They found, for example, that less 
than half of these high school seniors had an understanding of 
the impact of inflation on one's savings or one's investments. 
They found that only 14 percent of the high school seniors knew 
that the best return in a multiple choice question from a 
category of investments over the long term was stocks, not 
savings accounts, for example.
    I think if this is a national effort, if it involves all of 
these agencies of the Federal Government, that we ought to go 
back and check ourselves against this kind of data and see 
whether we are moving the needle, whether life is getting 
better or not, and whether this effort is meaningful. 
Obviously, that is the object. We want to improve the level of 
financial literacy in America.
    Mr. Bernanke. I would like to add to that.
    Senator Allard. Chairman Bernanke.
    Mr. Bernanke. That besides just looking at tests, we also 
want to look at outcomes and behavior, and do we see that 
people who have received this information, who have been part 
of these programs, are they doing a better job of budgeting, 
are they saving more, are they making better choices in credit 
markets? So we want to look at outcomes and behavior at that 
level as well as at the knowledge level, but I agree that both 
of these are very important.
    I want to reiterate my comments to Senator Sarbanes about 
the DoD study that we are doing. There is a real lack of 
serious program evaluation in this area. It is a very difficult 
problem from a social science point of view, and we are working 
on it in this particular context, and we will do other studies 
as well. But it is not going to be easy. We will need to do 
significant research to determine what works and how people's 
behavior is affected by those programs.
    Senator Allard. Is there some effort to somehow or other 
incorporate these programs into the educational effort that 
goes off--maybe not necessarily at an institution of higher 
education but perhaps at a vocational school, or even small 
business? Is one of their biggest reasons for failure is they 
just don't know how to manage their business properly and they 
just basically miss the fundamentals of how do you, in the 
proper way, fill out a check, and how do you manage your 
checking accounts? Your loans? Small business people have to 
get loans and traps that they can fall in there.
    Mr. Bernanke. Senator, there are two broad types of 
programs. There are programs in the K-12 educational system, 
and a number of States have mandated either financial education 
courses or modules in their programs, starting to get some 
sense of the effects of those programs. But also for adults, 
there are a lot of nonprofits. Just here in Washington I 
recently visited with a program called Operation HOPE in 
Anacostia, which counsels small business people on exactly some 
of the issues you are talking about, and the evidence we have 
is actually very favorable on counseling, because when people 
are making a decision about a mortgage or taking out a loan or 
starting a small business, they are very motivated to try to 
understand the issues. And counseling that takes place at that 
point has, we have found in the research and others, that it 
has definite benefits for their behavior.
    Senator Allard. I just want to thank you, Mr. Chairman. You 
can expect this Member of this Committee to frequently ask 
questions about the PART Program of the President, looking to 
ask the question on outcomes. Thank you.
    Chairman Shelby. Senator Stabenow.
    Senator Stabenow. Thank you, Mr. Chairman.
    Welcome back to the Committee, Chairman Bernanke and 
Chairman Cox. It is good to have you with us. I first want to 
say that we in Michigan are taking this issue very seriously. 
We have about 70,000 people in the last year that have received 
some kind of financial literacy education through our programs 
with our banks, our credit unions, Jump$tart, with accountants, 
others that are involved. We have about 250 student-run 
financial institutions and about 40,000 students that are 
getting some kind of credit, classroom credit, for learning 
about finances. So we have been able, in the last while, to 
double what we are doing in Michigan, and I think this is so 
important for all of us to be doing. When I originally put 
forward the idea of a commission--and, Mr. Chairman, I thank 
you for including the Stabenow-Enzi Commission legislation in 
the final bill we did as Title 5.
    The goal was not only to report on what we are doing, 
because as I looked around the Federal Government there are a 
lot of things that we are doing, and you indicated today a lot 
of things that we are doing, important things that we are 
doing, but the idea was to first bring it together and make it 
accessible--and we do have the website, we have the hotline 
number and so on--but also to really develop a strategy--and I 
know other colleagues have asked about this, but I think it is 
very important to look at the difference between a report on 
best practices, which I think really is what that report is. It 
talks about what is happening, what best practices are, versus 
a strategy on how we are going to go forward to determine what 
works and what does not, and make more things available.
    So I would ask your thoughts on really moving forward on a 
strategy. Do you see the Commission making recommendations more 
specifically on what should be available in schools, for 
instance, or what businesses should be doing internally as it 
relates to employees and retirement and so on? Where do you see 
us going on this? Because I think it is we really will not have 
done what I had hoped we would do if we have not gone beyond 
just listing what is already there, but how do we streamline it 
and bring it together, and how do we develop a strategy so all 
of this that we are doing in the Federal Government can come 
down to a point where we could have a strategy and measure it 
and really be able to see us moving forward on these issues of 
education, which affect predatory lending, which affect a whole 
wide range of issues that we deal with all the time? But I am 
concerned about getting to more specific actions and specific 
strategies.
    Mr. Bernanke. Senator, the good news is that so much is 
happening. As we talked about this morning, Chairman Cox and I, 
there are so many programs and so many initiatives going on. 
One point I would make is that one of the lessons we have 
learned is that there is room for both top-down and bottom-up 
type strategies. From the top-down, the Federal Government can 
usefully set standards. It can provide materials. It can do 
research. But we found that much of the effective work takes 
place when we collaborate with local nonprofits, community 
institutions, financial institutions and the like, who know 
their constituency, who know their local area, and so you want 
to have a combination of top-down and bottom-up. You do not 
want to take a entirely top-down approach.
    I do think that we need to look at how the activities of 
various agencies like the SEC and the Fed and many others are 
coordinating with each other and working together, and so I 
would just agree that we need to do more to understand how best 
to coordinate those activities and how best to measure those 
outcomes going forward.
    Mr. Cox. I would second that and add that the strategy 
document that was just delivered last month is just that, and 
it is very new, and so we are now beginning to execute on it. I 
think we all need to be encouraged to be creative. I think a 
good deal of what you expect of us is, as you say, not just 
that we will report and give you a static view of best 
practices or the way things have been, but collaborate and find 
new ways to reach people that are increasingly effective.
    One of the things that we are doing, along the lines of 
what I just presented here about seniors and students and armed 
services people and so on, is to target this information to the 
special circumstances of people at times in their lives when 
they can really use it. In Michigan and Ohio right now we have 
a lot of people who are losing their jobs in the auto industry. 
They are in these buy-out circumstances, and the Securities and 
Exchange Commission is targeting information to them, so at a 
time when they have to make choices about how to deal with a 
lump sum distribution, let's say that information is right at 
hand.
    Senator Stabenow. I would just encourage you to continue to 
do that, and I think it is very true, and I appreciate what you 
are saying, Chairman Cox, in terms of what people are going 
through right now, no question about it, but the more we can 
coordinate and even streamline. We found that there were, in 
setting up the Commission originally, there were lots of 
different things happening. We were not necessarily 
coordinating what was happening, and also making 
recommendations on where we ought to be putting our time or 
resources. It may be that there are some ways in which we ought 
to be investing some dollars to encourage certain kinds of 
things to happen, and I hope and look forward to your 
recommendations on that.
    Chairman Shelby. Thank you, Senator.
    Senator Bunning.

                STATEMENT OF SENATOR JIM BUNNING

    Senator Bunning. Thank you, Mr. Chairman.
    Chairman Bernanke, since the Fed raised interest rates two 
weeks ago, the stock market has given back a lot, if not all, 
of the gains made this year. The prime rate is now 8 percent, 
and almost every American cannot, I say cannot, borrow at that 
rate, and credit, especially mortgage credit, is getting too 
expensive for many Americans. Do you understand what the Fed 
actions and words have done? Does that bother you?
    Mr. Bernanke. Senator, in our policy statement on May 10th, 
we noted that there are some upside inflation risks in the 
economy. Among other things, higher inflation would raise 
mortgage rates by raising long-term interest rates. And we 
indicated at that time that some additional firming of policy 
might yet be needed in order to address those risks.
    But we also noted at that time that our thinking on this 
would be very data dependent. We would be looking at the data 
as they come in, and making a decision based on the full 
picture. We have about a month to go before the next FOMC 
meeting and a lot of data between now and then, and we will be 
watching that data very carefully.
    Senator Bunning. Chairman Bernanke, during your 
confirmation process, I warned you to be careful about what you 
say because people are going to follow your words very closely. 
At the end of last month your comments to a financial reporter 
at a White House dinner made quite an impact on the market the 
next week. Did you learn anything from that episode about being 
careful about what you say and who you say it to?
    Mr. Bernanke. Senator, that episode you refer to was a 
lapse of judgment on my part. In the future my communications 
with the public and with the markets will be entirely through 
regular and formal channels.
    Senator Bunning. Last but not least, Chairman Bernanke, why 
do you think the stock market has been so sensitive to the 
Fed's action and the statements over the last few months? Do 
you find it troubling how sensitive the markets are to interest 
rate expectations right now?
    Mr. Bernanke. Senator, I think there are a lot of factors 
that are entering into the stock market, among them some 
reduction in desire to bear risk, some change in evaluation of 
the global economy, and also some concerns about inflation. So 
I think there are a number of issues affecting the stock 
market.
    Senator Bunning. Or can we look at the action of the market 
as a typical correction, like a 10 percent correction which 
occurs occasionally, or do we have to look beyond that into the 
global economy?
    Mr. Bernanke. Senator, I do not want to make judgments 
about why the stock market is doing what it is doing or what 
the value of the stock market is. The Federal Reserve's 
responsibility is to meet its mandate of stable prices, maximum 
sustainable employment and low-to-moderate interest rates. We 
are going to make our decisions in a way to achieve those 
objectives.
    Senator Bunning. The problem with that is that we have to 
be accountable for the people for your actions, and your 
actions have adversely affected people's retirements, people's 
ability to invest confidently in the market, and with a 10 
percent correction--especially international markets have had a 
bigger than a 10 percent correction--we are troubled at the 
actions of the Federal Reserve, and I just want to let you know 
that.
    Thank you.
    Chairman Shelby. Senator Carper.

             STATEMENT OF SENATOR THOMAS R. CARPER

    Senator Carper. Thanks very much.
    I just want to say how refreshing it is to hear the 
statements that both of you have made, and Commissioner Cox, I 
think I should mention the plain English movement which you are 
the unofficial leader of here in the Federal Government, and I 
am just delighted that you are providing that leadership. I am 
delighted that our new Chairman of the Federal Reserve 
subscribes to that movement and is an active participant in it.
    In Delaware, we are quite proud of the work that is being 
done with respect to financial literacy. We have a State 
treasurer who--and I say this is an old State treasurer--who 
has taken up the mantel of leadership with respect to financial 
literacy throughout our State and has created something called 
the Money School. Actually, later today there is, this evening, 
the 20th anniversary celebration of something called Meaningful 
Economics Competition, that is really the heart and soul of 
that competition is a woman who is a retired elementary school 
teacher, who taught in the Brandywine School District for 
years, and actually would teach one of my sons. She is going to 
be--her name is Ronni Cohen. I like to say in Delaware, we are 
not a Johnny-come-lately with respect to financial literacy. We 
are not a Ronni-come-lately either. She has just provided great 
leadership for several decades. The competition is actually 
supported by the Delaware Money School and by the University of 
Delaware Center for Economic Education and Entrepreneurship. So 
these are issues that we are not just interested in, but 
enthusiastic about in the First State. We appreciate your 
comments today.
    Before you actually began your testimony, Commissioner Cox, 
I was wondering how do we convey these--let me just ask both of 
you just a simple question. Why do you think we are such lousy 
savers in this country?
    Mr. Bernanke. Senator, in the aggregate, part of the 
factors that has been driving down the savings rate has been an 
increase in capital gains. Essentially for people who own a 
home, for people who own stocks, increases in wealth have made 
people feel that it is less necessary to save out of their 
current paycheck, and that has been one of the factors that has 
driven down the savings rate over the past few years.
    That is a concern because if we cannot finance our domestic 
investment through our own saving, it contributes to the 
current account deficit, which is an issue we have discussed at 
other times.
    There is a rather separate issue, I think, which is saving 
at the lower end of the income distribution, which has always 
been quite low, and that is a concern because people need to 
have at least some savings for precautionary purposes, and one 
would hope, to help them in their retirement or in education 
and those sorts of things. We need to improve financial 
literacy and financial understanding to help people understand 
the instruments and the importance of saving.
    I think employers could be helpful, for example, by 
providing savings vehicles and by having a default option which 
says people will automatically have a payroll deduction into 
their saving plan unless they otherwise choose not to, which 
has been shown to increase savings rates.
    It is possible that the Congress might want to consider 
various tax measures to provide incentives for saving at the 
lower levels of income. There is a whole variety of approaches 
one could take.
    It is true, historically, we have not been high saving 
people in this country, but I think the concerns are greatest 
at the lower levels of income where there is very little wealth 
and very little reserve in case of emergency or for retirement.
    Senator Carper. Thanks.
    Mr. Cox, briefly, do you want to respond? Why do you think 
we are such lousy savers?
    Mr. Cox. Certainly, in my capacity as Chairman of the SEC, 
I cannot improve upon professional economists and the Chairman 
of the Fed's description just now, and I subscribe to 
everything that he just said. As a former Member of Congress, 
normally I would be happy to jump into the tax debate and 
describe how incentives for saving in the tax code might be 
advisable, but sticking to the position I am playing and the 
reason that I am here, I think there are two main reasons that 
can describe the way that people save and do not save in 
America. One category of reasons is structural, and economists 
in particular should be listened to in explaining those.
    The other is behavioral, and there the SEC can play a role. 
To the extent that these are choices that people are making, 
rather than decisions that they really haven't any control over 
because of wealth factors and so on. To the extent that these 
are choices that people are making, education can help, making 
it easier to invest wisely.
    And so what we are doing to facilitate investors' choices, 
I think, plays a big role there.
    Senator Carper. My time has expired. We have a vote 
underway, so I am going to yield to our colleagues.
    Chairman Shelby. Senator Menendez.

              STATEMENT OF SENATOR ROBERT MENENDEZ

    Senator Menendez. Thank you, Mr. Chairman.
    Chairman Shelby. We are about to run out of time, but I 
wanted to recognize you. We have a vote on the floor.
    Senator Menendez. Thank you, Mr. Chairman. I appreciate it.
    I want to get just to two very specific points, and they 
both go toward the question of financial literacy, but 
particularly as it relates to the impact in two areas, credit 
card debt, particularly among young people, and adjustable rate 
mortgages.
    My district director's 2-year-old son got a pre-approved 
credit card, so I guess if you have a Social Security number 
and a pulse beat you can get a credit card. The reality is, is 
the number of solicitations that are out there, particularly 
aimed on college campuses with young people is overwhelming, 
and that is now wonder that we now have undergraduates who have 
credit cards and have high-level balances between $3,000 and 
$7,000. I keep hearing stories from families who ultimately 
paid off the debt of their students because they did not want 
them to end up with bad credit.
    When you look at that and you look at the number of 
solicitations that are taking place, the question is, Chairman 
Bernanke, is Regulation Z really being used in such a way that 
ultimately creates that protection? Should we consider the 
possibility of having that particular universe having to opt in 
versus opting out because of the enormous overture and the 
great debt that is being accrued by this generation of 
Americans in this age group?
    And second, I have a real concern about this tranche of 
adjustable rate mortgages that are going to be coming due--I 
think some estimate it to be around $2 trillion--in which this 
adjustment period will take place and what the consequences are 
for consumers in this country to be able to actually pay their 
new rates. Is that a concern that you have as well?
    Mr. Bernanke. Senator, first on credit cards, there are 
arguments on both sides. As an economist I know I am always 
subject to that critique, but from the point of view of a 
college student, credit cards can be a convenience. They can 
also be a way to build a good credit history. It can be a way 
to learn how to manage money. So used properly, they can be 
positive. Obviously, they also have the potential to create 
debt and problems for students.
    I think the best approach is, again, through financial 
literacy. If students are exposed at the high school level and 
the college level to these issues of credit management, and we 
take that seriously, I think that is probably the best 
solution.
    Disclosure is important. People need to understand, as we 
were discussing earlier, the importance of making substantial 
payments each month and keeping up with their obligations. And 
again, as I mentioned, we are reviewing Regulation Z on credit 
cards, and we will be thinking about all aspects of our 
disclosure and information policy in that respect.
    On adjustable rate mortgages, our data are that about 10 
percent of all mortgages, not just adjustable rate, but of all 
mortgages, will reprice in 2006. Something on the order of 20 
to 25 percent of outstanding mortgages are adjustable rate and 
something close to half of those will be repriced, we think, 
within the next year. That is significant, obviously, for those 
people who have those mortgages and may be facing higher 
interest rates.
    One concern I would note is that adjustable rate mortgages 
seem to be more prevalent in the sub-prime market relative to 
the overall market, and so some pressure may be felt in that 
area.
    The Federal Reserve and the other banking agencies have 
recently issued guidance about nontraditional mortgages, which 
go beyond adjustable rate mortgages to look at interest-only 
mortgages and payment option type adjustable rate mortgages. We 
are asking banks and other lenders to be more complete in their 
disclosures and explanations, and more careful in their 
underwriting to make sure that the people who are taking out 
these more exotic mortgages both understand the instrument and 
are able to make the payments even as interest rates adjust.
    Senator Menendez. I appreciate your answer. I think we have 
to start earlier on financial literacy than even high school, 
to be very honest with you. Hopefully, parents do that, but the 
reality is a great percentage of those students who were in a 
survey said they didn't get that from their parents. So the 
reality is, with credit being such an incredible part of our 
lives, and bad credit having such enormous consequences, this 
universe of Americans is being challenged to operate credit 
responsibly and effectively and not end up with bad credit, and 
I think we need to extend ourselves.
    And on the adjustable rate mortgage, I will just tell you, 
I hope that when people hit the new levels that they have to, 
that they are going to be able to sustain the payments, but I 
have a real concern that they will not, and we will see a fair 
number of houses being foreclosed upon, and that has an 
enormous effect, not only to those individuals, but to the 
economy as a whole.
    Thank you, Mr. Chairman.
    Chairman Shelby. Senator Carper, you have a last word for 
this panel?
    Senator Carper. Your point about starting early, Ronni 
Cohen was a fourth-grade teacher for my son, Christopher, at 
Burnett Elementary School. By the time he was 15 years old, he 
had saved $7,000. She taught his financial literacy course in 
the fourth grade. He was about 9 years old. He is an 
extraordinary saver, and I suspect that so are the other kids 
that went through his class with him and the others who have 
learned from her. Starting early, I think you nailed it right 
there. That is the key.
    Chairman Shelby. We thank the panel. I do want to note for 
the record that Secretary Snow is in the Middle East at the 
request of the President, but his written testimony will be 
made part of the record.
    Chairman Shelby. Chairman Bernanke, Chairman Cox, we 
appreciate you coming today.
    We are going to try to make this vote and then come back 
for the third panel. The Committee is in recess.
    [Recess.]
    Chairman Shelby. The Committee will come back to order.
    Our third panel is composed of Ms. Cindy Hounsell, 
Executive Director, Women's Institute for a Secure Retirement; 
Ms. Sarah Teslik, Chief Executive Officer, Certified Financial 
Planner Board of Standards, Incorporated; and Mr. Steve 
Brobeck, Executive Director, Consumer Federation of America.
    We welcome all of you here. Your written testimony will be 
made part of the record. We appreciate your patience in going 
through two panels. This is the third panel today. So you 
proceed. We will start with you, Ms. Hounsell.

 STATEMENT OF M. CINDY HOUNSELL, PRESIDENT, WOMEN'S INSTITUTE 
                    FOR A SECURE RETIREMENT

    Ms. Hounsell. Thank you. It is an honor to be here. Thank 
you very much for including this issue of women's retirement.
    First, I wanted to start with a story, the story of Hazel 
Shoyrer, a lifelong worker, who would have greatly benefited 
from financial counseling when leaving her job. Like most 
workers, she was left on her own to figure it out, and the 
decision she made will affect her standard of living for the 
rest of her life.
    Ms. Shoyrer retired at age 62 from a Chicago factory after 
30 years. Like most American workers, she took her Social 
Security benefit at the earliest age and, when she did so, 
likely was informed that it would provide her with the highest 
amount of lifetime benefits.
    A moderate earner, she was unaware of the amount of money 
needed in retirement. She thought she could easily manage her 
modest lifestyle with monthly $900 Social Security and $988 
pension payments. In fact, her benefits add up to a substantial 
amount for an average worker, $10,000 above the median 
retirement income for retired women. She had also accumulated a 
nest egg of $5,000 which probably seemed to her like a sizable 
amount of money.
    After retiring, she took a part-time job at a truck stop. 
But then she was hit with what researchers call a ``negative 
shock,'' an event likely to cause significant financial 
consequences. Her negative shock was pneumonia. It landed her 
in the hospital. The $5,000 in savings vanished, a $10,000 
hospital bill appeared, and she lost her part-time job.
    She is now age 67, and she is looking for work. She pays 
hundreds of dollars a month for medications, insurance, and her 
Medicare Part B. She talks about her bills, and she says, ``No 
matter how much you think you have, it's not enough.''
    She was never told the basics. Such as, she needed to be 
age 65 to be eligible for Medicare and that taking Social 
Security would cause her to lose 20 percent of her benefit. She 
is unlikely to recover financially, and while she continues 
searching for work, that will become more difficult as she 
ages.
    Women, least of all, can afford any of these financial 
mistakes. We use this example because it is not an uncommon 
story and because she started retirement with twice the income 
of most women and access to a pension that today is only 
available to one out of five workers.
    Women have unique retirement problems. The biggest risk is 
longevity. Women should be saving more money than men because 
they will need extra money to support longer lives. Yet two-
thirds of working women earn less than $30,000. So the notion 
of being told to save more must seem like trying to get blood 
from the proverbial stone, especially as all workers are taking 
on more out-of-pocket responsibility to pay for their health 
and retirement benefits.
    Despite a decline in poverty rates among older Americans, 
many older women remain poor, and that likelihood increases 
with age. It is a startling demographic, but the vulnerable 
population of those living past age 85 is expected to double 
and triple over the next few decades.
    All Americans are being asked to assume a larger share of 
responsibility for making complex retirement savings decisions. 
Aside from the overwhelming quantity of information, financial 
literacy is impaired by language that many people just don't 
get. The Treasury report mentioned earlier refers to the 
national mosaic of America's financial literacy and education. 
I think mosaic is a generous description. It is more like a 
giant jigsaw puzzle that is missing the box cover that shows 
the picture.
    I think it is also laudable that the Committee and the Bush 
administration have set a course to develop a national 
strategy, and perhaps that strategy will help people to see the 
puzzle begin to take shape.
    Our experience with financial education outreach has borne 
out the research. People need the guidance to make the crucial 
decisions. Our most popular booklet, which I happen to have 
here, is ``Seven Life-Defining Decision,'' a joint project with 
the Actuarial Foundation. It takes people through the big 
decisions such as taking a job, marriage, starting a family, 
determining when to retire, how much income is needed, it walks 
them through it all.
    We have learned that people need the information put into 
such a context because they hear a lot of conflicting advice. 
You ask any three financial experts whether you should pay off 
your home mortgage, and you are likely to get three different 
answers.
    In a dramatic display of the broader consequences of our 
financial literacy, the State of Nebraska recently dropped its 
401(k)-type plan because it found that individuals' investment 
decisions were unwise, resulting in a waste of taxpayer 
contributions to those plans. In fact, a study by Standard & 
Poor found that as a result of poor investment practices, a 
switch to 401(k)s by public employees might lead over the 
medium term to lower pension contribution costs, but in the end 
they were going to have higher public assistance costs.
    Our program known as the POWERCenter began as a cooperative 
project funded by the United States Administration on Aging. We 
work with thousands of organizations across the country. They 
teach our program. We work with financial companies, insurance 
companies, everyone. But this is a drop in the bucket compared 
to the millions of boomer women who need to be educated.
    We have found that workshop participants are most 
interested in learning how it all fits together--a basic 
lifetime financial journey. I often say to people it is like 
those refrigerator magnets where all the words are in a jumble, 
and then they all get thrown at you--annuity, beneficiary, you 
know, money markets, all of these things. And people just don't 
have the basic road map on how to make the right decisions.
    Outreach, let me just give a few suggestions because I know 
my time is running over. We have 48 million boomer women whose 
retirement clocks are ticking. I think what we need is a 
coordinated national campaign that everybody is going to be 
talking about. When I was a much younger woman in the early 
1980's, everyone used to talk about IRAs. You have to have one, 
you have to sign up. And I did. I don't even think I knew why, 
just everyone told me that I had to do it, that it was a good 
deal. And if I hadn't had that, I am sure I would not have the 
financial security that I have today.
    One of our board members is also a financial journalist, 
and she does financial tips for MTV's University feature, and 
that is another way to reach people. But we have to reach the 
omen that I am talking about because they are the ones that are 
coming up, and they are the ones that are going to be likely 
living in poverty with no idea that this is happening.
    Women are much more likely to spend their lump-sum 
retirement distributions because they have smaller accounts. We 
have to stop them from doing that. And then I thought I might 
as well leave you with sort of a far-fetched idea, and the far-
fetched idea is that there is a retirement readiness program 
that is being developed by InFRE, which is the International 
Foundation of Retirement Education, for testing with OPM. And 
perhaps there is some way that a retirement readiness test or 
checklist could come with your Social Security statement and 
you would tick off all these things and if you cannot tick them 
off, then you cannot retire and you should not be taking those 
benefits early.
    Finally, to end on an upbeat note, I will say that we were 
able to launch a wonderful program in Appalachia with a group 
of self-employed knitters. To make a long story about a very 
complicated journey short, since half of the full-time working 
women in West Virginia earn less than $20,000, we were able to 
get all of these knitters into a savings program, and it showed 
that if you spend enough time teaching financial concepts, and 
if you have a financial incentive, that low-income workers will 
take the opportunity to do something about it.
    Thank you.
    Chairman Shelby. Ms. Teslik.

 STATEMENT OF SARAH TESLIK, CHIEF EXECUTIVE OFFICER, CERTIFIED 
           FINANCIAL PLANNER BOARD OF STANDARDS, INC.

    Ms. Teslik. Thank you very much. I know that the main 
obligation of a last panel is to be brief, so with your 
permission, I will skip introductions. In fact, I think if 
Dante were going to redo the Inferno today, he would add a 
layer of hell where you have to listen for eternity to 
testimony at hearings. So I will try to be brief.
    What we have learned this morning so far is that we have a 
huge problem. You have heard a number of facts, although I 
don't know that you have heard the juiciest ones. I gave you a 
one-page summary of those, of which my two favorite are the 
following:
    If I told you to go to a number of bedrock States like 
Indiana, Ohio, Tennessee, Utah, knock on every door, and find 
out how many households had ever declared bankruptcy, if I said 
to you that 1 out of 40 of those households had declared 
bankruptcy sometime in their existence, you would be stunned. 
But that is not the truth. The truth is that more than 1 out of 
40 households in those States has declared bankruptcy in the 
last year alone.
    Chairman Shelby. Say that again.
    Ms. Teslik. In Indiana, Ohio, Tennessee, and Utah, over 1 
in 40 households declared bankruptcy last year alone.
    Chairman Shelby. Is that unprecedented?
    Ms. Teslik. It is. It is in the one-page fact sheet. The 
other fact I will highlight from that sheet is the following: 
Look at current seniors. This is the generation that has lived 
through the Depression, the Greatest Generation, the one that 
works hard and saves. How much money does the average senior 
today get from their retirement savings? Not from Social 
Security, not from their corporate pension fund. From their own 
savings, which is what we are trying to generate here through 
financial literacy. A thousand dollars a year. That is from the 
Depression era babies. That is the size of the problem.
    We know we have a huge problem. Nobody debates that. We 
also know we have a huge effort that has been around for a 
while, thanks in part to a number of you, targeted at financial 
literacy. Look at the size of the list of entities compiled by 
the Treasury Department. Look at all the public and private 
dollars. We know there is a huge effort, but, frankly--and I 
will be the one to say it--so far the effort has been a huge 
failure. The numbers are all going in the wrong direction. 
There are just little bits here and there, but we are getting 
deeper into debt. We are having worse and worse behavioral 
outcomes.
    The fact of the matter is there is no mystery why the 
problem is getting worse, not better, despite this effort. If 
you think about what you have heard so far this morning, the 
whole focus has been on financial literacy. Literacy is 
information. Information works most easily for something that 
is simple to do, like the campaign recently that says turn your 
babies up instead of down. It is very easy for people to flip 
their babies. We are not talking about baby flipping here. We 
are talking about telling people to postpone gratification. 
That is what financial literacy is. Don't spend it today, save 
it for tomorrow. By the way, save it for 40 years from now when 
you might not be around and those little bits will add up so 
slowly you will hardly notice them. That is what financial 
literacy is. This is about as tough a game as you are ever 
going to play. This is a game that equates most closely to the 
efforts to combat smoking, alcoholism, gambling, and dieting. 
And you have got to think about it that way or all of this will 
be a waste of time.
    What that means is we have to not only focus on the message 
of financial literacy, which has so far been massaged to death. 
But we have to focus on the behavior. Are we reaching the right 
people and are we changing their behavior?
    Luckily, there happens to be a revolution going on--the 
timing could not be more perfect. It is a revolution in 
academia. I know that sounds dull. It is actually not dull. And 
that is that because of technology, our ability to put people's 
brains in PET scans and watch them think while they are alive 
and our ability to crunch numbers in huge amounts. The areas of 
psychology, biology, chemistry, anthropology, and finance are 
merging. The thing that is in the center of them is financial 
literacy, financial behavior.
    So what is it we are learning, and what does this mean we 
should do? I am going to say five totally inappropriate things 
because, otherwise, what is the point of being here?
    The first is we know that people like to be inert. I know 
my sons don't like to wake up in the morning and hear them as 
an example yet again on the evening news, but we know that 
people like to be inert. So science has taught us that if we 
redesigned financial structures so that people take no action, 
they take the right action. That is obviously why we have seen 
a bump up in participation of 401(k) plans. That is the thing 
we already know about, but that is an example where the science 
has made us do a better job. We simply changed the structure. 
We are getting higher participation rates.
    The second is that we have to admit that because financial 
literacy asks you to postpone gratification and because human 
beings are wired as a survival mechanism not to do that, you 
need to pair a postponing action with a now reward, which is 
why banks used to give away toasters when you opened bank 
accounts. They had that figured out 50 years ago, but we are 
missing that in financial literacy. Where are the efforts to 
pair a reward today for a savings action tomorrow? There are 
many ways to do it. There are some ways which our laws prevent 
that from happening. This is an easy area to work on.
    Third--and this sounds odd--meds, pills. We know, for 
example, that some percentage of people who take Parkinson's 
medication become compulsive gamblers. We know there is a 
chemical link. We also know that there is now chemical evidence 
that you can play with people's wiring with pills and alter 
their shopping habits. I know this sounds odd--but if you are 
going to tackle a problem as large as our personal finance 
problem, you have to look at all the weapons you have got, and 
this is another area where the science is booming. In fact, I 
would make the case that the Banking Committee may want to 
rethink what its most important Government agency is. It may 
turn out to be NIH, where all these grants are given, rather 
than the SEC.
    Fourth, why don't you go with a winner? What is one of the 
most compelling, engaged-in financial behaviors in America 
today? Gambling. One-quarter of all Americans--including 
babies, prisoners, the institutionalized, people who cannot get 
out--one-quarter of all Americans have visited a non-Indian 
reservation casino at least four times in the last year. The 
amount of money that Americans spent last year with online 
gambling, smaller than the other two types of gambling, last 
year, was $145 billion. Now, there is science behind this. We 
know why gambling is addictive. I can go into it, but I will 
not. We do know why it has a draw for humans that putting money 
in a 401(k) does not. OK, well, we know that works. Why don't 
we change the way we get people to do financially responsible 
stuff to draw on this science?
    For example, have a State lottery, but put the money into 
everyone's 401(k). Right now I have to beg my hourly employees 
to participate in our 401(k). I do not ever beg them to 
participate in the State lottery. They do it. There is actually 
a scientific reason for that. Why structure something where you 
force people to make a hard decision when you can let them make 
an easy decision? There is a lot of creative work out there. I 
do not hear it being discussed in forums like this. It has a 
lot of potential.
    Finally, let's look at the organizations that have 
addressed similar problems--alcoholism, smoking, dieting. What 
is the only successful model in all of those areas? It is 
networks like AA, Weight Watchers, Take Off Pounds Sensibly. If 
we are going to all jump into ice water together, we need a 
bunch of people to hold our hands and go together.
    I just read in the Annals of Internal Medicine's edition 
last month that when they had a dieting program that gave the 
same information in two ways--one, they gave it once; and then 
the second model, they gave it 30 times over a period of weeks. 
There was, of course, a huge difference in the success rate if 
you do it over time. Financial literacy information needs to be 
packaged in networks of human beings over long periods of time 
if we are going to get people to give up the shoes today to 
save for retirement.
    Thank you.
    Chairman Shelby. That was a good presentation. Thank you.
    Mr. Brobeck.

  STATEMENT OF STEPHEN BROBECK, EXECUTIVE DIRECTOR, CONSUMER 
                     FEDERATION OF AMERICA

    Mr. Brobeck. Thank you, Mr. Chairman, Senator Sarbanes, and 
I thought I was going to be the only skunk at the garden party, 
but I endorse virtually everything that Ms. Teslik has said.
    In my remarks, I will focus on the limits and opportunities 
of financial education to help tens of millions of Americans 
become truly financially literate. Unfortunately, financial 
education is limited by its current weaknesses and by its 
inherent character. There is no coherent national strategy nor 
effective leadership implementing the strategy to meet the 
financial literacy needs of the Nation. In the schools, 
coalitions have made progress persuading State legislatures to 
pass financial education mandates, yet many States still have 
not approved mandates, and in those that have, the education 
varies widely in intensity and effectiveness. The magnitude of 
the remaining challenges is reflected in annual surveys of 
students with financial education that reveal low knowledge 
levels which have not improved.
    In communities, financial education efforts are even more 
fragmented. Just in the past decade, hundreds of public 
corporate and nonprofit organizations, including my own, have 
initiated their own programs that seek to inform and educate. 
Yet the quality of these programs varies considerably, with 
many ignoring the most important messages consumers should 
receive. I would be surprised to learn, for example, that most 
materials about credit cards stress the single most important 
message that card holders should try to pay off all their 
balances in full every month on time or, to oversimplify, bad 
things may well happen to you.
    Moreover, there is little adequate evaluation of the 
effectiveness of all this community financial education. Most 
initiatives contain no assessment of consumer impact. Those 
that do tend to limit their evaluation to one-time surveys of 
the experience of participants, and very few attempt to study 
the long-term programmatic effects on participant behavior and 
whether any behavioral changes are sufficient to meet financial 
services needs.
    Even more importantly, financial education is limited in 
the extent to which it can produce real financial literacy: the 
ability to effectively manage one's financial resources to 
achieve lifetime financial security. Knowledge, though 
essential, is simply not enough. Consumers must value this 
knowledge enough to apply it, and there must be accessible 
opportunities for utilizing these skills. Let me give two 
examples very briefly.
    Knowledge about retirement programs is very difficult to 
apply if one does not have available at work a contributory 
plan, as many workers do not. But even when one is available, a 
significant minority of employees are not sufficiently 
motivated to participate, and of those that are, many choose 
inappropriate investment allocations. Similarly, knowledge 
about the expense of payday loans is not sufficient if one does 
not have available less expensive credit options. And even when 
these options exist, they are sometimes considered too 
inconvenient to be utilized.
    Truly effective financial education is linked to motivation 
and opportunities to produce desired behavioral change and has 
the capability--this is very important--of going to scale. 
Hundreds of uncoordinated programs only trying to convey 
knowledge are not sufficient to meet the financial services 
needs of tens of millions of consumers. I would urge this 
Committee and others to examine programs that come the closest 
to meeting the criteria for effectiveness that I have outlined.
    In closing, I suggest one initiative that would not only 
help link diverse financial education programs but also help 
motivate as well as inform consumers. That is a call to all 
consumers in the country to estimate and then periodically 
monitor their net personal wealth. Awareness of net assets is 
an important motivator for better money management and debt 
management, as well as savings accumulation. People who know 
their net wealth are more likely to spend money carefully, 
monitor their finances, live within their financial means, and 
patiently accumulate wealth through retirement savings, 
homeownership, and other savings strategies. In other words, if 
Americans were more aware of their net personal wealth, they 
would be far more receptive to effective financial education 
programs that help them monitor, conserve, and accumulate 
financial resources. My written testimony suggests how such an 
initiative, at least in broad outline, might be developed, as 
well as an appropriate role for the Federal Government.
    Thank you.
    Chairman Shelby. I thank all of you.
    We will start with you, Ms. Hounsell. The life expectancy 
gap between men and women is still such that women, we all 
know, on average, will live longer than men. What implications 
does this seemingly simple fact or truth have on retirement 
strategies for women for educational outreach, particularly in 
those instances where a woman might outlive a husband who is 
also the family's financial planner?
    Ms. Hounsell. Well, I think it is dire, the fact that women 
need more income. They need to deal with inflation. They need 
to deal with the fact that they are going to be living alone, 
that probably because they live alone, there will not be anyone 
to take care of them, so they are going to need money for long-
term care. And I think these are strategies that people are not 
even thinking about.
    Chairman Shelby. In your testimony, you mentioned that your 
organization, WISER (Women's Institute for a Secure 
Retirement), has worked cooperatively with the Departments of 
Agriculture and Labor, Good Housekeeping magazine, and even 
U.S. Airways to reach out to women on the retirement issue. Can 
you elaborate on your strategy and briefly tell us how you 
coordinated the different participants involved in your 
outreach? And what lessons did you take from this outreach?
    Ms. Hounsell. Well, I will sort of back up for a second. I 
had one of the first frozen pensions. I used to work for PanAm. 
I was a flight attendant. And in 1984, they froze our pensions. 
And I went on and----
    Chairman Shelby. When you say they froze it, what do you 
mean?
    Ms. Hounsell. It is like the United--all those airline 
pensions that they are freezing today. You know, it stopped in 
1984, and when someone explained that to me, I thought, well, 
that just meant when I get old, I will just go to the freezer, 
take out the pension, and everything will be fine. But it was 
explained to me that it would not accrue any value. So someone 
suggested, you better get a new career, my dear, because, you 
know, you have just lost your benefits.
    So I left years before the company went out of business, 
and I went to law school, came to Washington, worked at a 
nonprofit here that only worked on retirement issues, and I 
realized that everyone I knew was going to be poor. No one was 
doing this. No one was saving. And one of the foundations, when 
we started this women's pension project, came and said, If you 
could do one thing, what would you do? And I said we need to 
make every women's group, every, you know, financial 
organization pay attention to this issue. And I think, you 
know, over the years that I have been doing this, that is what 
the Good Housekeeping project did.
    We have a newsletter, and I would just say that recently I 
was thinking about just going online, forgetting the paper 
version, because I wasn't sure. And we sent out a survey, and 
the letters we got back from people, because a lot of times 
people just don't go home, and they're not going to get online 
and read about what they should be doing financially, even 
though there is a lot of information there.
    So you have got to get it to them in a way that they feel 
comfortable with and that they will use. And that is what we 
were able to do. We were able to meet--to really reach millions 
of women----
    Chairman Shelby. It is not easy, though, is it?
    Ms. Hounsell. No. No, it is not. But with the groups that 
we work with--and as I said, I think we are losing an 
opportunity. If you bring somebody in for budgeting, they need 
the whole long-term picture. We call it a lifetime financial 
journey. You cannot bog them down and say, ``You don't save 
today, you are going to be poor tomorrow.'' But you need to 
say, look, you can start, you have to get your debt in order, 
and this is where you are going to end up, and you can do it.
    Chairman Shelby. Ms. Teslik, what is your experience with 
people speaking of the goals that they have set out? In other 
words, how do you keep people on the long-distance run here?
    Ms. Teslik. It is as difficult to get people to continue to 
meet long-distance financial goals as it is long-distance 
dieting goals, which is one of the reasons that my last 
suggestion was that we find ongoing networks of support for 
people, because sometimes you need somebody who says, well, you 
know, that path is not working for you, let's see if we can do 
this; you don't seem to be able to save this way, let's try to 
do this.
    These networks can be provided through employers. It is 
much, much cheaper for employers to provide financial advice 
than it is for them to provide a pension plan, and so for 
companies that cannot afford a DB plan but can afford someone 
who is there to say, well, if this isn't working, let's try 
this. It is as big a problem as it is in the dieting world. It 
has to be acknowledged in that way, and you have to know that 
different things work for different people.
    Chairman Shelby. Is it basically a behavioral problem?
    Ms. Teslik. It is much more a behavioral problem than an 
information problem.
    Chairman Shelby. Mr. Brobeck, you mentioned the potential 
value of what you call a wealth estimator for encouraging 
Americans to change their financial behavior. How would this 
work? And what impact do you believe it would have?
    Mr. Brobeck. I think the only way it would work is if all 
of us would get together and agree on a fairly simple net 
wealth estimator that would not only allow you to estimate your 
current wealth but also project into the future your future 
wealth, and it was endorsed by organizations such as the 
Federal Reserve Board. And then all financial educators, 
planners, financial institutions, educators who have anything 
to do with financial education should encourage individuals and 
communities, to utilize this net wealth estimator.
    The highly respected journalist, Michelle Singletary, has 
compared this to keeping track of your weight. If you do that, 
there is no guarantee that you are going to maintain your 
weight, but if you do not, it is very difficult to do so.
    The other thing that people will recognize when they start 
estimating their wealth and also their wealth-building 
potential is they have far greater wealth-building potential 
than they think they do. People are not aware of--and we have 
tested the Nation's knowledge on this--the power of interest 
compounding. People underestimated that power by two-thirds, 
and when we talk to focus groups about interest compounding, 
people who were 25, 26 years old with very low incomes said, 
``If I had known that when I was 20''--and they are only 
earning $18,000--``I would have started saving $10 a week or 
$20 a month.''
    So this is not a cure-all, but we need something that will 
galvanize the population and that will also tie together these 
thousands of disparate efforts in financial education. Maybe 
somebody else has a better idea. This is the best one we have 
been able to come up with.
    Chairman Shelby. But you first have to have a financial 
literacy program that will work. You have got to let people 
know and understand what their situation is.
    Mr. Brobeck. We would start with the estimate.
    Chairman Shelby. Then they have got to modify their 
behavior to react to that, have they not?
    Mr. Brobeck. We would agree. But you can start with the 
wealth estimator, and I am speaking particularly--this does not 
apply as much to kids who are in school, but to the adult 
population. Just start with that. So community educators, 
government educators, are all urging people to check on their 
net financial wealth. You know that 9 percent of households, 
according to the Federal Reserve Board research, have negative 
wealth. And quite a few of those are young people who buildup 
credit card debt and student debt.
    One of the great barriers to people in their 20's to 
building personal wealth is they are pessimistic. That is what 
our focus groups show. They never think they can get out of the 
hole that they have dug for themselves. But when you do the net 
wealth estimator and you project your income to the future, you 
see it may take 5 to 10 years to pay off that debt. But after 
that, you are on the upward slope.
    Chairman Shelby. There are countless numbers of financial 
literacy programs, as we know, but how do we measure those? How 
do we measure the efficacy of them? How can we better measure 
behavioral change here dealing with financial literacy?
    Mr. Brobeck. We would agree with the Chairman of the 
Federal Reserve Board that it is very important to evaluate and 
measure. Now, the way academics traditionally measure is they 
use statistical significance. Let's say that somebody is saving 
$20 a month. If an academic were to study the effectiveness of 
a program and they went from $20 to, let's say, $30 a month, 
the researcher would conclude that there was a statistically 
significant difference at probably the 1/1000th level, which is 
highly significant. But, really, the true measure should be in 
terms of the financial needs of that individual. Is their need 
$30? Or is their need $100? We need to establish through a 
needs assessment what they need to save and then measure in 
those terms, not just in terms in conventional academic 
statistical significance.
    Chairman Shelby. Rather than the so-called minimum payment, 
which everybody markets--and I say ``everybody.'' A lot. Why 
couldn't there be a program of some kind out there dealing with 
financial literacy, not just credit cards, but that is a real 
thing?
    Mr. Brobeck. Yes.
    Chairman Shelby. How you can pay so much more a month, $10, 
$20, $30, and pay this off, or how you could double up on your 
house payment and pay this house off, instead of 30 years, in 
12 years or 10 years, how can you show wealth that way? Is that 
part of this?
    Mr. Brobeck. If you utilize an effective wealth estimator, 
that will show you very specifically the benefits of paying off 
that mortgage early.
    Chairman Shelby. But you have got to have discipline to do 
that.
    Mr. Brobeck. Yes, you do. That is why I would agree with 
Ms. Teslik that you need social support mechanisms. Our America 
Saves program, for example, has wealth coaches as well as 
motivational speakers. Motivational speakers get their 
attention, persuade them to start on a personal wealth 
building, and then the wealth coaches encourage them, assist 
them, give them advice.
    Chairman Shelby. But at the very end--and I guess the 
beginning, too--we should do everything, working with the bank 
regulators, to try to promote literacy and make sure people are 
not exploited because of their non-understanding of financial 
products and so forth. Is that fair?
    Mr. Brobeck. I would agree. The financial regulators and 
the institutions they regulate play a critical----
    Chairman Shelby. And this Committee, perhaps.
    Mr. Brobeck.----A critically important role in terms of 
improving financial literacy and motivating people to make more 
sensible financial decisions and providing opportunities to do 
so.
    Chairman Shelby. Thank you.
    Senator Sarbanes.
    Senator Sarbanes. Thank you very much, Mr. Chairman.
    This has been a very helpful panel, and I particularly want 
to acknowledge and stress my appreciation for the very 
thoughtful statements that have been submitted for the record. 
I have had a chance to go through them very quickly, and they 
are enormously helpful.
    Ms. Hounsell, I was struck by your reference that it is not 
a mosaic, as the Secretary of the Treasury says, but like a 
giant jigsaw puzzle that is missing the box that shows the 
picture the pieces are supposed to form. Actually, the national 
strategy we are trying to get out of the Commission was 
designed or intended to be that box cover, which brought 
programs in line with target groups and eliminated duplication, 
promoted partnership aimed at underserved groups, including, of 
course, women in retirement on which you focused. But I would 
like to ask each of you whether you think this report of the 
Treasury's, the first--well, the Treasury as chair of the 
Commission, but we all know that--those of us who serve on 
committees know that it looks very much to the Chairman to push 
its agenda, and it can make a big difference. Chairman Shelby, 
for instance, has been pushed very hard on oversight, which 
this is an example of. I think that makes a big difference in 
effecting policy.
    What is your view of this first report that has come in 
from the Financial Literacy and Education Commission? I put 
that to all of you.
    Ms. Hounsell. I think it is not going to do the trick, and 
maybe there is hope for the future that they are going to keep 
improving on it. But as I said in my testimony, I feel like, 
you know, the house is on fire and people are talking about how 
they should evaluate the firemen and, you know, whether there 
should be--how many reports there should be and, you know, 
whether they should have filled out forms or whatever.
    I was recently on a panel, and everyone on that panel, I 
feel--I am passionate about this because, you know, I lost my 
own retirement about 20 years ago. So I realize--it was not 
just me. Lots of people were in trouble because they did not 
even have a pension to lose. And when I see the status of where 
we are today with the baby-boomers marching into retirement, 
you know, we hear it every day. It is not a long time. We are 
not taking the steps that are needed to get them the 
information, and the reason I use the story that I used was 
that this was a woman who sort of had it made. I mean, she was 
like your dream worker. She worked, she had a great pension, 
she had a decent Social Security benefit. And within a couple 
of years, she is on the road to poverty. She is going to, you 
know, end up in big--I mean, she is already in big trouble.
    And so what are we going to do for all those people that 
don't even have that knowledge that can't make these decisions 
and don't have the money? We have to get to them now. That is 
why I keep saying we either need a national campaign, we have 
to use the Social Security statement that people get, put more 
information, make people take a test when they get that 
statement. I mean, I know people that just throw it away and 
say, ``Oh, I thought it was an advertisement. I didn't know,'' 
as if the Social Security Administration sends you 
advertisements.
    So, you know, we need to use the tools that we have, I 
think, and----
    Senator Sarbanes. Of course, you get these people who are 
soliciting you for one thing or another, and they do everything 
they possibly can to make it look like it is coming from the 
Social Security Administration. It shows up in the mail, you 
say, oh, here is something from the Social Security 
Administration. It is not something from the Social Security 
Administration.
    Ms. Teslik, do you want to address this point? And then Mr. 
Brobeck.
    Ms. Teslik. I was trying not to smile when you asked it. I 
also want to thank you for your leadership on this issue. Thank 
goodness there is some somewhere, because it is not in the 
report.
    I was speaking at the break with one of the key staffers of 
La Raza who is here. We were saying if only we had that money 
to change financial behavior, what we could have done with it, 
the money that went into preparing the report.
    As I mentioned before, this is an area where the 
measurables are actually there. They are easy to measure. We 
can measure in the aggregate changes in financial behavior 
really easily. We can measure them on the individual level. We 
are not trying to evaluate people's appreciation of a painting. 
We are trying to evaluate how much they are spending versus how 
much they are making, how much they have on credit cards. This 
is very easy to measure.
    This is an area where there are lots of interesting new 
ideas, some of which I mentioned----
    Chairman Shelby. Are these the statistics?
    Ms. Teslik. Yes, right. Again, what we are measuring is 
personal financial behavior, and it's easy to come up with lots 
of them. You can debate which are the right ones, but compared 
to a lot of things, there are measurable activities here.
    Second, there are lots of new ideas, which I really have 
not seen in the report. There is exciting stuff going on. This 
Committee could have a couple hearings where you showcase some 
programs that are working. One of the ways you already try to 
further a goal you want is to say, well, who is already 
achieving that goal and let's bring them in and then let's 
replicate it. There wasn't really that in the report. There 
wasn't the focus on, well, who is already doing it and how can 
we fund those programs.
    So I think it is a missed opportunity, and maybe we will 
just hope the next ones will be better.
    Senator Sarbanes. Mr. Brobeck?
    Mr. Brobeck. The report does include useful information 
about a number of constructive financial education programs, 
but it does not really set out what I think this Committee 
intended it to do, and that is, as you indicated earlier, 
Senator, it does not define a national strategy. A national 
strategy would set very measurable goals: we will increase the 
saving rate for low- and moderate-income households by X 
amount; we will reduce high-cost debt by X amount. And then it 
will outline a set of strategies. And I think we have to be a 
little agnostic here. At this point I don't think anyone really 
knows exactly what would work for the country. I think we know 
what works for some populations and some groups, but not for 
the whole country. So we have to take an experimental approach, 
and try out different strategies. But then every year we need 
to assess, we measure. To what extent have we met the goals? 
And we evaluate the strategies.
    Now, why did we not meet the goals? Was it this aspect of 
the strategy or that aspect? And then we fine-tune. We try new 
strategies, and this will take some time. Social change takes a 
long time. But I think it is very worthwhile, and we appreciate 
the leadership of this Committee in this area.
    Senator Sarbanes. Well, Mr. Chairman, I know the hour is 
late, but I want to thank the panel again, and also, as I 
indicated, for these very thoughtful statements. We set up a 
commission on the Trade Promotion Coordinating Committee some 
years ago, and we had difficulty in the beginning, but we 
finally got them where they began to develop a national 
strategy for trade promotion. And you can say, well, you know, 
it needs this or it needs that. But it finally gave us kind of 
the box to fit the jigsaw together. And I think we desperately 
need to do the same thing in this area as we move ahead. There 
are so many programs out there of varying quality and impact, 
and we need to be able to evaluate them, and then as Ms. Teslik 
said, I think, put forward the ones that are really working and 
producing results as models to be followed by others.
    One of the problems in all of this--and we are searching 
how to--is the hit-or-miss nature of the thing. It is not 
systemic so you can sort of say, well, you know, here is the 
curriculum, everyone gets exposed to the curriculum, et cetera, 
et cetera. I mean, some people may be fortunate to get very 
good financial literacy education and training. Others get 
hardly any at all or get some that is not very good. So you 
have these very different--and, of course, Ms. Hounsell, you 
point out where we are going in the future in terms of--I mean, 
this challenge is only going to increase, not diminish.
    Ms. Hounsell. Exactly.
    Senator Sarbanes. So thank you all very much for your 
contribution.
    Thank you, Mr. Chairman.
    Chairman Shelby. I want to join Senator Sarbanes in 
thanking you. I think maybe we should have had this panel 
first, Senator Sarbanes.
    [Laughter.]
    Chairman Shelby. Because you spoke to the heart of the 
matter, the tough approach that it is going to take. It is not 
going to be easy. But thank you very much for your 
contribution.
    The Committee is adjourned.
    [Whereupon, at 12:24 p.m., the hearing was adjourned.]
    [Prepared statements and responses to written questions 
supplied for the record follow:]
                 PREPARED STATEMENT OF BEN S. BERNANKE
       Chairman, Board of Governors of the Federal Reserve System
                              May 23, 2006
     Chairman Shelby, Senator Sarbanes, and members of the Committee: I 
am pleased to be here to discuss financial literacy and financial 
education. My remarks will emphasize the importance of financial 
literacy, both as a source of better decision making by consumers and 
as a means of improving the functioning of financial markets. I will 
also highlight various Federal Reserve System initiatives to promote 
financial education and address some of the opportunities and 
challenges that policymakers and financial educators face as they seek 
to improve financial literacy.
    Technological advances have dramatically transformed the provision 
of financial services in our economy. Notably, increasingly 
sophisticated information technologies enable lenders to collect and 
process data necessary to evaluate and price risk much more efficiently 
than in the past. For example, the expanded use of credit-scoring 
models, by reducing the costs of making loans and by increasing the 
range of assets that can be securitized, has facilitated greater 
extension of credit to a larger group of borrowers. Indeed, we have 
seen an increasingly wide array of products being offered to consumers 
across a range of incomes, leading to what has been called the 
democratization of credit. Likewise, innovation has enhanced financial 
services, such as banking services, and increased the variety of 
financial products available to investors.
    Even as the availability of credit has increased, so has the range 
of potential providers. In particular, in recent years, the number of 
nonbank entities providing credit products and other financial services 
has increased significantly. Data from a recent paper on alternative 
providers of financial services revealed that, between 1996 and 2001, 
the number of nonbank check-cashing establishments doubled in the 
United States. Payday lending outlets, a source of credit that was 
almost non-existent a decade ago, now number more than 10,000.\1\ Data 
from the Federal Reserve Board's 2004 Survey of Consumer Finances 
indicate that the share of households with a loan from a finance 
company increased from 13 percent of households in 1992 to 25 percent 
of households in 2004.\2\ While many of these providers cater to low- 
and moderate-income consumers, their customers include people with a 
wide range of incomes and financial experience.\3\ Clearly, to choose 
wisely from the variety of products and providers available, consumers 
must have the financial knowledge to navigate today's increasingly 
complex financial services marketplace. Consumers with the necessary 
skills to make informed financial decisions about purchasing a home, 
financing an education or their retirement, or starting a business will 
almost certainly be economically better off than those lacking those 
vital skills.
---------------------------------------------------------------------------
    \1\ Noah Sawyer and Kenneth Temkin (2004), ``Analysis of 
Alternative Financial Service Providers,'' prepared for The Fannie Mae 
Foundation by the Urban Institute Metropolitan Housing and Communities 
Policy Center, http://www.urban.org/UploadedPDF/
410935_AltFinServProviders.pdf.
    \2\ Survey of Consumer Finances (2004), Federal Reserve Board of 
Governors.
    \3\ Gary Elliehausen, Ph.D and Edward C. Lawrence, Ph.D, (2001), 
``Payday Advance Credit in America: An Analysis of Customer Demand.''
---------------------------------------------------------------------------
    Informed financial decision making is also vital for the healthy 
functioning of financial markets. Like any other businesses, financial 
service firms will provide better products at better prices when they 
are subject to market pressures imposed on them by informed consumers. 
Regulators have an important role in helping to ensure that financial 
service companies provide necessary information to their customers, but 
such information is of value only to the extent that it can be 
understood and applied by potential users of these services. Market 
competition among financial providers for the business of informed 
consumers is, in my judgment, the best mechanism for promoting the 
provision of better, lower-cost financial products.
Research on the Impact of Financial Education
    Research suggests that financial education can help consumers make 
better choices. For example, for many decades, various nonprofit 
organizations have offered homebuying programs and credit counseling to 
improve consumers' financial management skills and reduce the risk of 
default or delinquency. Research on the effectiveness of these programs 
has generally associated financial counseling with improvements in 
consumers' credit management. For example, one study that analyzed 
nearly 40,000 affordable mortgage loans targeted to lower-income 
borrowers found that counseling before the purchase of a home reduced 
90-day delinquency rates by 19 percent on average.\4\ This study also 
documented a 34 percent reduction in mortgage delinquency rates among 
borrowers who received individual counseling rather than classroom or 
telephone instruction.
---------------------------------------------------------------------------
    \4\ Abdughani Hirad and Peter Zorn (2001, ``A Little Knowledge Is a 
Good Thing: Empirical Evidence of the Effectiveness of Pre-Purchase 
Homeownership Counseling,'' www.chicagofed.org/cedric/files/
2003_conf_paper_session1_zorn.pdf.
---------------------------------------------------------------------------
    In another study, researchers found that credit counseling had a 
positive effect on creditworthiness, especially for individuals with 
the lowest credit scores. They examined credit bureau data on 14,000 
recipients of one-on-one credit counseling and found that, over a 3-
year period, these borrowers reported reduced debt levels and 
delinquency rates.\5\ Another, preliminary study found that after 
receiving on-line instruction in credit management new or recently 
delinquent credit cardholders were more likely to pay on time and to 
have lower revolving balances.\6\
---------------------------------------------------------------------------
    \5\ Gregory Elliehausen, E. Christopher Lundquist, Michael Staten 
(2003),``The Impact of Credit Counseling on Subsequent Borrower Credit 
Usage and Payment Behavior'' (January), www.chicagofed.org/cedric/
files/2003_conf_paper_session1_staten.pdf.
    \6\ Kimberly Gartner and Richard Todd (2005), ``Effectiveness of 
Online `Early Intervention' Financial Education for Credit 
Cardholders'' (July), www.chicagofed.org/cedric/files/
2005_conf_paper_session3_todd.pdf. 
---------------------------------------------------------------------------
    Other research has looked at the link between financial knowledge 
and broader financial management skills. For example, one study 
examined the relationship between financial knowledge and financial 
behavior such as cashflow management, savings, and investing. Overall, 
the study found a significant correlation between the level of 
financial knowledge and good financial management practices. 
Individuals who were familiar with financial concepts and products were 
found to be more likely to balance their checkbook every month, budget 
for savings, and hold investment accounts.\7\ Similarly, another study 
on consumer creditworthiness and consumer literacy determined that 
financial knowledge is the single best predictor of behaviors, such as 
budgeting, saving, and shopping responsibly, that translated into 
positive outcomes on credit bureau reports. This study also found that 
the main sources of knowledge were bad experiences, school instruction, 
and other education.\8\
---------------------------------------------------------------------------
    \7\  Jeanne M. Hogarth and Marianne A. Hilgert (2003) ``Patterns of 
Financial Behaviors: Implications for Community Educators and 
Policymakers,'' www.chicagofed.org/cedric/files/
2003_conf_paper_session1_hogarth.pdf.
    \8\  Marsha Courchane and Peter Zorn (2005), ``Consumer Literacy 
and Creditworthiness,'' www.chicagofed.org/cedric/files/
2005_con_paper_session3_courchane.pdf.
---------------------------------------------------------------------------
The Federal Reserve System's Commitment to Financial Literacy 
    The Federal Reserve System has long recognized the value of 
economic and financial education for producing better-informed citizens 
and consumers. Broadly, our financial education activities fall into 
five primary categories: (1) increasing access to information about 
financial products and services, (2) promoting awareness of the 
importance of financial literacy, (3) collaborating with educational 
and community organizations, (4) supporting research and identifying 
best practices, and (5) providing financial education for its own 
employees. I will briefly comment on each of these.
Increasing Access to Information About Financial Products and Services
    One important means by which the Federal Reserve helps consumers 
make better informed financial decisions is through its consumer 
protection rule-writing. For example, in pursuit of the goals set by 
the Congress, our regulations require the disclosure of specific 
information on terms and fees associated with credit and deposit 
accounts. The Truth in Lending Act of 1968 (as implemented by 
Regulation Z) requires uniform methods for computing the cost of credit 
and for disclosing terms on a broad range of credit products--credit 
cards and other lines of credit, automobile loans, student loans, and 
home-purchase and other home-secured loans. In addition, the Truth in 
Savings Act, implemented by Regulation DD, requires uniform disclosure 
of certain cost information on deposit accounts, including the annual 
percentage yield. These disclosures provide consumers with the 
essential information they need to assess the costs and benefits of 
financial services offered by different providers. Standardization of 
disclosures allows for comparison among similar products and thus 
provides consumers with an important shopping tool.
    One of the challenges of creating effective disclosures is 
presenting information so that it is as accessible and understandable 
as possible. To address this issue, we conduct focus groups and 
consumer testing to inform the rule-writing process. Because regulatory 
language can be quite technical, the Federal Reserve also publishes 
numerous brochures that explain the terminology and consumers' rights 
in straightforward terms or provide useful information on particular 
areas of concern, such as predatory lending and identity theft. Focus 
groups convened over the years have found that the Federal Reserve's 
consumer brochures were regarded as high-quality, unbiased 
publications. We have also found that counselors and educators often 
use our brochures when teaching about financial products and services.
Promoting Awareness of the Importance of Financial Education and 
        Literacy
    The Federal Reserve System has also worked to promote awareness of 
the importance of financial education and literacy. In May 2003, the 
Board and the twelve Reserve Banks participated in a national campaign 
to call attention to the value of personal financial education and the 
wide variety of financial literacy tools and resources available. This 
multi-media initiative, entitled ``There's a Lot to Learn about 
Money,'' included a public service announcement and a toll-free number 
for obtaining financial education resources. Consumers were also 
directed to our education website, www.federalreserveeducation.org, to 
obtain more-substantive information, ranging from materials about 
personal financial literacy to interactive tools for economic 
education. The website links to a wide variety of financial education 
resources at the national, regional, and local levels.
Collaborating With Educational and Community Organizations
    A third piece of the Federal Reserve's financial education effort 
is its collaboration with a wide range of educational and community 
organizations. Staff members from the Federal Reserve Board advise and 
assist national organizations such as the Jump$tart Coalition for 
Personal Financial Literacy, the Conference of Mayors' DollarWi$e 
Campaign, Operation HOPE, the American Savings Education Council, and 
America Saves on the development of policies, programs, and 
partnerships. The Federal Reserve Banks also join with regional 
organizations to address financial education needs. For example, the 
Federal Reserve Bank of Cleveland has worked with community financial 
educators to form regional networks that combine resources and share 
best practices.
    The Federal Reserve Bank of Chicago sponsors ``MoneySmart Week,'' 
partnering with banks, businesses, government agencies, schools, 
community organizations, and libraries to host activities designed to 
help consumers learn how to manage money. The Federal Reserve Banks of 
San Francisco and Minneapolis have worked with leaders in the Native 
American community to develop financial education materials. As you are 
aware, the Federal Reserve Board also participates in the Federal 
Government's Financial Literacy and Education Commission.
    Collaboration with outside organizations also plays a central role 
in the Federal Reserve's support for broader economic education. We 
believe that a better understanding of how the economy works promotes 
both better citizenship and greater personal economic success. As one 
means of supporting this objective, Reserve Bank staff members advise 
high-school teachers on ways to help students understand economics. 
Perhaps the best-known economic education initiative in the Federal 
Reserve System is the Fed Challenge. This academic competition offers 
high-school students the opportunity to learn more about how the 
Federal Reserve develops monetary policy and how those policies affect 
the economy. Federal Reserve Bank economists provide instruction guides 
for developing a Fed Challenge team. These teams compete at local, 
regional, and national levels. The competition hones students' 
analytical and presentation skills, while expanding their knowledge of 
economic principles. I have personally judged the national finals of 
this competition on two occasions and can attest to the remarkable 
economic knowledge displayed by these students.
    I have included an appendix to this testimony describing some of 
the significant System and Federal Reserve District programs and 
collaborative efforts in financial and economic education.
Promoting Research and Identifying Best Practices
    The Federal Reserve also promotes, and engages in, research 
relevant to financial literacy. For example, understanding how families 
are doing financially helps financial educators decide how best to 
focus their efforts. The Federal Reserve Board conducts the triennial 
Survey of Consumer Finances to gain insight into U.S. families' assets, 
borrowing, retirement saving, and use of financial institutions. Many 
researchers and practitioners use this unique data set in analyzing 
conditions and trends in consumer finances.
    Given the significant commitment to financial education by 
government, private-sector, and nonprofit organizations, it is 
important to determine whether such programs actually improve consumer 
financial literacy and behavior. Toward this end, the Federal Reserve 
undertakes and promotes research that aims to increase our 
understanding of the financial education programs and delivery channels 
that work best. For example, the Board's Division of Consumer and 
Community Affairs engages in research on learning preferences and 
consumer financial behavior. Currently, Federal Reserve researchers are 
collaborating with the Department of Defense to conduct a 3-year 
longitudinal study of the effect of military-sponsored financial 
education on soldiers' financial behaviors. Since 1999, the Federal 
Reserve System's biennial Community Affairs Research conference has 
generated and highlighted new research on the efficacy of financial 
education. In fact, much of the research that I cited earlier has been 
presented at these conferences. The Federal Reserve Bank of Chicago 
maintains the Financial Education Research Center, which provides 
access to online resources for researchers, educators, and program 
developers.
    Economists at the Federal Reserve Banks also assess the effects of 
financial education. The Federal Reserve Bank of Kansas City is 
currently evaluating the role that financial knowledge and education 
play in personal money management behavior. In addition, the Federal 
Reserve Bank of Boston plans a year-long evaluation of its credit 
repair education program, which is provided to taxpayers filing for the 
Earned Income Tax Credit at volunteer tax preparation sites where 
Reserve Bank staff offer their assistance. This study seeks a better 
understanding of the underlying determinants of credit problems and 
ways in which credit counseling can improve individuals' credit scores.
Employee Financial Education
    Besides these externally focused initiatives, the Federal Reserve 
seeks to improve the financial literacy of its own workforce. The Board 
offers a comprehensive financial education program to help employees 
plan their retirements and better use their benefits. We also offer 
regular seminars on topics ranging from budgeting and saving to buying 
a home or investing for children's education. The Board maintains an 
internal website with links to information on quality-of-life matters, 
including managing finances. The website is organized by age groups and 
life events to help employees identify the information resources that 
are most relevant to their circumstances.
    We view our employee education program as a win-win proposition. 
Research has determined that such programs benefit employers as well as 
employees. For example, one study found that workplace financial 
education programs contribute to improved worker performance, increased 
job satisfaction, and decreased absenteeism.\9\ The Federal Reserve 
Bank of Kansas City is studying how financial education programs affect 
employers' bottom lines.
---------------------------------------------------------------------------
    \9\ E. Thomas Garman, Jinhee Kim, Constance Y. Kratzer, Bruce H. 
Brunson, and So-hyun Joo (1999), ``Workplace Financial Education 
Improves Personal Financial Wellness,'' Financial Counseling and 
Planning Journal, vol. 10.
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Challenges and Opportunities
    Financial education is a critical component of a robust and 
effective financial marketplace, but it is not a panacea. Clear 
disclosures, wise regulation, and vigorous enforcement are also 
essential to ensuring that financial service providers do not engage in 
unfair or deceptive practices. Even the most financially savvy consumer 
may fall victim to fraud or deception.
    As policymakers and educators know, providing effective financial 
education presents many challenges. Efforts to increase financial 
literacy are resource- and time-intensive. Counseling programs require 
trained instructors and, to be most effective, must be available to 
consumers near the time at which they are making an important financial 
decision, such as whether to buy a home. Some school programs now 
include financial literacy courses or modules, but curricula must be 
regularly updated to remain relevant and teaching methods must be 
adapted to the backgrounds and interests of students. In some cases, 
financial education efforts are constrained by gaps in math and reading 
literacy, which impede comprehension of fundamental financial concepts.
    Recent findings by the Jump$tart Coalition for Personal Financial 
Literacy illustrate the magnitude of the challenges still facing us, 
particularly in the case of young people.\10\ The Coalition has 
administered financial literacy tests to high-school students annually 
for the past nine years. Student performance on these tests has not 
improved during that time: The average score reported in the 2006 
survey was 52.4 percent, up from the low of 50.2 percent in 2002 but 
below the 1998 score of 57.3 percent. The survey results also show a 
gap in financial literacy between minority and nonminority students: In 
the most recent survey, white students scored an average of 55 percent 
while African-Americans scored 44.7 percent and Hispanics scored 46.8 
percent. Clearly, there is still much work to do to understand how to 
improve the financial literacy of young people. On the other hand, the 
Jump$tart survey does confirm the importance of financial literacy, in 
that students who score higher on the test tend to make better 
financial decisions. For instance, students who reported having bounced 
a check averaged just 45.8 percent on the financial literacy test while 
students with checking accounts who had never bounced a check scored 
higher on average, at 53.4 percent.
---------------------------------------------------------------------------
    \10\ Jump$tart Coalition for Personal Financial Literacy (2006), 
``2006 Survey of Financial Literacy Among High School Students,'' 
http://www.jumpstartcoalition.org/.
---------------------------------------------------------------------------
    Because financial literacy leads to better outcomes for individual 
consumers and for our economy generally, continued effort in this area 
is highly desirable. Fortunately, given the current level of interest 
in improving financial literacy and education both in the United States 
and internationally, opportunities abound for cooperation and 
collaboration among public, private, academic, and community 
institutions. Advances in technology also offer great promise for 
improving the quality and delivery of financial information and for 
sharing of research and best practices among financial education 
providers.
    In closing, I want to reaffirm the Federal Reserve System's 
commitment to increased financial literacy and improved financial 
education. We look forward to continuing our collaboration with the 
many partners who share these objectives.
Financial Education Programs and Initiatives
In Order of Federal Reserve Bank District
Federal Reserve System
    There's a Lot To Learn About Money is the Federal Reserve System's 
financial education campaign. This web-based resource features the 
brochure and the public service announcement used in launching the 
campaign, as well as links to financial education resources available 
through the Federal Reserve Banks and through organizations within the 
Federal Reserve Districts.
    American Savings Education Council is a national coalition of 
public- and private-sector institutions committed to making saving and 
retirement planning a priority for all Americans. ASEC is a program of 
the Employee Benefit Research Institute Education and Research Fund 
(EBRI-ERF). ASEC brings together public- and private-sector partners to 
share information on best practices and to collaborate on financial-
security initiatives, including the Federal Government's Savings 
Matters campaign (now in its tenth year), the Choose to Save public 
service campaign, and the U.S. Securities and Exchange Commission's 
Facts on Saving and Investing campaign. The Federal Reserve Board is an 
ASEC mission partner, along with other government agencies, educational 
institutions, and nonprofit organizations committed to increasing 
awareness of the importance of saving and financial education.
    The Federal Reserve is active in the America Saves initiative and 
serves on the National Savings Forum, its national advisory committee. 
The mission of this nationwide campaign--sponsored by nonprofit, 
corporate, and government groups--is to help individuals and families 
save and build wealth. The program is targeted at low- and moderate-
income families, to raise their awareness and support their efforts to 
become more financially secure. Through local and regional campaigns, 
America Saves recruits ``savers,'' who commit to the program and pledge 
to save. As a result of their commitment, savers receive information 
and education about strategies for fulfilling their financial goals, 
such as reducing debt, building an emergency fund, and saving for a 
home, education, or retirement. The Federal Reserve Bank of Cleveland 
played a significant leadership role in developing and launching 
Cleveland Saves, a pilot program for the national America Saves 
campaign. The program has also launched the targeted initiatives Black 
America Saves, Hispanic America Saves, and Military Saves.
    Financial Literacy and Education Commission (FLEC), established by 
Congress in 2003 through the passage of the Financial Literacy and 
Education Improvement Act, was created to ``improve the financial 
literacy and education of persons in the United States through 
development of a national strategy to promote financial literacy and 
education.'' The Federal Reserve, along with numerous other Federal 
Government agencies, is a member of this commission, which is supported 
by the Treasury Department's Office of Financial Education.
    U.S. Conference of Mayors' National DOLLAR WI$E Campaign was 
developed to encourage the development of ongoing local strategies to 
educate citizens about financial issues. With improved basic money 
management and financial planning skills, citizens are in a better 
position to own homes, raise healthy families, educate their children, 
and invest in small businesses. The Federal Reserve Board serves as an 
advisor to the National DOLLAR WI$E Campaign. The Federal Reserve Banks 
of Cleveland, Chicago, and St. Louis provide supporting programs that 
have been described as best practices by the U.S. Conference of Mayors.
    Operation HOPE is a nonprofit organization that provides lower-
income and minority populations and communities with financial 
education and access to financial services. Its mission is to improve 
asset-building skills and accessibility of mainstream financial 
services for its constituencies. The organization, founded in 1992, is 
effective in creating public-private collaborations to fulfill its 
mission. Among its many national partners are the Federal Reserve 
Board, the FDIC, the Department of Commerce, H&R Block, E*Trade, 
Citigroup, and Bank of America. The Federal Reserve System has 
partnered with Operation HOPE in launching its youth financial 
education program Banking on Our Future in Washington, D.C.; 
Providence, Rhode Island; Atlanta, Georgia, and Los Angeles, 
California. A Federal Reserve Board staff member serves on Operation 
HOPE's Mid-Atlantic advisory board.
    The Jump$tart Coalition for Personal Financial Literacy, in its 10-
year history, has brought visibility and--through its biennial survey 
of high school seniors--research-based data to the financial literacy 
movement. Jump$tart is a Washington, D.C.-based not-for-profit 
organization that seeks to improve the personal financial literacy of 
students in kindergarten through college. The coalition has grown to 
include more than 170 national partners and 43 affiliated state 
coalitions. One of its premier services is the Jump$tart Personal 
Finance Clearinghouse (www.jumpstartclearinghouse.org), a web site that 
lists more than 580 financial literacy titles and provides information 
about speakers and training programs. The Federal Reserve is a partner 
and serves on the Jump$tart Coalition board of directors.
    The Fed Challenge, in its twelfth year, is an academic competition 
in which five-member student teams play the role of monetary 
policymakers. In this role, each team makes a presentation in which it 
analyzes the current economic situation and advocates a monetary policy 
prescription. The team then engages in a question-and-answer session in 
which the judges probe to examine students' understanding of the 
mechanics of monetary policy, macroeconomic concepts, and the workings 
of the Fed. The Fed Challenge has been a great success, as measured by 
participants' grades on Advance Placement Exams, adoption of the 
program by other central banks (for example, the central banks of 
England, New Zealand, and South Korea); recommendations in the New York 
State Economics Syllabus, textbooks, and the National Academy 
Foundation's Academy of Finance curriculum; and anecdotal evidence 
offered by teachers that the Fed Challenge profoundly affects 
participants' career choices. The Fed Challenge is organized by the 
Federal Reserve Bank of New York, and many other Federal Reserve Banks 
participate.
    FederalReserveEducation.org is the Federal Reserve System's 
recently redesigned financial education web site, designed to increase 
the use of Federal Reserve educational materials and promote financial 
education in the classroom. The web site has material intended for the 
general public, as well as materials specifically geared toward 
teachers and high school and college students. It provides easy access 
to free educational materials, a resource search engine for teachers, 
and games for various ages and knowledge levels. 
FederalReserveEducation.org is maintained by the Federal Reserve Bank 
of Kansas City.
    Federal Reserve Community Affairs Research Conferences are 
sponsored to invite and highlight research on a variety of issues that 
affect consumer financial service policies and practices. Since 1999, 
this biennial event has featured research that evaluates and explores 
the role of financial education in improving financial outcomes for 
consumers, particularly those with lower incomes.
Boston
    The New England Economic Adventure is an hour-and-a-half 
interactive exhibit at the Federal Reserve Bank of Boston that 
highlights New England entrepreneurs Francis Cabot Lowell, Colonel 
Albert Pope, and Ken Olson and investment decisions they made that 
enabled workers to be more productive. Increased productivity helped to 
raise the standard of living of the average New Englander and 
contributed to the overall economic growth of the region. Program use 
and effectiveness is tracked through visitor and teacher evaluations 
and an online evaluation form. Numbers of visitors, including those 
from low- and moderate-income communities, are also recorded.
    Peanuts & Crackerjacks is a frequently visited online economic 
education program that simulates a baseball game to teach economic 
concepts. Pitches are questions, correct answers to questions about the 
economics of team sports lead to hits and runs, and wrong answers are 
outs. The site also includes a teacher's guide. The next iteration, 
Economics of Entertainment, is due out in this fall. It will focus more 
on the abstract concept of markets and will draw from the music 
industry to tap into students' own experience.
    Talking About College is a curriculum created in collaboration with 
Citizen Schools, the national after-school program. It was created for 
middle school students to nurture their aspiration to attend college 
and to assist them in financial planning and the college-selection 
process. This curriculum has been taught as a financial literacy 
``apprenticeship'' in after-school programs in the Boston Public 
Schools. The curriculum includes a built-in assessment.
New York
    It's All About Your Money is a program, offered in two formats, 
that promotes financial awareness among students in grades 4-8. In one 
format, groups of 30-35 students visit the Bank for roughly three hours 
to take part in a series of activities, including a play about 
bartering; an active-learning exercise about how money has changed over 
time; social studies lessons derived by examining foreign currency 
notes; and several team and individual activities focusing on 
budgeting, saving, and other personal finance topics. In the second 
format, teachers direct all of the activities described in the first 
format in their own classrooms by using a package of materials and 
guides ordered directly from the Bank through the Internet. Success is 
measured by the teachers, who engage students in activities and 
assignments before and after their visit to the Bank. Students then 
write letters to the Bank discussing what they learned and what they 
intend to do differently as a result of the program. In the 2005-2006 
school year, the program was presented to 55 schools, mainly in low- 
and moderate-income communities, as planned.
    Foundations of Finance: Money Management for High School and 
College Students is a money management workshop that teaches students 
basic sound practices that foster wise financial decisionmaking. 
Workshop content is flexible and can be adapted to the content, format, 
and time specifications set forth by each host school or college. 
Frequently requested topics include college financing, the benefits and 
risks of credit use, financing life's expected and unexpected 
contingencies, budgeting and building net worth, taxes and other 
financial obligations, wise consumer practices, work and compensation, 
and common financial mistakes. Success is measured by school 
administrators and educators, who meet to determine the extent to which 
the workshops helped to encourage changes in curricula and mandates. 
Ideally, the workshop results in the development of new courses, 
mandated personal finance awareness sessions for all students, or 
changes in course content. An attempt is made to contact all students 
who participated in the workshop to determine how it changed their 
financial practices.
    Wall Street Economics and Finance Club reaches approximately 50 
high school students from throughout the Second Federal Reserve 
District who convene for eight two-hour monthly meetings at the New 
York Fed to learn more about the structure and functions of the 
financial system. Students take part in numerous activities, including 
discussions with economists, analysts, and traders at private-sector 
financial institutions; visits to trading floors and financial 
exchanges; their own presentations about financial developments and 
issues; and educational competitions that lead directly to internships. 
The Bank measures success by participating in discussions with 
educators involved in the program, attempting to determine the extent 
to which club activities resulted in changes in lesson plans, 
curricula, course offerings, and students' performance and interest in 
finance-related topics. Students in the club become Ambassadors to 
their classmates, encouraging greater interest in economics and finance 
as a course of study or career.
Philadelphia
    Finding the Keys to Your Financial Success is an annual, free, 5-
day training program for educators on a curriculum created by the Bank, 
the University of Delaware, the Delaware Bankers' Association, and the 
Consumer Credit Counseling Services of Maryland and Delaware. The 
program is used extensively in Delaware schools, and over the past two 
years it has been promoted it to schools in seven Pennsylvania and New 
Jersey school districts.
    Buried by Debt: The Dangers of Borrowing is a 14-minute video for 
adults that describes the pitfalls of borrowing against your home. On 
the video, six Philadelphia District residents tell the viewers, in 
their own words, how they lost or nearly lost their homes by making 
unwise borrowing decisions. The Bank created the video at the request 
of ministers who were contacted to assist with outreach to low- and 
moderate-income minority homeowners who were most at risk because of 
lending abuses. The Bank has distributed over 4,000 copies to 
organizations throughout the United States and abroad. The video is 
shown at training events conducted for faith-based organizations 
interested in delivering financial education programs. A Spanish 
version is also available.
    Money and Banking for Educators, the Bank's signature free summer 
professional development course for teachers, is in its third year of 
existence. It is designed to provide teachers with active learning 
techniques to enhance students' understanding of the economy, the 
Federal Reserve System, and monetary policy. Those who elect to receive 
graduate-level credits for the course enroll through a participating 
university.
    Personal Finance for the Middle School Classroom is a 5-day 
professional development course for K-12 educators taught by Federal 
Reserve economic education specialists and staff from the state centers 
for economic education. The course covers how to teach students about 
money, banking, and the Federal Reserve System. Emphasis is placed on 
strategies for active and collaborative learning.
    Personal Financial Education Curricula and Compendium of Providers 
provides information on training materials and other resources 
available to the public, as well as organizations that offer 
educational services in the Third Federal Reserve District.
Cleveland
    The Learning Center and Money Museum was opened in January 2006. 
The Learning Center features over 30 interactive exhibits and related 
educational programs centered around the theme ``What gives money 
value?'' The educational programs were designed by the Bank, with 
teacher input, based on state educational benchmarks. Programs include 
lessons on saving and spending, inflation, barter, and the Federal 
Reserve System. The Learning Center hosted over 2,500 visitors in its 
first quarter of operations, and reservations for Learning Center 
educational programs are booking seven months in advance. All program 
participants ``strongly agree'' that their Learning Center visit 
provided a valuable learning experience. The center has been endorsed 
by the Ohio Council on Economic Education.
    Fourth District Financial Education Consortia launched in June 2003 
with a series of roundtable meetings with financial institutions, 
government agencies, and community-based nonprofits. These meetings 
were convened to coordinate financial education programs and discuss 
how to improve financial education delivery in the Fourth District, in 
part in response to the Federal Reserve Bank of Cleveland's financial 
education survey ``Financial Education: What Is It and What Makes It So 
Important,'' published earlier that year. The meetings were also a 
response to the growing complexity of financial services, predatory 
lending, wide gaps between white and minority homeownership rates, 
record low savings rates, and increases in personal bankruptcies and 
debt among American consumers. The roundtable meetings resulted in the 
formation of several financial education networks, or ``consortia,'' in 
the Cincinnati, Cleveland, and Pittsburgh regions. The Federal Reserve 
Bank of Cleveland has staff in each of those cities who act as 
coordinators for these initiatives.
    The Essay Contest is an annual competition for area high school 
students. Essay topics are chosen with an eye toward engaging a broad 
range of students, not just students in economics classes. Topics have 
included the economics of children's literature, the economics of rock 
music, and economics on TV.
    The Bank also participates in the Fed Challenge and hosts a number 
of other programs for teachers and students throughout the year, 
including workshops and student competitions with various partners such 
as Ohio Jump$tart, the Ohio Council on Economic Education, Junior 
Achievement, and local public libraries.
Richmond
    My Money is an educational package for elementary school students 
that includes a teacher's guide and student workbooks featuring lessons 
entitled ``What is Money?,'' ``Money Equivalents,'' and ``Jobs, Money, 
Goods and Services.'' Over 1,100 My Money packages have been shipped to 
elementary schools worldwide since early 2006. Teacher feedback 
gathered from evaluation cards has been overwhelmingly positive.
    The Essay Contest is an annual fall contest, sponsored by the Bank, 
designed to reach students who may not be enrolled in an economics 
class and have limited knowledge about personal finance and the Federal 
Reserve. High school juniors and seniors write a three-page essay on a 
financial literacy topic or the Federal Reserve. Winners receive 
savings bonds at an awards luncheon held at the Bank. In the fall of 
2005, the essay theme highlighted the importance of saving at a young 
age. There were over 250 entries.
    Financial Literacy Fairs are sponsored by the Bank for its 
employees each year, during Financial Literacy Month. Financial 
seminars address issues ranging from free credit reports, saving for 
retirement, and paying off credit card debt.
    The Bank also partners with local and regional financial and 
economic education organizations, including the Council on Economic 
Education in Maryland, Virginia, North Carolina, and South Carolina.
Atlanta
    Monetary Policy: Part Art, Part Science is a DVD-based lesson that 
focuses on the structure and functions of the Federal Reserve System, 
the Fed's role in formulating monetary policy, and how members of 
Reserve Banks' board of directors contribute to interest rate-setting 
decisions. This video was originally used as part of the Atlanta tour 
program; however, because of its popularity, it was adapted for use 
across the District and for distribution to educators. As part of this 
extension, a lesson plan entitled ``Monetary Policy Starts in Your Own 
Backyard'' was developed to accompany the DVD. The lesson and video 
were distributed to more than 4,300 educators in the spring 2006 Extra 
Credit e-newsletter.
    Extra Credit, an e-newsletter published twice a year, is designed 
to help teachers looking for information, lesson plans and activities, 
and ideas for teaching economics and personal finance to middle school 
and high school students. The second edition of the e-newsletter, 
available on the Internet, was distributed in spring 2006 to more than 
4,300 educators.
    Financial Education Day at the Fed, an annual event, teaches 
eighth-grade students about personal financial education. More than 40 
employee volunteers teach roughly 250 students money management skills 
through lectures and interactive exercises dealing with budgeting, 
credit, and saving. To measure the knowledge gained, students are given 
a test--both before and after the event--on the topics covered.
    Workshops and tours reached roughly 2,000 educators and over 15,300 
students in 2005. In addition to conducting workshops and tours, the 
Bank works with other organizations to collaborate on various 
initiatives to provide quality learning experiences for educators. In 
July 2005 the Bank--in cooperation with the St. Louis Fed's Memphis 
Branch, the Mississippi Council on Economic Education, and Mississippi 
Jump$tart--conducted a 3-day economic and financial education workshop 
that reached over 100 educators each day. Similar collaborations are 
planned for 2006 throughout the District.
    The Bank also works closely with the state Department of Education 
and state legislators on legislation and on a curriculum for a high 
school personal finance course. It also works with organizations that 
promote financial literacy, such as Junior Achievement, Jump$tart 
Coalition, and the Academy of Finance.
Chicago
    Money Smart Week, an annual event, continues to be the Bank's 
premier program for promoting the importance of financial and economic 
education to the Chicago community. In line with our goals to continue 
growth, participating partner organizations numbered 192 (up from 134 a 
year ago) and events numbered 274 (up from 220 in 2005). The campaign 
included promotional and marketing components such as a direct mail 
campaign to one million households, distribution of almost 400,000 
Money Smart bookmarks to grades K-6 within the Chicago public schools, 
and street marketing campaigns to distribute 40,000 event calendars. In 
addition, 5,000 Spanish language event calendars were distributed as 
part of the program.
    Financial Education Research Center is a data base of research on 
the impact of financial education programs. The goal of the center is 
to promote excellence in the field by providing online resources for 
researchers, educators, program directors, and others interested in 
supporting these types of programs and initiatives. The web-based tool 
also offers a listing of national financial education programs 
available to the public and educators.
    Power of Money Curriculum Package includes two lesson plans and a 
nine-minute video about the Federal Reserve Bank of Chicago. Since its 
inception in 2003, the package has been distributed to almost 2,200 
high schools in the five-state region. The total audience for the 
project is upwards of 250,000 students.
    The Visitors Center and Tour Program continues to grow and receive 
positive feedback from the students, teachers, and members of the 
general public who visit the facility. Surveys in which visitors rated 
their experience in the Visitors Center show an 87 percent satisfaction 
rate, defined as a score of 4.5 on a 5-point scale. The total number of 
counted visitors in the Visitors Center during 2005 was 23,623, a 9 
percent increase over 2004. Uncounted (walk-in visitors) are estimated 
to have totaled more than 5,000 in 2005. This was the second year in a 
row in which the number of counted visitors has exceeded 20,000. Since 
the museum opened in June 2001, new attendance records have been set 
each year.
St. Louis
    Making Sense of Money and Banking is a one-week, three-credit 
college course hosted by the Bank in conjunction with the University of 
Missouri--St. Louis and Southern Illinois University--Edwardsville. The 
course is offered to K-12 teachers to help them integrate money and 
banking topics into social studies, language arts, and math lessons. 
Guest speakers from the St. Louis Fed are featured. June 2006 will mark 
the eleventh year of the course, which draws 25 to 35 educators each 
year. The success of the course is measured by attendance, formal 
course evaluations, and general commentary by actual and prospective 
students.
    Teach Children To Save Day is a national event developed by the 
American Bankers Association Education Foundation in cooperation with 
the Bank, the University of Missouri--St. Louis Center for 
Entrepreneurship and Economic Education, and a number of metro area 
banks. Students in the first, second, and third grades are given 45-
minute lessons on the importance of saving and then receive piggy 
banks. Of the 148 volunteers who delivered the program to 287 area 
classrooms, 68 were Bank employees. Success is measured by 
participation and by reaction from teachers and students.
    Your Paycheck  is a program conducted with Culver-Stockton College 
of Canton, Missouri, that focuses on teenagers earning their first 
paychecks and facing challenges related to money, credit, and financial 
responsibility. The program is sponsored by Quincy, Illinois, 
businesses that often employ teens. The program's trainers are Culver-
Stockton students who are trained by Bank employees. Success is 
measured by evaluations from the student trainers and the program 
students.
    Learn Before You Leap is a series of brochures listing counseling 
agencies that provide advice on every step of the home-buying process, 
from budgeting income to negotiating a contract to closing on a loan. 
Each of the brochures focuses on one of the Federal Reserve Bank's 
regional areas--St. Louis, Little Rock, Louisville, and Memphis.
Minneapolis
    Supply, Demand, and Deadlines is an annual economics workshop for 
journalists. In its sixth year, the workshop--sponsored by the Bank and 
the University of Minnesota's Journalism School--was founded on the 
premise that a better understanding of economics can improve the 
reporting skills of journalists from all news beats, not just the 
business section. Roughly two dozen journalists from all types of media 
spend three days learning about economic principles and participate in 
a thorough case study. The workshop faculty includes college professors 
and experienced professional journalists. All participants are surveyed 
six months after the course to determine how they are applying what 
they have learned.
    The Essay Contest for High School Students, has, since 1998, 
challenged hundreds of high school students from the district to look 
through an economic lens to address questions about poverty, the 
environment, banking, economic development, and even illegal drug 
markets. The top 30 essay writers, along with their parents and 
teachers, are invited to the Bank for an educational program on that 
year's subject and to receive an award. Many teachers also use the 
contest materials in their class curriculum to apply economics to real-
world issues. The Bank works with district teachers to regularly 
evaluate the effectiveness of this program.
    The Bank has also assisted with the formation of local financial 
education organizations, including the Montana Financial Education 
Coalition (MFEC), the Montana Jump$tart Coalition affiliate, and the 
Minnesota Jump$tart Coalition affiliate. The Bank partners with the 
Native Financial Education Coalition (NFEC), created to promote 
financial education in native communities, and its Youth Initiatives 
Committee for the Building Native Communities adult financial education 
curriculum; the Minnesota Council of Economic Education; the Montana 
Council of Economic Education; the South Dakota Council of Economic 
Education; the Minnesota Saves Network; and the University of 
Minnesota's Center for Personal and Family Financial Education (CPFFE).
Kansas City
    The Workplace Financial Education Program encourages employers to 
offer financial education classes to employees. The program is a series 
of seminars that include budgeting for current and future needs, 
reducing debt, increasing savings, understanding how credit works, 
improving credit ratings, building a relationship with financial 
institutions, and maximizing retirement funds. To complement the 
classroom settings, each participant is offered up to two hours of 
confidential one-on-one counseling with a certified financial planner. 
This program was piloted by the Bank in October 2005. Kansas City's 
community affairs research economist conducts surveys, before and after 
the program, in order to publish results and findings from the program.
    Jump$tart Your Money was organized in Oklahoma in 2005 and has 
successfully raised the profile of personal financial education. The 
event, one week of programs focusing on personal financial education, 
is sponsored by over 60 statewide partners. The Bank is working to 
replicate this program by establishing coalitions in Missouri, Kansas, 
and Nebraska. The Bank is also developing a comprehensive data base and 
a public web site to create awareness of financial education resources 
and services.
    The Bank also participates in financial education networks in 
Oklahoma, Colorado, New Mexico, and Wyoming--most notably Teach 
Children To Save Day (Denver and Kansas City), Oklahoma Jump$tart 
Coalition, and the Denver Financial Literacy Network.
Dallas
    Building Wealth: A Beginner's Guide To Securing Your Financial 
Future is a publication that introduces individuals and families to the 
idea of developing a plan for building personal wealth. It contains 
four sections: Learn the Language, Budget to Save, Save and Invest, and 
Take Control of Debt. Written in both English and Spanish, it is 
available in print and as an interactive web site. Building Wealth is 
widely used as a basic financial education tool by a broad range of 
professionals, including bankers and other lenders, credit counselors, 
homebuyer education providers, employers, and real estate 
professionals. Its popularity has increased steadily since its 
introduction in October 2000, and over 170,000 copies have been printed 
and distributed across the country. In addition, it is the most 
frequently downloaded publication on the Bank's web site, with over 
130,000 downloads in 2005.
    Rx: Financial Health is the Bank's 2006 personal financial 
education workshop. It will address topics related to achieving 
financial health--such as credit scoring, banking services, and tax 
preparation--and will touch on state-legislated personal finance 
education initiatives. This workshop, open to all high school 
educators, is part of a series of annual workshops hosted by the Bank 
in partnership with the Texas Council on Economic Education. Several 
presentations will be conducted by representatives of both private and 
public organizations, including the Internal Revenue Service, the 
Federal Reserve Bank of Dallas, and the Texas Council on Economic 
Education. The workshop was held in Dallas and at the Bank Branches.
    Where Did My Money Go? Making Money, Spending It, and Keeping It 
was the Bank's 2005 workshop series, which focused on money in the form 
of income, how personal choices affect future income, and the 
difference between money made and money kept. More than 300 high school 
teachers attended workshops conducted by Dallas Fed economists, the 
Consumer Credit Counseling Services, and Citigroup's Office of 
Financial Education. The 1-day events were held at the Bank in Dallas 
and at Branches throughout the District.
    Riding the Waves of the Global Economy was a Bank-hosted two-day 
economic summit for more than 130 high school faculty. The program 
focused on the world economy and international issues, with special 
emphasis on technology, financial markets, poverty, and outsourcing. 
Dallas Fed President Richard Fisher and Fordham University economics 
professor Darryl McLeod were featured speakers.
San Francisco
    There's a Lot To Learn About Money is the Bank's one-hour personal 
finance session for high school students, which supplements the Bank's 
tour program. This interactive session teaches students how to take 
control of their finances by understanding the time value of money 
through saving and investing, how to develop a budget, and how to use 
credit wisely. Since the program was launched in the fall of 2005, a 
total of 69 workshops have been held, reaching 1,620 students. Teachers 
also have access to the program curriculum through the Bank's web site.
    Open and Operating: The Federal Reserve Responds to September 11 is 
a video-based lesson that gives history and economics teachers a tool 
for introducing their students to the Federal Reserve System. The video 
combines news footage and interviews with Federal Reserve officials to 
illustrate how the Fed functions in the real world. The events of 
September 11, 2001, provide the context for this lesson, documenting 
how the Federal Reserve acted decisively to calm the financial markets, 
keep funds moving, and stabilize the economy. The program includes a 
videotape/DVD, a lesson plan booklet, and web-based resources. In the 
first quarter of 2006, 2,500 Open and Operating kits were distributed 
to high school teachers, reaching more than 17,500 students across the 
country.
    The International Economic Summit (IES) is a program that educates 
high school students about the benefits of world trade while exploring 
the controversies associated with globalization. Working in small 
groups, student teams adopt a country and take on the role of economic 
advisor. Each student team evaluates conditions within their country 
and develops a strategic plan to improve living standards. A typical 
event hosts 300 to 400 students representing 60 to 80 countries. The 
event concludes with an awards ceremony recognizing those teams of 
economic advisors who achieved the goals of their strategic plan. 
Student teams also compete for awards in creative costume and table 
displays. The Bank established a partnership with the IES Foundation in 
2003 to promote and support the program throughout the District. Since 
then, approximately 25,000 students have participated in the IES 
simulation in high school classrooms throughout California, Idaho, and 
Washington. Most recently, the first bi-national IES event hosted 300 
high school seniors from San Diego County and Ensenada, Mexico.
    Building Native Communities is a series of workshops offered in 
Portland, Sacramento, Seattle, and Phoenix to train tribal members and 
representatives of Native American community organizations to teach 
financial education curricula in their communities.
    Individual Development Account Initiatives were launched in the 
District to establish partnerships for sponsoring match-savings account 
programs for low- and moderate-income populations to save for buying a 
home, starting a small business, or pursing education. The programs 
include financial education for participants.
                                 ______
                                 
                 PREPARED STATEMENT OF CHRISTOPHER COX
           Chairman, U.S. Securities and Exchange Commission
                              May 23, 2006
    Chairman Shelby, Ranking Member Sarbanes, and Members of the 
Committee: Thank you for giving me the opportunity to be here today to 
testify about the importance of financial literacy and the Securities 
and Exchange Commission's efforts to protect and educate our nation's 
investors. I commend each of you for raising awareness regarding this 
critical issue.
    In my testimony today, I discuss the financial literacy challenges 
we face with various segments of our population and explain what the 
SEC is doing to get information into the hands of today's investors--
whether they are young adults, teachers, seniors, or the members of our 
armed services. Improving financial literacy is one of the keys to 
fulfilling the investor protection part of our mission. But it's not 
just about pushing educational information out the door. It is not our 
job to tell people how they should invest. Critical to our efforts to 
improve financial literacy is actually putting investors in the 
driver's seat so they can better make their own financial decisions. 
Putting them in the driver's seat means giving ordinary investors the 
means to interact directly with companies' information in a way that 
allows them to compare, contrast, and put that information into 
contexts that are meaningful to them. In the last part of my testimony, 
I explain why plain English disclosure and interactive data are key to 
getting investors into the driver's seat.
I. Financial Literacy for Young Americans
    Senator Sarbanes, when I last appeared before this Committee, you 
mentioned the particular challenge we face in educating our young 
people about personal finance and the benefits of savings and 
investment. Your concerns are well placed. Recently, the non-profit 
Jump$tart Coalition published the results of a comprehensive financial 
literacy survey of 5,775 high school seniors.
    On average, students answered only 52 percent of the survey 
questions correctly. In addition to the low average scores, I found 
several of the findings to be of particular concern:
    Based on several questions in the survey, fewer than half of 
respondents demonstrated an accurate understanding of the impact of 
inflation on savings.
    Perhaps as a corollary, while a large majority of teens in the 
survey appreciated the importance of safer investment vehicles for 
short-term savings, they struggled mightily when faced with questions 
about long-term investment. Specifically, 80 percent of the kids 
understood that for money that will be needed within a few months or 
years, a bank savings account is superior to stocks, corporate bonds, 
or locking cash in the closet--an encouraging result. Yet when asked 
which investment vehicle tends to have the highest growth over a period 
of 18 years--and given the choice of a US Savings Bond, a checking 
account, a savings account, or stocks, only 14 percent knew that the 
correct answer is stocks.
    This is of great concern when we reflect on the wonderful news that 
Americans' life expectancy continues to increase--we expect the average 
baby born today to live 78 years. We expect that the average high 
school senior in the survey group will also live to almost 80, and a 
fair number will live past 100. It is essential that they get into the 
savings habit early and that they take advantage of the best 
opportunities to grow their wealth, allowing them someday down the road 
to cover the costs of a retirement that may last for decades. To put it 
another way, these kids will face the Mt. Everest of financial planning 
if their plans do not include exposure to the equity markets, 
especially when they are young. Just as we need to teach these kids 
that the stock market is no place for the summer job earnings that they 
need at college this fall, we also need to share with them the powerful 
role of stock investments in building wealth over the long haul.
    Wharton School Professor Jeremy Siegel's research has shown that 
over the long-term--in fact over the last two centuries--investing in 
stocks has delivered average real growth of between 6 and 7 percent per 
year. We make it clear in our investor education efforts that stocks 
have historically had the greatest risk and highest returns among the 
major asset categories. While the volatility of stocks makes them a 
risky investment in the short term, I do believe that thanks in part to 
the reforms that bear your name, Senator Sarbanes, young people with 
long-term financial goals can invest in America's companies with 
confidence, taking advantage of all the financial tools appropriate to 
their circumstances. And we seek to address this gap in financial 
literacy by making sure that just as young investors understand the 
risks of equity investments, they also fully appreciate the rewards.
    Funding their retirements will be a challenge, but of course the 
kids headed into the workforce or to college this fall will have many 
large expenses before then, for example their own kids' college 
tuition. The College Board reports that the average cost of attending a 
public college or university for just one year is now over $12,000 and 
the average cost for just one year of private college is now more than 
$29,000. Both continue to rise significantly faster than inflation. I 
believe it is crucial that today's young people are encouraged to look 
a few years down the road and learn the greatest lesson of investing--
start early! As a side benefit, if we can convince today's young people 
to contemplate the money that they will need to provide for their own 
families in the future, and perhaps reflect on the sacrifices already 
made to finance their educations, then perhaps they will also begin to 
appreciate and respect their parents.
    For aspiring young investors and, in fact, for investors of all 
ages, we offer a range of informative publications. Our Office of 
Investor Education and Assistance routinely creates and disseminates 
neutral, unbiased information on saving and investing. The educational 
materials are all directed at helping people make wise investment 
choices and avoid fraud.
    In these publications, we emphasize factors investors should 
consider before they invest, and explain important questions to which 
they should get answers before investing. Many of our materials explain 
to investors how a small difference in fees can translate into a large 
difference in returns over time. We also repeatedly remind investors of 
the benefits of paying off high-cost credit card debt before beginning 
any investment program. After all, virtually no investment pays off as 
well as, or with risk less than, wiping out the balance of a credit 
card.
    Since we serve on the board of the Jump$tart organization, our 
information, which is available in Spanish and English, is incorporated 
into many, many K-12 curriculums. Anyone who can read a newspaper can 
understand our educational materials. Everything we produce is 
available free of charge and not copyrighted, so that the widest 
possible dissemination is encouraged.
    While we cannot tell investors which products to purchase, we can 
and do arm them with the information they need to assess various 
products and investment strategies. For example, our ``Get the Facts on 
Saving and Investing'' brochure helps individuals create a basic 
financial plan, explains the differences between stocks and bonds, and 
highlights the ``magic'' of compound interest. Another brochure 
explains the basics of asset allocation, diversification, and 
rebalancing.
    We also offer a wide range of publications on many financial 
products, including mutual funds, 529 plans, variable annuities, and 
equity-indexed annuities.
    A dominant theme of the SEC's investor education materials is 
``investigate before you invest.'' We encourage individuals to ask 
questions and to check out the background and credentials of any 
salesperson or financial professional they use. We make sure investors 
know how to find out whether their brokers or investment advisers have 
a history of complaints or fraud. Not only do we list the key questions 
every investor should ask, but we also provide investors with 
information on how to confirm whether a financial professional is, in 
fact, duly licensed. In addition, we give investors resources for 
researching companies and tips for avoiding fraud.
    Overall, we have published hundreds of educational brochures, 
investor alerts, and short topics of interest to investors. While some 
of our most popular materials are available in print, all of our 
materials are available through the ``Investor Information'' section on 
our website (www.sec.gov/investor). There, visitors can search for 
these materials using a targeted search engine, browse for information 
by subject matter, or view an alphabetical list of publications.
    We have also begun beta testing of investor education delivered 
through ``podcasting.'' Podcasting is a method of publishing and 
syndicating audio broadcasts through the Internet. Podcasting allows 
individuals to listen to our broadcasts directly from their computers. 
Individuals can get started saving and investing by listening to our 
introductory podcast entitled ``Welcome to Your Money,'' or learn how 
to determine whether a hot stock tip is a good investment by listening 
to the episode called ``Hot Stock Tips.'' Users can also download these 
podcasts onto their iPods, or other handheld listening devices, just as 
they would their customized music playlists. That way, they have the 
flexibility to listen to them, or re-play them, wherever and whenever 
it suits their needs. If this outlet for dissemination is successful--
and we believe it will be--we will expand the library of financial 
information podcasts available to the public.
II. Financial Literacy for Other Target Populations
A. Seniors
    I've talked about today's young people and their need to save and 
invest for the many expenses they will face, right up to and including 
a long retirement. But l'd like to focus now on the people who are 
already there--our nation's retirees--the largest and fastest growing 
segment of our population. The statistics tell the story: No fewer than 
75 million Americans are due to turn 60 over the next 20 years, more 
than 10,000 every day. Households led by people aged 40 or over already 
own 91 percent of America's net worth. The impending retirement of the 
baby boomers will mean that, very soon, the vast majority of our 
nation's net worth will be in the hands of the newly retired.
    Older Americans, who have already worked and saved over the course 
of a lifetime, have different needs. As you know, I have spent a good 
portion of my time as SEC Chairman working to ensure that America's 
seniors are protected against those who would cheat them out of their 
life savings. I have been so focused on this issue in fact that I have 
to be careful not to give the impression that this is all I do each 
day. But I think my focus is well placed given our aging population, 
and the fact that so much of America's financial assets are held by 
seniors.
    Sadly, some industry professionals target seniors for inappropriate 
investments. And we know that scam artists frequently prey on the 
elderly.
    That's why I recently announced that I will convene a ``Seniors 
Summit'' of regulators and organizations that are vitally concerned 
with seniors, to publicly discuss what steps can be taken to better 
protect this precious segment of our society. I intend this to be a 
first step towards a nation-wide assault against securities fraud 
perpetrated against seniors.
    I have also announced that we are working with state regulators and 
the NASD to evaluate the ubiquitous ``free lunch'' seminars aimed at 
convincing seniors to purchase complex and perhaps inappropriate 
financial products. Building on work we first started in Florida, we 
will be expanding our joint efforts to examine ``free lunch'' programs 
in other jurisdictions.
    Throughout this nationwide effort, we will be coordinating the 
distribution of educational materials to senior investors, and reaching 
out to the local media to raise awareness of financial issues affecting 
seniors. This joint initiative also involves extensive information 
sharing among securities regulators with a common goal: to safeguard 
the financial well-being of our nation's senior citizens.
    When I addressed this Committee last month, I described the 
Commission's three-pronged approach to combat investment fraud on our 
senior citizens: enforcement, examinations, and education. This morning 
I'd like to provide some more details about our educational efforts for 
seniors and how we are putting better information in their hands so 
they can make informed investment decisions.
    We know that many seniors, and many children and caregivers of 
seniors, use the Internet to search for information on investing. That 
is why we created a page on our website (http://www.sec.gov/investor/
seniors.shtml) aimed specifically at senior investors. The information 
on this page can help seniors fend off high pressure sales pitches for 
legitimate, but arguably unsuitable products. After reading our 
materials on equity-indexed annuities, for example, seniors will know 
to avoid any salesperson claiming that individuals ``can't lose money'' 
in that product. Investors can lose money buying an equity-indexed 
annuity, especially if the investor needs to cancel the annuity early.
    In addition to providing critical information on other investments 
commonly marketed to seniors, such as variable annuities, promissory 
notes, and certificates of deposit, the page also provides key 
information about how to detect and avoid fraudulent schemes.
    Fraudulent schemes come in many flavors and fraudsters can turn on 
a dime when it comes to tailoring their pitches to capitalize on the 
latest trends, from hedge fund investing to charity schemes. But most 
frauds, like bad sitcoms, are not new. Instead, they're the same old 
material wrapped up in new packaging.
    The frauds targeted at seniors mirror the frauds aimed at broader 
audiences: ``Ponzi'' or pyramid schemes--where money from new investors 
is used to pay off earlier investors until the whole scheme collapses; 
questionable debt instruments--which are often pitched as providing 
guaranteed income; and classic ``pump and dump'' market manipulations--
when fraudsters drive up the price of a company's stock (typically a 
microcap or penny stock) using false and misleading statements and then 
sell at the peak.
    Our ``Seniors'' page warns against the dangers of listening to the 
sales pitches of cold-callers and alerts seniors to the very real 
threat of affinity fraud--scams that prey upon members of identifiable 
groups, such as religious or ethnic communities, professional groups, 
or the elderly.
    Senior citizens and their adult children who love them can learn 
more by browsing through our ``Senior Care Package,'' a collection on 
our website of our most popular brochures for seniors (which are also 
available in hard-copy). Illustrative examples of brochures that we 
publish that might be of special interest to seniors include: ``Cold 
Calling'' and ``Variable Annuities: What You Should Know.''
    Our investor education publications are available through our 
website, www.sec.gov/investor, by writing us at SEC headquarters or by 
calling 1-800-SEC-0330.
    We are continuously looking for ways to provide valuable 
information to our nation's elderly citizens. Since last month, we've 
added two new investor education brochures to our page dedicated to 
seniors. One new brochure can help individuals become more informed 
before they invest a lump sum payout, a common and often difficult 
decision for seniors who elect to receive their pension in a single 
payment. And because many financial professionals use designations that 
imply that they are experts at helping seniors with financial issues, 
we also added a brochure that can help investors understand the sets of 
initials that may follow the names of their financial professionals and 
the meaning of titles, like ``senior specialist,'' they use to market 
themselves.
    But helping our nation's seniors is not a task that can be 
undertaken solely by the Commission. Efforts by multiple parties play 
an important role in equipping consumers with needed financial skills. 
Coordinated actions can efficiently reach seniors with high-quality, 
unbiased information. That's why the SEC works with others to leverage 
our efforts. I mentioned earlier our cooperation with the states, 
represented by the North American Securities Administrators 
Association, as well as with the NASD, in aggressive actions to prevent 
and respond to investment fraud against seniors, and we are also 
working cooperatively on the education side, giving seniors the tools 
to avoid being victimized.
B. Teachers
    Of course, our educational tools are not only geared towards 
seniors. When we noticed that our busy, dedicated public school 
teachers sometimes overlook their own financial needs, such as planning 
for a secure retirement, we created our ``Just for Teachers'' web page 
(www.sec.gov/investor/teachers.shtml). The page helps teachers evaluate 
and select appropriate investments for employer-sponsored 403(b) 
retirement savings plans and other savings vehicles. Mindful of the 
need I discussed earlier to ensure that their students also benefit 
from financial education, we have also included on the site and 
resources for teaching personal finance in the classroom.
    While all of the materials are available online, teachers can also 
contact the SEC from the ``Just for Teachers'' web page and request a 
free ``Teacher Care Package,'' consisting of SEC educational brochures 
on mutual funds, variable annuities, and other investing topics, which 
will be mailed to the investor. We have contacted teachers in every 
state to let them know of the resources we have to assist in financial 
education and we have mailed over four thousand teacher care packages 
to educational professionals all across America.
C. Military Personnel and Their Families
    We are also committed to improving the financial literacy of our 
service members and their families. The SEC's Office of Investor 
Education and Assistance has teamed with the NASD Investor Education 
Foundation and the Department of Defense on a multi-faceted financial 
education program serving members of the military and their families. 
In addition, we have presented our educational materials to enlisted 
men and women on military bases and ships all over America.
    Our ``For Military Personnel and Their Families'' web page 
(www.sec.gov/investor/military.shtml) contains helpful resources for 
our service members. These resources include an online brochure 
explaining mutual fund contractual plans--also known as periodic 
payment plans--which generally impose a 50 percent up-front fee. As you 
know, some unscrupulous salespeople have used misleading scripts to 
sell these investment products to our military personnel.
III. Making Disclosure More Useful for Ordinary Investors
    I'd now like to address the elephant in the room when we talk about 
financial education, and I'm not talking about any of the Republican 
Senators on the majority side. We face a great challenge, even if we 
are able to provide robust financial education to our young people, and 
an abundance of online tools and paper publications to Americans of all 
ages.
    Even if investors know to start saving early, to appropriately use 
stocks and bonds depending on their needs and time horizons, to ignore 
promises of guaranteed sky-high returns, to disregard emails, faxes, 
and voice mail messages containing ``hot'' stock tips, to be wary of 
apparently free lunches, and to check out the advisers and brokers 
seeking their business, they will still have trouble getting the 
information they need.
    Even armed with an outstanding financial education, very few 
investors are able to slog through the swamp of legalese known as 
corporate annual reports and mutual fund prospectuses. Based in part on 
the requirements we have placed on corporations and mutual fund firms, 
and in part on the desire of these firms to defend against potential 
lawsuits, current disclosures often do not give investors the chance to 
read the key facts about a potential investment in plain English, nor 
to easily extract the particular information they want from these 
cumbersome mounds of paper.
    Watching TV or reading magazines, you have probably noticed an 
increasingly prominent theme in advertising and marketing. A recent New 
York Times piece described the trend this way: ``My, my, my. Madison 
Avenue has become obsessed with using the word ``my''--along with 
``your'' and ``our''--in advertising slogans, as well as in the names 
of brands, products and even a new television network. The trend is 
inspired by a desire by marketers to demonstrate that they understand 
changing consumer needs by, literally, putting the customer first.''
    Madison Avenue is responding to consumers who increasingly demand 
personalized and customized products and services.
    Unfortunately, when it comes to financial information, ``Have it 
your way'' is not a phrase that immediately comes to mind. ``Take it 
our way'' is what these documents seem to be saying to the individual 
investor, and the result is that even the most ardent students of our 
educational efforts run into a sometimes impenetrable wall of 
complexity, discouraging them from an informed examination of their 
financial assets.
    But technology offers a way for average investors to create My 
Annual Report, My Prospectus, or My Quarterly Update--exactly the 
information they want, how they want it, when they want it, uncluttered 
by extraneous legal gobbledygook.
    As I described last month, interactive data will let any user--
anyone--take mountains of financial data and make it searchable and 
usable.
    Until now, data has been held captive to the document where it was 
originally published. But that will change once each piece of 
information is given a unique label through data-tagging.
    With interactive data, each investor will be able to focus on the 
disclosure they want to see with just a few clicks of the mouse. All of 
the information they seek is called up instantly to one page.
    Since mutual funds are the investment of choice for retail 
investors, that's where we feel interactive data will make its first 
big splash. We already require mutual funds to disclose a great deal of 
information. With interactive data, we can help investors tame this 
mass of facts, statistics, and numbers, so it can serve the individual 
needs of each user. I am pleased that the Investment Company Institute, 
which represents the mutual fund industry, has recently volunteered its 
time and talent to completing the technical work necessary to allow 
mutual fund investors to enjoy the benefits of interactive data. I'm 
also pleased to report that earlier this month, the SEC received its 
first voluntary interactive data test filing from the mutual fund 
industry.
    The goal of interactive data is simple--to supply investors with 
information they can use. The Commission is also working towards this 
goal by requiring clear and concise disclosures.
    Since the day I began at the Commission, I've been focused on 
translating disclosures--that appear to be written by and for attorneys 
and accountants--into plain English that ordinary investors can read 
and understand. We can't continue to ``let a short cut for the writer 
become a roadblock for the reader,'' as our own Plain English Handbook 
advises. That means eliminating legalese, defined terms, and, in most 
cases, the passive voice.
    When I was here last month, I indicated that the Commission is 
committed to making disclosures more meaningful, and intelligible, to 
average investors.
    I described initiatives that would require plain language 
disclosure of executive compensation and reduce the complexity of 
accounting rules and regulations. But our plain English movement is 
intended to transform all of the disclosure documents sent to 
individual investors.
Conclusion
    Encouraging financial literacy is a high priority for my colleagues 
on the Commission and for me. We seek to accelerate our educational 
efforts and we believe that technology, combined with plain English 
disclosure, offers an unprecedented opportunity to give Americans the 
power to become the most informed investors in human history.
    In closing, thank you for giving me the opportunity to be here 
today to testify about financial literacy. I can think of no more 
important topic for the future of the American economy and I am happy 
to answer any questions you may have.
                                 ______
                                 
                PREPARED STATEMENT OF M. CINDY HOUNSELL
      President, Women's Institute for a Secure Retirement (WISER)
                              May 23, 2006
Introduction
    Chairman Shelby, Senator Sarbanes, distinguished members of the 
Committee, thank you for the opportunity to discuss WISER's efforts at 
helping women develop their financial knowledge and planning skills.
    My name is Cindy Hounsell. I am president of the Women's Institute 
for a Secure Retirement (WISER), a nonprofit organization dedicated to 
ensuring the security of women's retirement income through outreach, 
partnerships, and policy advocacy.
    WISER commends the Committee for examining the state of financial 
education in our country. There is ample evidence that Americans lack 
financial knowledge, and that financial education is an ever-growing 
need that requires more resources to address these challenges.
    Our testimony will briefly cover the reasons women are at 
particular risk for economic insecurity in their retirement years. We 
will detail the outreach efforts of WISER and its partners to provide 
financial education to help women address these unique challenges. We 
will also cover the topics that seem to resonate most with women we 
reach, and issues that all Americans must become more informed on if we 
are to improve financial literacy--and in particular, the literacy of 
those who are nearing retirement age.
    First, I'd like to share the story of Hazel Shoyrer, a lifelong 
worker, who would have greatly benefited from education and financial 
counseling to help her with the complicated financial decisions she 
needed to make when leaving her job. Unfortunately, Ms. Shoyrer was 
left on her own to figure it out--and the decisions she made when 
leaving her job influenced her standard of living for the rest of her 
life.
    Ms. Shoyrer retired at age 62 from a Chicago hot dog factory after 
30 years of service.\1\ Like most American workers, she took her Social 
Security benefit at the earliest age and likely was informed when she 
applied that doing so would provide her with the highest amount of 
lifetime benefits.
---------------------------------------------------------------------------
    \1\ Bonnie Miller Rubin, ``More Working Women Find They Can't 
Afford to Retire.'' Chicago Tribune, April 24, 2006. (http://
www.chicagotribune.com/features/health/chi-
0604240222apr24,1,6336184.story?page=2.)
---------------------------------------------------------------------------
    As a modest earner throughout her working life, she was unaware of 
the amount of money that she would need in retirement and the critical 
challenge of making the money last for the rest of her life. She 
thought she could easily manage her modest lifestyle with a $988-a-
month pension and a $900-a-month Social Security check. In fact, these 
are substantial benefits for an average worker and well above the 
median retirement income of $12,080 for retired women. She had also 
accumulated a nest egg of $5,000 which probably seemed like a sizable 
amount of money.
    After a year in retirement, Ms. Shoyrer took a part-time job at a 
truck stop. But then she was hit with what researchers refer to as a 
negative shock, an event which is likely to cause significant financial 
consequences. Her negative shock, pneumonia, landed her in the hospital 
for 6 days. She was discharged with a $10,000 hospital bill, and the 
loss of her part-time job at the truck stop. The $5,000 she had in 
savings quickly vanished and she is still paying off the hospital bill.
    Now at age 67, Ms. Shoyrer is desperately trying to find work. She 
has since developed a heart problem, and though Medicare paid for a 
recent hospitalization, she pays hundreds of dollars a month for heart 
medications, supplemental insurance, and Medicare Part B coverage. As 
she looks down at all the bills on her table, she says, ``Some days, I 
just want to cry. No matter how much you think you have, it's not 
enough.''
    There were a number of decisions that would have helped Ms. 
Shoyrer: among them, she needed to know that she would not be eligible 
for Medicare until she was age 65 and that taking Social Security at 
the earliest age would cause her to lose about 20 percent of her 
benefit. Ms. Shoyrer is unlikely to recover financially, and while she 
remains hopeful and continues to search for work, she is unlikely to 
find it as she ages.
Women Need To Save More Money To Avoid Poverty in Retirement
    We began by using an example that unfortunately is not uncommon and 
because Ms. Shoyrer started retirement with nearly twice the income of 
most women and with access to a pension that today is only available to 
one out of five workers.
    Women have unique retirement problems. The biggest risk is 
longevity, and with it, the risk of outliving assets. Women should be 
saving more money than men because they will need money to support 
themselves for about four more years than men on average. They are also 
more likely to have higher expenses for health care and prescription 
drugs. Unfortunately, women's lower average earnings and more time out 
of the workforce for caregiving make it difficult for many of them to 
save the amounts needed for retirement.
    There are other reasons that make it difficult for women to save 
more money for retirement. Today, all workers are taking on more out-
of-pocket responsibility to pay for health and retirement benefits. 
While women must plan for a longer retirement, they start off with less 
income and are left to rely too heavily on Social Security as their 
primary retirement income source. The increased cost of health care and 
retirement cannot be easily addressed by saving more for most women. 
Two thirds of working women earn less than $30,000, so the notion of 
saving more for these women is much like trying to get blood from the 
proverbial stone.
    We know that in every age group, women on average have lower 
incomes than men do. But the wage gap is especially pronounced in 
retirement: the median retirement income in 2004 for women was $12,080 
compared to men's income of $21,102.\2\ Furthermore, older women are 
about half as likely as older men to have earnings or pension benefits, 
and those women who do have these sources of income receive, on 
average, much less than men do.\3\
---------------------------------------------------------------------------
    \2\ U.S. Census Bureau Statistics Division: Housing and Household 
Economics. Revised January 13, 2006.
    \3\ Social Security Administration: Income of Population 55 or 
Older, 2002. March 2005.
---------------------------------------------------------------------------
    Despite the overall decline in poverty rates among older Americans 
during the last several decades, many older women remain poor. In 2004, 
12 percent of women aged 65 and older were poor compared to 7 percent 
of the men in this age group.\4\ The likelihood of a woman being poor 
in retirement increases with age. Older unmarried women and minority 
women are especially at risk. Approximately one in five unmarried 
elderly women is poor.\5\ The poverty rate for single black women over 
age 65 is 40.8 percent, and for single Hispanic women it is 41.5 
percent--more than twice the rate of white women.\6\ (In 2004 the 
poverty threshold for an individual age 65 and older was $9,060.)
---------------------------------------------------------------------------
    \4\  U.S. Census Bureau:  2005 Annual Social and Economic 
Supplement. Current Population Survey. June 2005.
    \5\ Ibid.
    \6\ Ibid.
---------------------------------------------------------------------------
    The current generation of elderly women has little in the way of 
savings and investments for their retirement. In fact, half of all 
unmarried older women have less than $1,278 a year in asset income, 
which amounts to only about $106 a month.\7\ Older minority households 
have even less than white households: one survey found that older black 
households had an estimated net worth of $13,000 compared with $181,000 
for white households.\8\
---------------------------------------------------------------------------
    \7\ Social Security Administration 2002.
    \8\ Federal Interagency on Aging Related Statistics 2000.
---------------------------------------------------------------------------
    It is startling to be reminded that the vulnerable population of 
those living past age 80 is expected to double and possibly triple over 
the next few decades. The demographics of older Americans points to the 
importance of women's retirement security:

    At ages 65 and older, there are 6.2 million more women than 
        men.
    At ages 75 and older, there are 4 million more women than 
        men.
    At ages 85 and older, there are 1.8 million more women than 
        men. This amounts to 71 percent of the 85-and-older 
        population.\9\

    \9\ He, Wan, Manisha Sengupta, Victoria A. Velkoff, and Kimberly A. 
DeBarros: U.S. Census Bureau, Current Population Reports, P23-209, 65+, 
in the United States: 2005, U.S. Government Printing Office, 
Washington, DC, 2005.
---------------------------------------------------------------------------
Financial Education
    All Americans are being asked to assume a larger share of 
responsibility for making complex retirement saving decisions. But the 
thousands of pages available on the Internet, conflicting and often 
poor advice from families and colleagues, and quote ``education'' from 
marketers of financial products and services seem to create more 
confusion and inertia than action. The avalanche of information and the 
complexities involved in retirement planning especially are significant 
barriers to workers to protect themselves from economic insecurity.
    Aside from the overwhelming quantity of information, financial 
literacy is impaired by language that many people just don't get. Just 
think about some of the terms that are part of the financial planning 
lingo: we have MMAs, CDs, DBs, DCs, IRAs, annuities, low loads, no 
loads, 12b-1 fees, vesting. To reach people---to have them hear the 
message and turn it into action--we need to take a step back from all 
the jargon and give people basic, usable information. Otherwise, we 
will continue to see people tune out or throw their hands in the air 
and walk away from the responsibility.
    The Treasury report that Secretary Snowe discussed earlier on the 
national strategy for financial literacy refers to the ``national 
mosaic that comprises America's financial literacy and education 
effort.''\10\ I think mosaic is a generous description. It is more like 
a giant jigsaw puzzle that's missing the box that shows the picture the 
pieces are supposed to form. It is laudable that the Bush 
Administration has set a course to develop a national strategy for 
financial literacy.
---------------------------------------------------------------------------
    \10\ U.S. Department of the Treasury: Taking Ownership of the 
Future: The National Strategy for Financial Literacy. Financial 
Literacy and Education Commission. 2006.
---------------------------------------------------------------------------
What People Need To Learn
    Research has shown what WISER's experiences with financial 
education outreach have borne out--that people need better guidance for 
decisionmaking about determining when to retire, how much spendable 
income will be needed, where the money will come from, and how to make 
it last. We have noticed that, like our earlier example of Hazel 
Shoyrer, many people make the mistake of retiring early--reducing their 
pension and Social Security benefits without having considered the 
future costs of medical insurance and prescription drugs.
    But we have also learned that we have to help people put this 
information in context because they are hearing a lot of conflicting 
advice. At a recent briefing of financial experts recapping the 2006 
SAVER Summit, there was a brief discussion of what multiplier should be 
used times final pay to ensure sufficient income in retirement--the 
multiplier number recommended by the financial experts ranged from four 
to 22. Ask three experts whether you should pay off your home mortgage 
and you are likely to get three different answers.
    Workers should be given a ``retirement readiness'' program or test 
before they retire. There is a readiness survey being designed for 
testing with the Office of Personnel Management by the International 
Foundation of Retirement Education. This survey for government workers 
will help determine whether they will have enough income to retire and 
to understand the issues before they make their decisions to leave a 
job. While this may not translate as well into the private sector, it 
does indicate a promising means to help people gain an understanding of 
current resources.
    We find that many people are ill-prepared to make what we term 
life-defining decisions. Many people make retirement decisions based on 
the fact that they want to stop working or they get forced into it. But 
a key factor to consider before retiring is the likelihood of living 20 
or more years--years during which purchasing power may be lost with 
inflation and more income is needed for chronic medical needs. Nearly 
every retiree I have come into contact with over the past two decades 
tells me two things: they had no idea they would live so long, and they 
wished they had saved more money.
    A recent report, ``Public Misperceptions about Retirement 
Security,'' identifies areas of concern with regard to public knowledge 
about retirement.\11\ Some of the issues highlighted in this report 
include the following:
---------------------------------------------------------------------------
    \11\ Society of Actuaries, LIMRA International, Inc, Mathew 
Greenwald & Associates: Public Misperceptions about Retirement 
Security. 2005.

    Longevity risk is poorly understood and not planned for.
    More than 40 percent of Americans end up retiring earlier 
        than they planned to retire, usually due to job loss, family 
        needs including health issues, or personal poor health.
    Many people do not understand how investments work. For 
        example, they do not understand what a money market fund is.
    A substantial number of people believe that the common 
        stock of their employer is less risky than a diversified 
        portfolio of common stocks.
    Many people do not save enough, and they do not estimate 
        their needs well.
    Many people fail to consider the impact of future 
        inflation.

    The impact of these misperceptions is compounded by the increased 
responsibility taken on by millions of workers for their own retirement 
preparedness. In a dramatic display of the individual and broader 
consequences of low financial literacy, it has been reported that the 
state of Nebraska recently dropped its 401(k)-style plan because it 
found that individuals' investment decisions were unwise, resulting in 
a waste of taxpayer contributions to those plans. Indeed, a 2005 study 
by Standard & Poor's found that, as a result of poor investment 
practices, a switch by public employers to 401(k) plans might lead to 
``lower pension contribution costs over the medium term, but could end 
up with higher public assistance costs in the long term.''\12\
---------------------------------------------------------------------------
    \12\ American Federation of State, County and Municipal Employees: 
Myths and Facts. March/April 2006. (http://www.afscme.org/publications/
public_employee/2006/pema0607.htm.)
---------------------------------------------------------------------------
WISER's Program on Women's Education for Retirement
    One of WISER's key initiatives is the National Women's Resource 
Center and Program on Women's Education for Retirement, also known as 
the POWERCenter. The Center is dedicated to helping women plan for the 
future and provides average women with a place to turn for basic 
financial education.
    This initiative began as a cooperative project funded by the U.S. 
Administration on Aging in 1998. The program includes many partners--
employers, women's organizations and community based groups. Government 
agency partners have included the Department of Agriculture's 
Cooperative Extension Service, the Department of Labor's Women's 
Bureau, and the Social Security Administration. We have directly 
reached more than 25,000 women through our own workshops and millions 
through our publications published in Good Housekeeping Magazine and 
the US Airways in-flight magazine. Our organizational partners include 
Mothers' Voices Georgia, MANA, A National Latina Organization, N4A--the 
National Association of Area Agencies on Aging, the General Federation 
of Women's Clubs, and Business & Professional Women-USA. Our partners 
have helped us to train trainers and reach tens of thousands more 
women. WISER also works with several insurance and financial companies 
who help spread our message and disseminate our material. WISER's staff 
has published booklets with the Actuarial Foundation, including our 
most popular, Seven Life-Defining Financial Decisions.
    The PowerCenter's primary objectives are to:
    1. Ensure that the material and program is flexible enough to reach 
women in their communities, their jobs and their places of worship;
    2. Encourage women to take an active role in planning for their 
future;
    3. Reach the maximum number of average- and lower-income women with 
information;
    4. Create an awareness of retirement basics, pensions savings 
plans, and the Social Security program, to help motivate women to plan 
early by stretching and managing their resources and increasing their 
retirement income;
    5. Help older women protect their income by educating them about 
the types of insurance and related products that can help make their 
money last for a lifetime, as well as avoiding consumer fraud, 
financial schemes, and predatory scams; and
    6. Help women in crisis situations, such as caregiving for elderly 
parents and spouses, and with the financial issues resulting from death 
and divorce.

    WISER's POWERCenter workshop, ``Your Future Paycheck,'' hits home 
with diverse audiences. It provides practical knowledge by interweaving 
substantive information with case histories of women who have worked 
and cared for their families their entire lives. Participants identify 
with the situational problems and remember the solutions and make 
retirement savings a priority.
    WISER urges workshop participants to make sure they have a basic 
financial plan and teaches them how to take manageable steps to retain 
more of their earnings. We also acknowledge the fact that many of the 
participants are behind the eight ball when it comes to saving for the 
future. We emphasize taking small steps to avoid being overwhelmed.
    We have found that workshop participants are most interested in:

    Learning how it all fits together--a basic lifetime 
        financial journey;
    Practical suggestions for women with children who must 
        prepare for gaps in employment, lower wages, and fewer 
        benefits;
    Access to employer savings plans and techniques for saving 
        on one's own;
    Credit problems, credit repair, and debt reduction;
    First-time home ownership programs and Individual 
        Development Accounts;
    Types of insurance and annuities;
    Social Security as a retirement program and as a program 
        that provides survivor benefits to children and disability 
        benefits; and
    Predatory lending scams.
More Meaningful Outreach Is Needed
    As the Treasury report and other analysis shows, there is a lot 
more financial education happening now than in prior years, but not 
enough people are being reached, and not enough behavioral change is 
occurring to have a meaningful effect on retirement income insecurity. 
Much more meaningful outreach is needed, including:
    Increased public education for average Americans about 
        retirement planning and how much money is needed for 20-30 
        years in retirement. Much of the information in the media is 
        aimed at higher-income individuals.
    Information to help individuals understand the importance 
        of decisions about taking and leaving jobs. Women are more 
        likely to spend their lump-sum retirement distributions because 
        they have smaller amounts in their accounts.
    The effect of various types of insurance on retirement 
        planning, such as long-term care policies and annuities.
    Better education on planning for contingencies, such as 
        widowhood and divorce.
    Better education of lawyers and judges about pension 
        division at divorce.

    We would like to mention a successful initiative that was based in 
part on the Individual Development Account model to structure a matched 
retirement savings program.\13\ WISER worked with Appalachian By Design 
to create a savings program for self-employed knitters in rural West 
Virginia. Appalachian By Design is a nonprofit economic development 
company dedicated to finding markets and training a network of knitters 
in rural areas of the state. To make a long story about a complicated 
journey short, our program turned a small group of low-income women 
into first-time savers. Mr. Chairman, more than half of full-time 
working women in West Virginia earn less than $20,000 a year. To get a 
subset of these women saving for retirement is proof that a combination 
of the opportunity, the information, and an incentive to save can work 
to get even the hardest-pressed workers preparing for retirement.
---------------------------------------------------------------------------
    \13\ See ``Crafting a Retirement Plan for Appalachian Artisans.'' 
Appalachian By Design. 2004.  (http://www.appalachianbabydesign.org/
docs/Retirement%20Report%20April%202004.pdf.)
---------------------------------------------------------------------------
Conclusion
    Mr. Chairman, thank you for including women's issues in retirement 
as part of the broader discussion on financial education today. As I 
hope my testimony has pointed out, women are at a particularly high 
risk for poverty in retirement, and more education is needed to help 
them avoid this outcome. WISER has learned first-hand that women 
without financial knowledge are eager to gain and apply it, and take 
greater control of their financial lives. The Federal and state 
governments, non-profits, employers and others need to continue seeing 
financial education as an imperative, and to continue finding ways to 
help people achieve financial stability.
    Thank you. I welcome your questions.
                                 ______
                                 
                   PREPARED STATEMENT OF SARAH TESLIK
       CEO, Certified Financial Planner Board of Standards, Inc.
                              May 23, 2006
    Certified Financial Planner Board of Standards, Inc. (CFP Board) is 
a 501(c)(3) educational/certifying body a with a public mission. CFP 
Board owns the certification marks CFP, CERTIFIED FINANCIAL 
PLANNERTM and federally registered CFP (with flame logo) in 
the U.S. and awards use of those marks to more than 50,000 people who 
have successfully completed initial and ongoing certification 
requirements designed to ensure that those certified are capable of 
providing competent and ethical financial planning services. CFP 
Board's mission also includes a public focus: to create awareness of 
the importance of financial planning and the value of the financial 
planning process and to help underserved populations have access to 
competent and ethical financial planning.
    CFP Board's involvement with financial planning educators, 
financial planning professionals and the public that seeks financial 
planning information gives it a front-row seat in financial literacy 
and education circles. And it is clear there is a great need to 
increase Americans' understanding of and appreciation for financial 
literacy and financial planning and to encourage healthy financial 
actions across all sectors. So CFP Board thanks the Committee for the 
spotlight it is shining on these issues; their importance to the future 
of our country can hardly be overstated.
    It is always nice to start with good news, and there is some good 
news to report. First, the bodies of knowledge described by the terms 
``financial literacy,'' ``financial education'' and ``financial 
planning'' have developed so substantially over the past two decades 
they can fairly be described as mature. Billions of dollars and 
millions of person-hours have gone into defining and describing the 
content encompassed by these terms. And there is excellent material 
available capturing these bodies of information for a staggeringly wide 
array of audiences. Of course learning will continue, laws that affect 
these bodies of knowledge will change, and other developments will 
ensure gradual refinements and evolution, but the starting point is 
that we are not at the starting point. Information on financial 
literacy, financial planning, and financial education is high quality, 
wide ranging, deep and current.
    That is the good news. The bad news is that we know this 
information is not having the impact it should. We know, for example, 
that Americans are spending more than they are making. Even in the very 
highest income bracket over 15% of households spend more than they 
make. We know that average personal debt is around $10,000 a household 
and that income devoted to debt is at a record high, having almost 
doubled in only a decade. We know that half of all seniors are 
receiving annual income of $15,199 or less, and seven out of ten of 
them get the majority of that from Social Security, with the average 
senior today receiving only $1,000 a year from personal savings. And we 
know Americans are aging and that numbers unprecedented in human 
existence will be heavily testing these frayed governmental, personal 
and familial safety nets very, very soon.
    There is so much data and information about the serious issues 
related to Americans' financial situations that it has become 
information overload that we tune out. The numbers involved--from the 
gigantic groups mentioned in the statistics to the large sums 
individuals need to save for comfortable retirement--are so large they 
lose significance to us as individuals, just as distances in outer 
space do.
    So what does this mean should happen? First, government can address 
ways current laws make these problems worse. CFP Board does not 
officially support or oppose any law, regulation or piece of 
legislation, but various parties have suggested a number of ways 
governments discourage responsible financial behavior.
    Some suggest that tax laws discourage savings and encourage 
consumption. Some suggest bankruptcy laws make fools of individual who 
do not use them as a strategy to offload debt. Some say government 
guarantees in various markets encourage reckless investor behavior that 
comes back to haunt taxpayers. But these issues contain political 
dynamite that lawmakers are unlikely to pick up.
    Are there other, more achievable, advances that government might 
encourage to enhance financial literacy and financial planning 
knowledge and expertise? The answer is yes.
    That answer springs from relatively new developments. All around us 
a revolution in science is occurring that can help translate the 
excellent financial literacy and financial planning work that has 
already occurred into better results. As new technology enables us to 
obtain knowledge we never dreamed of before--whether by seeing inside 
living brains as people think or by collecting and crunching enormous 
data dumps--the edges between many once-distinct scientific disciplines 
are blurring. These disciplines include economics, biology, psychology, 
finance, math and many more. Neuro-economics and behavioral finance are 
obvious examples with immediate relevance to financial literacy, but 
there are many more.
    Financial literacy and financial planning are at the epicenter of 
this convergence of disciplines. Thus one of the main consequences of 
this explosion is a rapid increase in our ability to understand why 
people do what they do and what can be done to influence that behavior.
    What does this mean? It means that employers, learning from 
scientific studies confirming the human tendency to prefer choices 
requiring the least effort, are changing retirement plan designs to tap 
this inertia by having employees opt out of, rather than into 
retirement plans. This science allows financial policymakers to turn 
something that might otherwise be a negative--apathy or a preference 
for inaction--and turn it into a plus.
    This is but one example. The implications of behavioral finance and 
neuro-economics go much farther and some of the design suggestions they 
make, however unnerving they may at first seem, are exciting. Examples 
will be provided in oral testimony.
    These advances in science tend, as a whole, to make clear that the 
reason financial literacy information has not had greater impact is a 
more fundamental one and needs to be addressed as such.
    The reason is as obvious as it is overlooked: the vast majority of 
behaviors that financial literacy encourages involve postponed 
gratification. To save today what you could otherwise spend is not a 
popular message. There is a reason, for example, banks often offer a 
prize to individuals who make deposits--they need to create an 
immediately gratifying experience to obtain a postponement-of-
gratification decision. Policymakers need to wise up to this basic 
insight.
    The effort to get Americans to slim down and get fit offers a 
perfect analogy. There is abundant and excellent information on 
exercise and diet. There is a real interest in losing weight and 
getting fit. But all this interest and effort are having frustratingly 
few effects--largely because the effects depend on postponing 
gratification or denying gratification. We know some people can improve 
their physical fitness; we know for most people it is extraordinarily 
difficult.
    So, admitting the nature and size of this difficulty is essential 
if we are going to have any hope of success. Our problem is not just 
how to get the necessary information to the right people in the right 
form for them to understand it, but it is figuring out how to get 
people to deny themselves instant gratification and replace it with 
difficult behaviors designed to achieve goals that may not be reached 
in decades. I doubt many of us would want our annual job reviews to 
depend on achieving such a goal.
    Congress is not a body known for its ability to save--telling your 
constituents you are going to tax them more and provide them less but 
their children will benefit is not a popular re-election strategy. But 
Congress can encourage work that helps current and future financial 
literacy and financial planning initiatives have broader and deeper 
effects. Funding program and design changes can generate major benefits 
at minimal cost--a kind of financial elegance that financial literacy 
and financial planning initiatives deserve.
                                 ______
                                 
                 PREPARED STATEMENT OF STEPHEN BROBECK
           Executive Director, Consumer Federation of America
                              May 23, 2006
    I am Stephen Brobeck, executive director of the Consumer Federation 
of America. CFA is a non-profit association of 300 organizations that, 
since 1968, has sought to advance the consumer interest through 
research, advocacy and education. For three decades, CFA, and I 
personally, have sought to promote effective financial education. We 
commend you, Mr. Chairman, Senator Sarbanes, and members of your 
Committee for organizing these hearings and for providing us with the 
opportunity to explain our views on the role and limits of this 
education.
    In this testimony, I will briefly discuss the need for financial 
literacy, the limits of financial education, essential characteristics 
of effective financial education, and the single most important 
initiative we could take to promote financial literacy.
Growing Need for Financial Literacy
    Being financially literate means that one has the knowledge to 
effectively manage one's financial resources--especially through 
budgeting, debt management, and asset accumulation--to achieve lifetime 
financial security. Unfortunately, for several decades this financial 
management has grown more difficult, and in the future it is likely to 
become even more challenging. Two types of societal changes help 
account for this increasing difficulty.
    Erosion of Economic and Social Security: Many Americans have 
experienced an erosion in their economic and social security. Advances 
in technology and economic globalization have accelerated the pace of 
change in our economy, increasing both job insecurity and the awareness 
of this insecurity. In the past two decades, this has been especially 
the case for relatively highly compensated blue collar workers forced 
to accept less lucrative positions or retire from the workforce. In the 
future, this will increasingly be true for large numbers of white 
collar employees who will be replaced by foreign workers with access to 
the latest communications technologies.
    At the same time, globalization has spurred efforts by employers to 
reduce costly pension and health care benefits. As a result, over the 
past decade there has been a massive reduction in the availability of 
pension plans for employees. For younger workers, for all practical 
purposes these plans have ceased to exist. Employers have largely 
replaced these pension plans with contributory retirement programs that 
are voluntary and must be funded, entirely or in large part, out of 
wages. At present, most workers with access to these contributory 
programs are not participating sufficiently to allow them to retire in 
their sixties without suffering a great decrease in their level of 
living.
    Employers have also sought, with some success, to reduce their 
medical care obligations to existing and retired workers. That often 
increases the need for these Americans to take a more active role in 
managing their health care. If Medicare and Medicaid programs must 
sharply cut back benefits in the future, as many experts predict, this 
need for greater skill in dealing with health care and health insurance 
providers will only increase.
    A More Complex and Risky Financial Services Marketplace: Over the 
past two to three decades, as members of this Committee are well aware, 
the financial services marketplace has become much more complex and 
risky for consumers. In particular, the growing availability of credit, 
the way this credit is priced and sold, and the rising popularity of 
securities have increased financial literacy needs.
    Massive increases in the availability and purchase of consumer and 
mortgage credit now require almost all consumers to understand and make 
sensible decisions about debt. A key factor in the rising number of 
personal bankruptcies over the past decade has been the growth in 
credit card marketing, which includes over five billion mail 
solicitations annually, and in available credit lines on these cards, 
which have nearly reached $5 trillion. There has also been a 
substantial increase in extremely high-cost loans with onerous or 
unsustainable terms, such as payday loans and some mortgage loans. 
Furthermore, a principal reason for the decline of discretionary income 
for many young and middle-aged consumers has been the rising 
availability of aggressively marketed first- and second-mortgage loans 
made attractive by lower down payments, relatively low interest rates, 
and the expectation of future increases in housing prices.
    The more dynamic pricing of consumer and mortgage credit has also 
increased the need for financial literacy. As recently as 10 years ago, 
for example, someone who made two late payments on a credit card was 
charged only two late fees of under $20. Today, the same person who 
makes two late payments on the same credit card will not only be 
charged late fees of about $35 but may also have their annual 
percentage rate hiked by more than 10 percentage points, possibly have 
the interest rate on other credit cards increased, and experience a 
costly decline in their credit scores.
    However, these risks are much lower for middle-class consumers than 
those assumed by the less affluent who purchase nontraditional 
mortgages. Many experts, and lenders, worry about the ability of many 
purchasers of adjustable-rate mortgages to afford rising interest 
obligations. And they cannot understand how many lower-income consumers 
would ever be able to afford interest-only mortgages once they are 
required to start repaying principal as well as interest.
    As incomes and participation in contributory retirement programs 
have increased, more people, now nearly half of all households, have 
purchased stocks or bonds. But in the securities marketplace, as in the 
credit marketplace, consumers face complexity and risk. The latter 
include opportunities for casino-like day-trading, the temptation of 
highly risky, purportedly high-yield investments, increased 
availability of exotic financial products featuring derivatives, and 
solicitations by sellers more interested in their own compensation than 
investment risks and yields.
    In brief, to effectively manage their financial resources, most 
consumers must be much more financially literate about financial 
products and about financial services professionals who sell and manage 
these products.
The Limits of Financial Education
    Financial education, whose aim is to increase financial literacy, 
is limited by its current weaknesses and by its inherent character.
    Fragmented Character: The most important weaknesses of this 
education today relate to its fragmented character which, some say, 
reflects our society's lack of commitment to effectively providing this 
education. There are many institutions and individuals who are working 
with dedication and effectiveness to increase financial literacy. Many 
of their programs, including several in which we participate or lead, 
are described in the recently released ``National Strategy for 
Financial Literacy'' report. But these worthy programs do not begin to 
meet the financial literacy needs of our nation.
    For a start, there is no coherent national strategy, or effective 
leadership of the implementation of this strategy, to meet these needs. 
Such a strategy must define as precisely as possible the needs 
themselves and how they vary for different population groups, effective 
programs needed to meet these needs, and a rigorous method for 
assessing the success of these programs.
    In the schools, Jump$tart and its partners have made progress 
persuading state legislatures to pass financial education mandates. 
And, these mandates are in large measure responsible for the fact that 
hundreds of thousands of students now receive at least some financial 
education. Yet, many states still have not approved mandates, and in 
those which have, the education varies widely in intensity and 
effectiveness. The magnitude of the remaining challenge is reflected by 
Jump$tart's annual surveys of the literacy of students who have had 
financial education instruction that reveal little or no progress in 
knowledge levels. Moreover, it is not at all clear that even 
statistically significant increases in this knowledge adequately 
prepare students for the financial challenges of adulthood.
    In communities, financial education efforts are even more 
fragmented. Just in the past decade, hundreds of public, corporate, and 
nonprofit organizations, including CFA, have initiated their own 
financial education efforts. They have produced information on a wide 
variety of topics that they attempt to communicate to consumers through 
publications, audio-visual materials, the Internet, and workshops.
    The quality of this information varies considerably. Some of it, 
for example, ignores the most important messages consumers should 
receive. There are many materials on the use of credit cards, for 
example, that fail to emphasize the importance of trying to pay off all 
balances on time each month and the risks of being unable to do so. 
These and other materials also often tend to communicate more 
information than consumers are prepared to read and digest. 
Unfortunately, the lower-income and least-educated consumers, who have 
the greatest need for this financial education, also tend to be those 
who have the most difficulty understanding complex materials.
    There is little adequate evaluation of the effectiveness of all 
this community financial education. Most initiatives contain no 
assessment of consumer impact. Those that do tend to limit their 
evaluation to onetime surveys of the experience of participants. Very, 
very few attempt to study the long-term effect of the initiative on 
participant behavior and whether any behavioral changes are sufficient 
to meet financial services needs.
    Importance of Motivation and Opportunity as well as Knowledge: As 
noted above, financially literate persons must have adequate knowledge 
to effectively manage their financial resources, and the goal of 
financial education is to provide this literacy. However, since this 
literacy is only one condition necessary for effective management of 
resources, financial education alone cannot assure this skillful 
management. Two other conditions must also be obtained: consumers must 
value this skillful management enough to learn and practice it, and 
there must be accessible opportunities in the marketplace for utilizing 
these skills.
    The following examples illustrate the importance of all three 
conditions--knowledge, motivation, and opportunity:

    Only employees with access to retirement plans at work can 
        easily save for retirement. But they must want to participate 
        in these voluntary plans, and they must know how to do so in 
        ways that serve their long-term financial interests. That 
        usually entails keeping most funds in equities, not ``safer'' 
        money market funds.
    The knowledge necessary to maintain an emergency savings 
        fund is not complicated. But one must value this savings highly 
        enough to keep a separate savings account with balances 
        sufficient to meet normal financial emergencies. For lower-
        income individuals, it is easier to open such accounts if 
        financial institutions set low opening and minimum balance 
        requirements. And it becomes much easier to maintain adequate 
        balances if employers and financial institutions permit, even 
        encourage, split direct payroll deposits into saving as well as 
        checking.
    Aggressive credit marketing and its ``deceptive'' pricing 
        make it difficult for many consumers, especially the 
        inexperienced, to use and manage debt wisely. They assume that, 
        if a financial institution offers them credit, they can afford 
        it and that, if they are able to make minimum credit card 
        payments and initial payments on ARMs or interest-only 
        mortgages, this credit is sustainable. So, many think they have 
        little need to manage their debts carefully, for instance, 
        until their credit card balances are so large that 2-3 percent 
        monthly payments are burdensome or until ARM rates rise or 
        until principal must be repaid on an interest-only mortgage. In 
        our opinion, the only effective way to address these problems 
        is for lenders to be more responsible about extending credit 
        (``limiting credit opportunities'') and intervening at the 
        first sign of payment difficulties, perhaps by urging 
        consultation with reputable credit counseling agencies.
Characteristics of Effective Financial Education Programs
    Truly effective financial education programs share two general 
characteristics: They work--that is, they produce desired behavior 
change--and they have the capacity to ``go to scale''--that is, they 
can reach large numbers of consumers.
    Unfortunately, we have no idea whether the vast majority of 
financial education initiatives really work because their impacts have 
never been carefully studied. That is not to say these unexamined 
programs have no value. For the past 12 years, for instance, CFA has 
led a Consumer Literacy Consortium of national governmental, nonprofit, 
and corporate groups that carefully developed key consumer money-saving 
tips and then distributed, on request, nearly two million copies of its 
``66 Ways to Save Money'' brochure through the Federal Citizen 
Information Center, where it remains the most popular publication, and 
through other national networks. Frankly, we have no idea exactly what 
consumer impact this brochure, and related website, have had, but 
continuing strong consumer demand for this information, coupled with 
the program's low cost, strongly suggest it is cost-effective. That 
said, no one in the Consortium believes that this initiative should 
serve as the cornerstone of a national financial education program--it 
is much too limited in scope and ambition.
    Accordingly, for financial education programs to be seriously 
considered as model programs they must give evidence, through rigorous 
evaluation, of significant behavioral change resulting in satisfactory 
ability to manage financial resources. There are some initiatives, 
described in the ``National Strategy for Financial Literacy,'' that 
offer much promise for meeting these criteria. We are most familiar 
with the America Saves program, which in local and regional areas 
(often with Cooperative Extension leadership) has recruited public and 
private organizations to undertake campaigns to enroll thousands of 
nonsaving individuals as Savers. These participants are required to 
make written commitments to implement a specific plan that they have 
developed to meet a savings goal. To date, more than 50,000 Americans, 
about half of them African-American or Hispanic-America, have enrolled 
as Savers. Assessments funded by The Ford Foundation have revealed 
that, in the aggregate, these Savers are saving $.50 on each pledged 
dollar.
    Just as importantly, as a related assessment reveals, the local 
campaigns have persuaded important local institutions, particularly 
financial institutions and employers, to more effectively promote 
saving. For example, in several dozen areas where campaigns exist, most 
banks and credit unions have lowered opening and monthly savings 
minimums considerably so that less affluent families can afford to 
begin building savings.
    The America Saves program is relatively successful in large part 
because it seeks not only to communicate important financial 
information, but also to motivate individuals to apply this information 
in their financial lives and to create opportunities for the 
application of this knowledge. And, the program is expanding, both 
conceptually and physically, so that it can now realistically aspire to 
positively influence hundreds of thousands of Americans.
    This program cannot solve all financial problems or fully prepare 
participants to effectively manage their financial resources. Its 
principal goals have been to jumpstart personal saving and wealth-
building and to create an institutional environment that supports this 
wealth-building. So, no one with the 1,000 participating organizations 
believes that the program in and of itself is sufficient. But the 
experience of America Saves does suggest that there are great benefits 
to organizing a broad array of influential institutions to work 
together to develop and implement programs--which combine knowledge 
with motivation and opportunity--to change consumer behaviors in ways 
that are measured and evaluated.
    In our view, many of the most successful future efforts will be 
closely linked to ``products'' that are sold by institutions which can 
reach millions of Americans. These organizations include employers, tax 
preparers, banks and credit unions, other mortgage lenders, mutual 
funds, credit counseling agencies, the military, and schools. There is 
increasing study and experimentation in this area, which should be 
encouraged. One especially promising initiative, for example, involves 
``financial education'' by employers and financial institutions to 
persuade employees to split directly deposited paychecks into saving as 
well as checking. Nearly three-quarters of employees now directly 
deposit these paychecks, the ACH technology allows such splitting, and 
once employees have agreed to the split, saving is automatic. Of 
course, the risks of linking financial education to sale of products 
must be effectively minimized.
Linking Existing Financial Education Programs Through a New Initiative
    As noted earlier, an important reason financial education programs 
are relatively weak is that they are so fragmented. Can they somehow be 
linked, not institutionally but programmatically, to provide greater 
program coherence, mutual support, public identity and visibility, and 
attractiveness to the tens of millions of Americans with financial 
literacy needs? Unfortunately, general messages, even the tested, 
relatively effective ones of programs such as America Saves--``Build 
Wealth Not Debt'' and ``You Can Build Wealth''--are too diffuse to 
meaningfully link diverse financial education programs. A more 
effective linkage would involve a call to a specific action that is 
personally relevant to consumers. We believe the most effective call 
would urge consumers to estimate, and then periodically monitor, their 
net personal wealth.
    As financial educators as diverse as columnist Michelle Singletary, 
the Financial Planning Association, and my own organization have 
concluded, awareness of net personal wealth is an important motivator 
for better money management, debt management, and savings accumulation. 
People who have a pretty accurate idea of their wealth--real and 
financial assets minus debts--are more likely to spend money carefully, 
monitor their finances, live within their financial means, and 
patiently accumulate wealth through 401(k) contributions, amortizing 
mortgage payments, and other savings strategies. In other words, if 
Americans were more aware of their net personal wealth, they would be 
receptive to a broad array of financial education programs that helped 
them monitor, conserve, and accumulate financial resources. In a recent 
column, Singletary noted the parallels between keeping track of your 
physical weight and your net personal wealth. While weight-watching 
does not always result in weight-restraint, for many it is a 
precondition and motivator for such restraint.
    In such an initiative, there would be a great benefit to having one 
or two wealth estimators that financial educators would recommend and 
even help consumers use. The America Saves wealth estimator fairly 
easily helps one estimate their current net assets and their future 
wealth-building potential. But there are other useful asset estimators. 
Perhaps the most valuable would be one developed and promoted by a 
credible Federal agency, such as the Federal Reserve Board, which all 
other financial education organizations also promoted and linked to.
    Would using such an estimator be too discouraging for the tens of 
millions of Americans with few assets, including nearly one-tenth of 
households with negative net wealth? In our view, that might be the 
case for some but not for most of these individuals and families. There 
is a simple reason. People tend to grossly underestimate their 
capability to build substantial personal wealth over time through the 
combined working of regular deposits and interest compounding. In a new 
America Saves pilot financial education program with National City 
Bank, in which a series of case study scenarios show how less affluent 
households can build six or even seven-figure assets, hundreds of 
participants with modest incomes have gained hope that they too can 
build personal wealth. In doing so, they have become more hopeful about 
their financial futures. When we begin to carefully study any related 
behavioral changes, we are confident we will learn that this ``How to 
Save $1 Million'' program has also persuaded many participants to 
manage their money and debts more carefully.
    What could the role of the Federal Government be in such an 
initiative? For it to collectively mobilize its resources behind a 
public/private initiative to encourage and assist all Americans to 
estimate and monitor their net personal wealth would give such an 
initiative a big boost. That boost could involve not only making 
available and promoting wealth estimators, but also encouraging and 
assisting a wide array of non-governmental organizations, especially 
financial institutions who service virtually all American households, 
to join the initiative.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR BUNNING      FROM BEN 
                           S. BERNAKE

    Q.1. Do either of you think that the efforts by the Federal 
Government to educate investors will create an unrealistic 
sense of a government safety net when it comes to risk in 
investing?
    A.1. Financial education efforts by the Federal Reserve 
System focus on the importance of consumers assessing their own 
personal financial circumstances to evaluate their goals and 
risk tolerances. As a result, these educational approaches 
stress the importance of creating a budget; identifying 
financially related goals, such as owning a home, starting a 
small business, or financing education; and understanding and 
managing credit. We believe that financial education with the 
greatest long-term value helps consumers develop the skills 
that enable them to create and adapt personal financial 
strategies that further their life goals.
    Consistent with this, the Federal Reserve System is very 
careful to ensure that our programs do not endorse specific 
financial providers, products or vehicles. As such, the risk of 
our creating a sense of a government safety net for investment 
risk is minimal.
    Q.2. It seems that any advice that the government would 
provide would point investors to lower risk investment choices. 
Is the government able to educate investors and remain neutral 
about specific products or investment sectors?
    A.2. As indicated in response to the first question, the 
Federal Reserve System's financial education programs do not 
direct or recommend financial providers, products, or vehicles, 
but rather focus on acquiring knowledge to make informed 
financial decisions.
    To best serve consumers, we provide high-quality, reliable, 
and unbiased information that does not direct consumers to 
choices, but rather provides them access to resources that can 
assist them in their decision-making process. I believe that 
the government education programs must remain neutral in 
education efforts in order to best serve consumers as well as 
financial markets.
    Q.3. In your testimony, you stated that financial literacy 
has not really improved when it comes to our young people. Do 
you think this is something that our schools need to be 
spending time on? Is it more effective for that knowledge to 
trickle down in the home by educating parents?
    A.3. Because understanding how to manage personal finances 
is so critical, I believe that there is value in directing 
educational efforts to a wide variety of audiences and age 
groups through multiple delivery channels to best accommodate 
learning preferences and needs. Schools are one venue for 
financial education, but there are also many others that offer 
different strategic advantages.
    As a result, the Federal Reserve System employs financial 
education strategies that leverage opportunities to reach a 
wide range of populations through our publications and 
partnerships with community and educational organizations at 
the local, state, and national level. The appendix to my 
testimony detailed our involvement with such groups and the 
markets they reach.
                                ------                                

     RESPONSE TO WRITTEN QUESTIONS OF SENATOR BUNNING FROM 
                        CHRISTOPHER COX

    Q.1. Do either of you think that efforts by the Federal 
Government to educate investors will create an unrealistic 
sense of a government safety net when it comes to risk in 
investing?
    A.1. The government's role as a ``safety net'' in our 
financial markets is a source of confusion for many Americans 
so it is imperative that financial literacy initiatives led by 
the Federal Government clearly explain that investing involves 
risk. Currently, the SEC's investor education materials explain 
basic information about investment risk, particularly noting 
that the SEC does not recommend, approve, or guarantee 
investments. In addition to providing useful information on 
investing and avoiding fraud, we believe these materials have 
helped clarify the SEC's role in the financial markets.
    Q.2. It seems like any advice that the government would 
provide would point investors to lower risk investment choices. 
Is the government able to educate investors and remain neutral 
about specific products or investment sectors?
    A.2. We think there is a key distinction between providing 
neutral, educational information on investing, and providing 
investment advice. In our investor education materials, we do 
not tell investors what products to buy, or take a position on 
investment strategies or choices. Instead, our materials are 
directed at helping people make wise investment decisions and 
avoid fraud. By keeping the focus of our materials on this type 
of information and allowing investors to use it to make their 
own decisions, we believe the SEC can continue to educate 
Americans with unbiased information about investing.
    Q.3. I know the SEC website is a great resource for 
everyday investor tools such as the Mutual Fund Cost Calculator 
and investor information in plain English. However, I also know 
that these services do little good if no one uses them. Are 
investors taking advantage of these tools? How does the SEC 
monitor the success of its investor education program?
    A.3. We believe that it is very important to monitor the 
performance of programs aimed at improving the financial 
literacy of Americans. We know that individuals are using our 
investor education tools and information because we regularly 
examine their use. Last year, the SEC's investor education web 
pages received approximately 8.5 million hits. In addition, our 
Office of Investor Education and Assistance also distributed 
about 476,000 brochures through the Federal Consumer 
Information Center. We look to other measures, such as the 
recent Jump$tart Coalition survey, to determine whether the 
collective efforts among government agencies, industry groups, 
non-profit organizations, schools, and others to improve 
financial literacy are successful.
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