Elizabeth A Duke: Research, policy, and the future of financial education
Speech by Ms Elizabeth A Duke, Member of the Board of Governors of the Federal Reserve
System, at the Federal Reserve Bank of Boston, Boston, Massachusetts, 24 May 2011.
The original speech, which contains various links to the documents mentioned, can be found on the US Federal
Reserve System's website.
* * *
I would like to thank Eric Rosengren, President of the Federal Reserve Bank of Boston, for
inviting me to speak to you today. This is the third in a series of conferences on the Future of
Life-Cycle Saving and Investing cosponsored by Boston University School of Management
and the Boston Reserve Bank. The audience here includes leading academics in household
finance and consumer financial education, industry practitioners, and policymakers. The work
you do every day is critically important to the financial well-being of American consumers and
to the overall functioning of our economy.
Today's topic is a daunting one: how to improve consumers' financial education. I hope to set
the stage for your discussions by sharing my perspective on recent economic factors and
trends in the financial services industry and the impact they have had on consumers,
particularly those with low and moderate incomes. I will also give you my thoughts on the role
of financial education in facilitating effective decisionmaking and suggest areas where
additional research could help shape policies and practices to benefit individual consumers
and lead to safe and sustainable economic growth.
The case for financial education
I certainly don't need to impress upon this audience the importance of financial education.
Today's consumers are making decisions among increasingly complex financial products
and in the context of uncertain economic times. A working knowledge of basic financial terms
and concepts can lead to better economic decisions and outcomes for individuals over the
course of a lifetime. In addition, there is a clear relationship between individuals' financial
decisions and the health of our entire economy.
The financial crisis and the slow recovery from it has obviously had a dramatic impact on the
financial decisions made by American families. Many now have fewer financial resources
and limited options. The pace and timing of their saving and investing life cycle has also
been disrupted. For example, high unemployment levels among recent high school and
college graduates, especially among young African Americans, means that this demographic
likely won't be able to start saving and investing as early in life as previous generations.
In addition, starting salaries for recent college graduates have also declined, which means
that young Americans who are employed will have fewer resources for saving and investing
than their predecessors. Young people are living with their parents longer, which helps
conserve their limited resources but likely places a strain on their parents' budgets.
Also troubling is research showing that many consumers who should be saving for retirement
instead have been forced to take hardship withdrawals from their 401(k) plans. According to
an analysis by Vanguard, hardship withdrawals increased by 49 percent between 2005 and
2010. Other types of withdrawals increased by 56 percent.
The increasing use of retirement savings for other purposes is particularly troubling given
that the responsibility for saving for retirement has shifted away from employers to individual
employees. Having a secure retirement is a high priority and a significant long-term goal for
many Americans, so it is especially important that they have an understanding of what level
of resources they will need in retirement and the investment options available to them.
Individuals who are approaching retirement age, in particular, are being forced to make
changes to their plans for retirement. Social Security Administration data indicate that in
2009 and 2010, the proportions of men and women claiming social security benefits at age
62 began to rise again after several years of decline. Workers have either chosen to leave
the work force early in the last few years or, more likely, have applied for social security
benefits as early as possible because of the weak job market.1 Opting to receive a smaller
social security annuity earlier in life is just one of many hard decisions Americans have had
to make in order to balance their short-term and long-term financial needs.
The recession has clearly disrupted the future expectations and financial plans of millions of
Americans, but even in the best of circumstances, effectively managing one's longevity risk
requires a level of financial knowledge well beyond that required of any previous generation.
The pending retirement of Baby Boomers means that millions of older households will need
to assess pension distributions and make decisions about payout options for their defined
benefit plans. Those with defined contribution plans will need to make decisions about the
purchase of annuities or rates of withdrawal from these plans.
Younger workers, a majority of whom will not have pensions, will need to make complicated
decisions about their target amounts of retirement savings, portfolio allocation, and asset
management using 401(k) plans, individual retirement accounts, and other, non-tax
advantaged, accounts.
Financial products have also become more complex, adding a significant degree of difficulty
to the important task of managing one's own retirement savings. Consumers need
information and education to understand their saving and investment options, to make the
best choices for themselves and their families, and to help them implement and monitor
these choices over time.
In short, your efforts to identify, address, and meet the financial education needs of
consumers in all stages of the life-cycle have never been more urgent.
Changing consumer behaviors and information needs
The financial crisis has changed all of our assumptions about the future. Naturally, consumer
behavior is changing as a result, though it is unclear whether these changes represent
temporary or more permanent shifts in thinking and planning for the future.
For example, the collapse of housing prices and resulting worker immobility has changed
consumers' appetite for homeownership. In Fannie Mae's 2010 Own-Rent Analysis, the
percentage of respondents who said they were more likely to rent their next home than buy
climbed from 30 percent in January to 33 percent in December of the same year.
Similarly, the recent increase in gasoline prices has affected consumer choices in housing
and other purchases, big and small. Family incomes have not kept pace with rising costs and
many families, particularly those with low-to-moderate incomes, are actually facing the
decision between buying gas to drive long distances to work and paying their mortgage.
During the housing boom, when gas prices were much lower, potential homebuyers moved
steadily farther away from employment centers in search of more affordable homes. This
was referred to as the "drive till you qualify" method of home buying. Foreclosures remain
high in these areas where the cost of driving to work has become so great.
But, even independent of recent economic trends and the increasing complexity of financial
products, consumers' need for financial information and education is changing.
Evolving education needs
There is growing evidence that the changing financial services landscape has disconnected
young and other vulnerable consumers from mainstream financial services, making them
more prone to using alternative financial products. For example, some consumers prefer
using reloadable stored-value cards to opening a deposit account at a bank or credit union.2
This choice could have significant implications for a consumer's financial well-being, both
good and bad. These cards, with their Visa and Mastercard branding, make it easy for
consumers to make purchases online, but do not carry the same robust federal protections
as debit or credit cards and their use does not establish a relationship with a financial
institution that can serve as the entry point for other financial services such as loans.
As more and more new products are introduced to the financial marketplace, it becomes
more important for consumers to be able to evaluate and compare products' benefits and
potential costs. Many consumers seek the advice of friends and family when making financial
decisions. Online social networks are increasingly playing this role as a source of financial
information, particularly among younger consumers.3 At the same time, it is crucial that they
also have access to accurate, comprehensive, and unbiased financial information.
Starting financial education early
Successfully navigating the volumes of financial information out there, whether from
advertisements, advisors, or social media, requires critical skills based on a foundation of
numeracy, language arts, and decisionmaking that is first developed in school. It is important
that these skills be included in curriculum and measured in student achievement tests. If our
schools can't spare the resources to provide financial literacy as a subject unto itself, I
believe that the concepts required for sound financial decisionmaking should, at a minimum,
be incorporated into existing subject areas. Math problems can involve consumer financial
calculations. Social studies classes can help students understand the real world financial
issues and decisions they will face as young adults. I also think that the work many of you
are doing to make financial lessons more appealing to school aged children is extremely
important given the competition for attention from media and web-based entertainment and
games.
More broadly, financial education is a life-long endeavor. Sound financial decisions are made
when consumers have access to information that is clear and culturally relevant and that is
provided at critical "teachable" moments, such as when a consumer is financing education,
buying a car, starting a family, purchasing a house, or planning for retirement. These are just
a few examples. As academicians, practitioners, and policymakers, we need to identify as
many of these moments as possible and determine how best to support positive financial
outcomes for consumers at those moments.
Reaching consumers
There's a saying among communications professionals that "the medium is the message." In
that vein, I believe that how we deliver financial education has a significant impact on how
effective the lessons will be. New technologies present exciting new opportunities to deliver
timely financial lessons. Mobile payments and financial services are growing at a rapid pace.4
Financial management "apps" for smart phones abound, making it possible for consumers to
get just-in-time information. The developments in mobile financial services have only begun
to exploit the potential of this technology to provide tools for consumer financial
decisionmaking. I will be particularly interested to see how technology can be used to better
serve lower-income populations who may be more focused on stretching their paychecks to
meet monthly expenses than on investing. If you can have an app to track what you eat,
certainly you could use one to track what you spend.
Evaluating the effectiveness of financial education
Until now, we have had a limited understanding of which methods work best with respect to
financial education. For years, one of the correlates of higher scores on the JumpStart
Financial Literacy test was participation in the Stock Market Game, an enrichment program
offered in many schools. The FINRA Education Foundation sponsored a study to determine
just what it was about the game that made a difference. Not surprisingly, the answer is that
the game seems to develop math skills.5
Entertainment-based financial education also seems to be effective in capturing attention and
instilling knowledge among youths. Young people who played one of the Doorway to Dreams
(D2D) financial education games reported increases in financial knowledge, aspirations, and
self-confidence.6
Among young adults, financial education was found to be most relevant when it was tied to
financial outcomes.7 For example, in a Federal Reserve study conducted with Army
Emergency Relief, young enlisted service members who participated in a financial education
program seemed to make better car-buying decisions. These soldiers had higher down
payment-to-loan ratios and shorter-term loans than a comparison group who did not take the
financial education program.8
These are notable examples, but the fact is that we have very limited data on how effective
financial education is in improving financial well-being. The Financial Literacy and Education
Commission, of which the Federal Reserve is a member, has only recently developed a core
set of financial competencies, and has yet to establish the knowledge, skills, and behaviors
that will meet these competencies.
4
Mobile payments and financial services have grown nearly five-fold from 2007 to 2010, and that growth is
projected to continue at about 20 percent per year over the next four years. Javelin Strategy and Research
(2010), "2010 Mobile Banking and Smartphone Forecast."
5
Learning Point Associates (2009), "The Stock Market Game Study: Brief Report." (164 KB PDF).
6
Financial entertainment games include Celebrity Calamity, Bite Club, Groove Nation, and Farm Blitz.
Information on preliminary evaluations is available at
http://www.d2dfund.org/financial_entertainment_preliminary_results.
7
Joshua Sledge, Jennifer Tescher, and Sarah Gordon (2010), "From Financial Education to Financial
Capability: Opportunities for Innovation" (637 KB PDF). Center for Financial Services Innovation.
8
Catherine Bell and Jeanne M. Hogarth (2010), "Better Deals on Wheels: The Effects of Financial Education on
Car Buying," Federal Reserve Bank of Minneapolis, Community Dividend, April. The Center for Financial
Services Innovation also promotes relevance as one of the key features of innovative financial education
programs.
In order to develop an effective financial course of study, we need to find the answers to
some important research questions. I believe the answers to these questions will be quite
important:

What do people need to know in order to improve their long-term economic
wellbeing? How does this content vary across demographic groups, such as by income,
employment status, age, or culture?

How do people obtain and process financial information? What sources do they
use? Do outcomes vary by the source or timing of the information?

Is instilling financial knowledge enough to improve consumer outcomes, or do we
need to fundamentally change consumer behavior as well? How can we as
policymakers influence financial behaviors?
 How should financial literacy be measured to evaluate the impact of financial
education on financial outcomes and predict future behavior and well-being? Should
these measures vary across demographic groups and the context in which
consumers make financial decisions?
Undoubtedly some of the research shared at this conference will shed light on these
questions and also raise others. I look forward to learning from your work and to
implementing and supporting programs that have demonstrated results.
Conclusion
Decisions about saving and investing have a profound effect on the financial well-being of
individual consumers. Collectively, those same decisions shape our national economic
outcomes. Changes in the financial products offered to consumers and in the economic
circumstances of those consumers have added even more complexity to the financial
decisions faced by consumers. Comprehensive, effective regulation of consumer products is
the first step in ensuring positive outcomes for consumers. But consumers must also be
equipped with the necessary quantitative and decisionmaking tools, and supported with the
right information at the right time in order to make the best possible choices. While much
attention and many resources have been devoted to financial education, we still have
surprisingly little information about the effectiveness of financial literacy efforts. I hope that
the dialog facilitated by this conference and future research will focus on understanding the
best who, what, when, where, and why of financial education that will help American
consumers make better decisions and achieve better financial futures. The outcomes of this
conference will help us develop the tools to do that. I commend you for your efforts and wish
each of you success here and in the future.