Financial Literacy: The Federal Government's Role in Empowering Americans to Make Sound Financial Choices
Published: 2011-04-12T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Financial literacy plays an important role in helping ensure the financial health and stability of individuals, families, and our broader national economy. Economic changes in recent years have highlighted the need to empower Americans to make informed financial decisions, yet evidence indicates that many U.S. consumers could benefit from a better understanding of financial matters. For example, recent surveys indicate that many consumers have difficulty with basic financial concepts and do not budget. This testimony discusses (1) the state of the federal government's approach to financial literacy, (2) observations on overall strategies for addressing financial literacy, and (3) the role GAO can play in addressing and raising awareness on this issue. This testimony is based largely on prior and ongoing work, for which GAO conducted a literature review; interviewed representatives of organizations that address financial literacy within the federal, state, private, nonprofit, and academic sectors; and reviewed materials of the Financial Literacy and Education Commission. While this statement includes no new recommendations, in the past GAO has made a number of recommendations aimed at improving financial literacy efforts..
section_title: What GAO Found
paragraphs: Federal financial literacy efforts are spread among more than 20 different agencies and more than 50 different programs and initiatives, raising concerns about fragmentation and potential duplication of effort. The multiagency Financial Literacy and Education Commission, which coordinates federal efforts, has acted on recommendations GAO made in 2006 related to public-private partnerships, studies of duplication and effectiveness, and the Commission's MyMoney.gov Web site. While GAO's 2006 review of the Commission's initial national strategy for financial literacy found that it was a useful first step in focusing attention on financial literacy, it was largely descriptive rather than strategic. The Commission recently released a new strategy for 2011, which laid out clear goals and objectives, but it still needs to incorporate specific provisions for performance measures, resource needs, and roles and responsibilities, all of which GAO believes to be essential for an effective strategy. However, the Commission will be issuing an implementation plan to accompany the strategy later this year and the strategy will benefit if the plan incorporates these elements. The new Bureau of Consumer Financial Protection will also have a role in financial literacy, further underscoring the need for coordination among federal entities. Coordination and partnership among federal, state, nonprofit, and private sectors is also essential in addressing financial literacy, and there have been some positive developments in fostering such partnerships in recent years. There is little definitive evidence available on what specific programs and approaches are most effective in improving financial literacy, and relatively few rigorous studies have measured the impact of specific financial literacy programs on consumer behavior. Given that federal agencies have limited resources for financial literacy, it is important that these resources be focused on initiatives that are effective. To this end, the Commission's new national strategy on financial education sets as one of its four goals identifying, enhancing, and sharing effective practices. However, financial education is not the only approach for improving consumers' financial behavior. Several other mechanisms and strategies have also been shown to be effective, including financial incentives or changes in the default option, such as automatic enrollment in employer retirement plans. The most effective approach may involve a mix of financial education and these other strategies. GAO will continue to play a role in supporting and facilitating knowledge transfer on financial literacy. GAO will host a forum on financial literacy later this year to bring together experts from federal and state agencies and nonprofit, educational, and private sector organizations. The forum will address gaps, challenges, and opportunities related to federal financial literacy efforts. In addition, as part of GAO's audit and oversight function, GAO will continue to evaluate the effectiveness of federal financial literacy programs, as well as identify opportunities to improve the efficient and cost-effective use of these resources.

section_title: Letter
paragraphs: I am pleased to be here today to testify on this important topic during  Financial Literacy Month. Senator Akaka, you first sponsored Financial  Literacy Month in 2004 and have long sought to raise awareness of this  important issue. I, too, believe that giving Americans the information they  need to make effective financial decisions is key to their well-being, as  well as to the economic health of our nation. As I stated during my  confirmation hearing, I hope to use the unique position of the Comptroller  General to promote greater awareness of the importance of financial  literacy in the United States.
Financial literacy plays an important role in ensuring the financial health  and stability of individuals and families, and economic changes in recent  years have further highlighted the need to empower all Americans to make  informed financial decisions. For example, the recent financial crisis  revealed that many borrowers likely did not fully understand the risks  associated with alternative mortgage products, resulting in substantial  increases in defaults and foreclosures that continue to expose borrowers  to financial risk and be a drag on the economy today. Moreover, many  Americans face challenges in their ability to afford college or other  postsecondary education. Students and families have several options for  financing higher education, including federal and private loans and various  tax preferences. Financial literacy is key to helping ensure that Americans  have adequate information to understand and choose wisely among these  options, and that students are fully educated about their responsibilities to  repay any loans. In addition to affecting consumers’ individual well-being,  ensuring sufficient financial literacy also has broad public policy  implications. Consumers’ understanding of and decisions about such  matters as retirement planning or health insurance can affect our nation’s  policies on Social Security benefits, federal health care programs, and  other pressing economic issues.
My statement today will discuss (1) the state of the federal government’s  approach to financial literacy; (2) observations on overall strategies for  addressing financial literacy; and (3) the role GAO can play in addressing  and raising awareness on this issue. This testimony is based largely on  selected prior work we have conducted on financial literacy. In  conducting that work, we had interviewed representatives of organizations  that address financial literacy within the federal, state, private, nonprofit,  and academic sectors. We had also reviewed documents produced by the  Financial Literacy and Education Commission and benchmarked the  Commission’s national strategy against general characteristics of an  effective national strategy that we had identified. This testimony also  reports on some preliminary observations on the results of a literature  review we are conducting on studies and papers related to the  effectiveness of financial literacy and education efforts. In addition, we  have reviewed the Commission’s 2011 National Strategy for Financial  Literacy. We conducted this work from July 2010 through April 2011 in  accordance with generally accepted government auditing standards. Those  standards require that we plan and perform the audit to obtain sufficient,  appropriate evidence to provide a reasonable basis for our findings and  conclusions based on our audit objectives. We believe that the evidence  obtained provides a reasonable basis for our findings and conclusions  based on our audit objectives.
subsections: section_title: Background
paragraphs: There is no single definition for financial literacy, but it has previously  been described as the ability to make informed judgments and to take  effective actions regarding current and future use and management of  money. Financial literacy encompasses both financial education and  consumers’ behavior as it relates to their ability to make informed  judgments. Financial education refers to the processes whereby  individuals improve their knowledge and understanding of financial  products, services, and concepts. However, being financially literate refers  to more than simply being knowledgeable about financial matters—it also  entails utilizing that knowledge to make informed decisions, avoid pitfalls,  and take other actions to improve one’s present and long-term financial  well-being.
Evidence indicates that many U.S. consumers could benefit from improved  financial literacy efforts. In a 2010 survey of U.S. consumers prepared for  the National Foundation for Credit Counseling, a majority of consumers  reported they did not have a budget and about one-third were not saving  for retirement. In a 2009 survey of U.S. consumers by the FINRA Investor  Education Foundation, a majority believed themselves to be good at  dealing with day-to-day financial matters, but the survey also revealed that  many had difficulty with basic financial concepts. Further, about 25  percent of U.S. households either have no checking or savings account or  rely on alternative financial products or services that are likely to have less  favorable terms or conditions, such as nonbank money orders, nonbank  check-cashing services, or payday loans. As a result of this situation,  many Americans may not be planning their finances in the most effective  manner for maintaining or improving their financial well-being. In  addition, individuals today have more responsibility for their own  retirement savings because traditional defined-benefit pension plans have  declined substantially over the past two decades. As a result, financial  skills are increasingly important for those individuals in or planning for  retirement to help ensure that retirees can enjoy a comfortable standard of  living.
section_title: The Federal Government’s Approach to Financial Literacy Has Been Fragmented
paragraphs: Federal financial literacy programs and resources are spread widely  among many different federal agencies, raising concerns about  fragmentation and potential duplication of effort. As we noted in our  recent report on overlap, duplication, and fragmentation, in 2009, more  than 20 different agencies had more than 50 financial literacy initiatives  under way that covered a number of topics, used a variety of delivery  mechanisms, and targeted a range of audiences. This distribution of  federal financial literacy efforts across multiple agencies can have certain  advantages. For example, different agencies can focus their efforts on  particular subject matter or target specific audiences for which they have  expertise. However, this fragmentation also increases the risk of  inefficiency and redundancy and highlights the need for strong  coordination of these efforts.  Further, fragmentation of programs across  many federal agencies can make it difficult to develop a coherent overall  approach for meeting needs, identifying gaps, and rationally allocating  overall resources. Because of the fragmentation of federal financial  literacy efforts, coordination among agencies is essential to avoid  inefficient, uncoordinated, or redundant use of resources. Identifying  potential inefficiencies can be challenging because federal financial  literacy efforts have numerous different funding streams and there are  little good data on the amount of federal funds devoted to financial  literacy. Financial literacy efforts are not necessarily organized as separate  budget line items or cost centers within federal agencies and there is no  estimate of overall federal spending for financial literacy and education,  according to the Department of the Treasury.
In part to encourage a more coordinated response to financial literacy, in  2003 Congress created the multiagency Financial Literacy and Education  Commission and mandated that the Commission develop a national  strategy. We conducted a review of the Commission in 2006 and made  recommendations related to enhancing public-private partnerships,  conducting independent reviews of duplication and effectiveness, and  conducting usability testing of the Commission’s MyMoney.gov Web site.  We subsequently reported that the Commission had made progress in  cultivating sustainable partnerships with states, localities, nonprofits, and  private entities, and had acted on our recommendation to measure  customer satisfaction with its Web site. The Commission and the  Department of the Treasury also initiated two independent reviews, as we  had recommended, addressing overlap in federal activities and the  availability and impact of federal financial literacy materials. As we have  noted in the past, the Commission faces significant challenges in its role as  a centralized focal point: it is composed of many agencies, but it has no  independent budget and no legal authority to compel member agencies to  take any action.
Our 2006 review also found that while the Commission’s initial national  strategy was a useful first step in focusing attention on financial literacy, it  was largely descriptive rather than strategic. In particular, the national  strategy was comprehensive to the extent of discussing major issues and  challenges in improving financial literacy and describing initiatives in  government, nonprofit, and private sectors. However, it did not include a  plan for implementation and only partially addressed some of the  characteristics we had previously identified as desirable for any effective  national strategy. For example, although it provided a clear purpose,  scope, and methodology, it did not go far enough to provide a detailed  discussion of problems and risks; establish specific goals, performance  measures, and milestones; discuss the resources that would be needed to  implement the strategy; or discuss, assign, or recommend roles and  responsibilities for achieving its mission.
However, in December 2010, the Commission released a new national  strategy that identifies five action areas—policy, education, practice,  research, and coordination––and clearly lays out a series of goals and  related objectives intended to help guide financial literacy efforts over the  next several years. To supplement this national strategy, the Commission  has said it will be releasing an implementation plan for the strategy by the  end of this fiscal year. While the new national strategy clearly identifies  action areas and related goals and objectives, it still needs to incorporate  specific provisions for performance measures, resource needs, and roles  and responsibilities, which we believe to be essential for an effective  strategy. The new strategy will benefit if the forthcoming implementation  plan incorporates these elements, as well as addresses the fragmentation  of federal financial literacy efforts.
More recently, the Dodd-Frank Wall Street Reform and Consumer  Protection Act (Dodd-Frank Act) requires the establishment of an Office of  Financial Education within the new Bureau of Consumer Financial  Protection, further underscoring the need for coordination among federal  agencies on this topic. The Dodd-Frank Act charges the new office within  the bureau with developing and implementing a strategy to improve  financial literacy through activities including opportunities for consumers  to access, among other things, financial counseling; information to assist  consumers with understanding credit products, histories, and scores;  information about saving and borrowing tools; and assistance in  developing long-term savings strategies. This new office presents an  opportunity to further promote awareness, coordinate efforts, and fill gaps  related to financial literacy. At the same time, the duties this office is  charged with fulfilling are in some ways similar to those of the separate  Office of Financial Education and Financial Access within the Department  of the Treasury. As noted above, the Dodd-Frank Act charges the Bureau  of Consumer Financial Protection with developing and implementing a  strategy on improving the financial literacy of consumers—one that is  consistent with, but separate from, the strategy required of the  Commission. Thus, these entities will need to coordinate their roles and  activities closely to avoid unnecessary overlap and make the most  productive use of resources.
Coordination and partnership among federal, state, nonprofit, and private  sectors are also essential in addressing financial literacy, and there have  been positive developments in these areas in recent years. For example, a  recent partnership between the National Credit Union Administration, the  Department of Education, and the Federal Deposit Insurance Corporation  aims to improve the financial education of millions of students. These  three agencies are coordinating to facilitate partnerships among schools,  financial institutions, federal grantees, and other stakeholders to provide  effective financial education. Additionally, the National Financial  Education Network, the President’s Advisory Council on Financial  Capability, and the Community Financial Access Pilot all represent  examples of progress in fostering partnerships among participants in  financial education. For example, our review in 2009 found that the  establishment of the National Financial Education Network was a useful  initial action to facilitate and advance financial education at the state and  local levels. Similarly, the President’s Advisory Council on Financial  Capability facilitates strategic alliances among federal, private, and  nonprofit enterprises.
section_title: The Federal Government Must Determine What Works and Focus Resources Accordingly
paragraphs: Although numerous financial literacy initiatives are conducted by federal,  state, local, nonprofit, and private entities throughout the country, there is  little definitive evidence available on what specific programs and  approaches are most effective. As part of ongoing work we are performing  in response to a mandated study in the Dodd-Frank Act, we are conducting  a review of studies that have evaluated the effectiveness of financial  literacy efforts. More than 100 articles, papers, and studies have been  published on the general topic of financial literacy since 2000, but our  preliminary findings have identified only about 20 papers that constitute  empirically based evaluations on the effectiveness of specific financial  education programs. In addition, only about 10 of these studies actually  measured the impact of a program on participants’ behavior rather than  simply identifying a change in the consumer’s knowledge, understanding,  or intent. This distinction is important because a change in behavior is  typically the ultimate goal of any financial literacy program, and changes  in behavior do not necessarily follow from changes in knowledge or  understanding. We are currently in the process of analyzing the results of  these studies and look forward to reporting more fully on our findings this  summer. But in general, the consensus among a wide variety of  stakeholders in the field of financial literacy is that relatively little is  known about what financial literacy approaches are most effective in  meaningfully changing consumers’ financial behavior.
The limited number of rigorous, outcome-based evaluations of financial  literacy programs is likely the result of several factors. Because the field of  financial literacy is relatively new, many programs have not been in place  long enough to allow for a long-term study of their effectiveness; many of  the key federal financial literacy initiatives were created only within the  past 10 years. In addition, experts in financial literacy and program  evaluation have cited many significant challenges to conducting rigorous  and definitive evaluations of financial literacy programs. For example,  measuring a change in participant behavior is much more difficult than  measuring a gain in knowledge, which can often be captured through a  simple post-course survey. Similarly, financial literacy programs often  seek to effect change over the long term, which means that effective  evaluation can require ongoing follow up with participants—a complex  and expensive process. In addition, discerning the impact of the financial  literacy program as distinct from other influences, such as changes in the  overall economy, can often be difficult.
Nonetheless, given that federal agencies have limited resources, focusing  federal financial literacy resources on initiatives that work is important.  Some federal financial literacy programs, such as the Federal Deposit  Insurance Corporation’s Money Smart, have included a strong evaluation  component, while others have not. The Financial Literacy and Education  Commission and many federal agencies have recognized the need for a  greater understanding of which programs are most effective in improving  financial literacy. The Commission’s original national strategy in 2006  noted, for example, that more research and program evaluation are  needed so that organizations are able to validate or improve their efforts  and measure the impact of their work. In response, in October 2008, the  Department of the Treasury and the Department of Agriculture convened,  on behalf of the Commission, the National Research Symposium on  Financial Literacy and Education, which discussed academic research  priorities related to financial literacy.
Moreover, we are pleased to see that the Commission’s new 2011 national  strategy sets as one of its four goals to “identify, enhance, and share  effective practices.” The new strategy sets objectives for reaching this goal  that include, among other things, (1) encouraging research on financial  literacy strategies that affect consumer behavior, (2) establishing a  clearinghouse for evidence-based research and evaluation studies, (3)  developing and disseminating tools and strategies to encourage and  support program evaluation, and (4) forming a network for sharing  research and best practices. These measures are positive steps in helping  ensure that, in the long term, scarce resources are focused efficiently and  effectively. At the same time, as we have noted in the past, an effective  national strategy goes beyond simply setting objectives; it also must  describe the specific actions needed to accomplish goals, identify the  resources required, and discuss appropriate roles and responsibilities for  the players involved. We encourage the Commission and its participating  agencies to incorporate these elements into the national strategy’s  implementation plan, which is slated to be released later this year.
In addition, it is important to note that financial education is not the only  approach—or necessarily always the best approach—for improving  consumers’ financial behavior. Alternative strategies or mechanisms,  sometimes in conjunction with financial education, have also been  successful in improving financial behavior. In particular, insights from  behavioral economics that recognize the realities of human psychology  have been used effectively to design strategies to assist consumers in  reaching financial goals without compromising their ability to choose  among different products or approaches. For example, one strategy has  been to use what are referred to as commitment mechanisms, such as  having individuals commit well in advance to allocating a portion of their  future salary increases toward a savings plan. Another strategy for  encouraging consumers to increase their savings has been to use  incentives with tangible benefits, such as matching funds. In addition,  changing the default option for enrollment in retirement plans—that is,  automatically enrolling new employees while giving them the opportunity  to opt out—has led to significant increases in plan participation rates  among some organizations. The most effective approach to improving  consumers’ financial decision making and behavior may be to use a variety  of these types of strategies in conjunction with financial education.
section_title: GAO Will Continue to Play a Role in Supporting Financial Literacy
paragraphs: As I noted during my confirmation hearing, financial literacy is an area of  priority for me as Comptroller General, and during my tenure, I hope to  draw additional attention to this important issue. Improving financial  literacy involves many stakeholders and must be a partnership between  the federal government, state and local governments, the private and  nonprofit sectors, and academia. My hope is that GAO can play a role in  facilitating knowledge transfer among these different entities, as well as  working with other organizations in the accountability community, such as  the American Institute of Certified Public Accountants. Almost 7 years ago  we hosted a forum on the role of the federal government in improving  financial literacy. At that forum, public and private sector experts  highlighted, among other things, the need for the federal government to  serve as a leader in this area, but they also stressed the importance of  public-private partnerships. We will host another forum on financial  literacy later this year to bring together experts in financial literacy and  education from federal and state agencies, nonprofit organizations  representing consumers, educational and academic institutions, and  private sector employers. This forum will address the gaps that exist in  financial literacy efforts, challenges that federal agencies may face in  addressing these gaps, and opportunities for improving the federal  government’s approach to financial literacy.
In addition, as part of our audit and oversight function, we will continue to  conduct evaluations of the efficiency and effectiveness of federal financial  literacy efforts. Financial literacy plays a role in a wide variety of areas  that GAO regularly reviews—including student loans, retirement savings,  banking and investment products, and homebuyer assistance programs, to  name a few. For example, in work we have done on retirement savings, we  have made recommendations intended to facilitate consumers’  understanding of retirement plans, disclosures, and any associated fees.  Additionally, our reviews of financial products will continue to focus on  consumer understanding of these products, as well as strategies for  encouraging consumers to make sound decisions about them. Moreover,  we will continue our body of work evaluating various consumer  protections, which in conjunction with financial education are a key  component in helping consumers avoid abusive or misleading financial  products, services, or practices.
Financial education has its limitations, of course, but it does represent an  important tool that can benefit both individuals and our economy as a  whole. On an individual level, better money management and financial  decisions can play an important role in improving families’ standard of  living and helping them achieve long-term financial goals. While personal  financial decisions are made by individuals and their families, the federal  government can play a role in helping ensure that its citizens have easy  access to financial information and the tools they need to make sound  decisions. Moreover, improving consumer financial literacy can be  beneficial to our national economy as a whole. Financial markets function  best when consumers understand how financial service providers and  products work and know how to choose among them. Our income tax  system requires citizens to have an adequate understanding of both the tax  system itself and financial matters in general. Educated citizens are also  important to well-functioning retirement systems—for example, workers  should understand the benefit of saving for their retirement to supplement  any benefits received from Social Security. Finally, our nation faces a  challenging long-term fiscal outlook, and it is important that our citizens  understand and are attentive to the fact that the federal government faces  hard choices that will affect their own, and our nation’s, economic future.
Chairman Akaka, Ranking Member Johnson, this completes my prepared  statement. I would be happy to respond to any questions you or other  Members of the Subcommittee may have at this time.
section_title: GAO Contact and Staff Acknowledgments
paragraphs: For further information about this testimony, please contact Alicia Puente  Cackley at (202) 512-8678 or at cackleya@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on the  last page of this statement. Individuals making key contributions to this  testimony include Alicia Puente Cackley (Director), Jason Bromberg  (Assistant Director), Tania Calhoun, Beth Ann Faraguna, Jennifer  Schwartz, and Andrew Stavisky.
section_title: Related GAO Products
paragraphs: Opportunities to Reduce Potential Duplication in Government  Programs, Save Tax Dollars, and Enhance Revenue. GAO-11-318SP.  Washington, D.C.: March 1, 2011.
Consumer Finance: Factors Affecting the Financial Literacy of  Individuals with Limited English Proficiency. GAO-10-518. Washington,  D.C.: May 21, 2010.
Financial Literacy and Education Commission: Progress Made in  Fostering Partnerships, but National Strategy Remains Largely  Descriptive Rather Than Strategic. GAO-09-638T. Washington, D.C.: April  29, 2009.
Financial Literacy and Education Commission: Further Progress  Needed to Ensure an Effective National Strategy. GAO-07-100.  Washington, D.C.: December 4, 2006.
Highlights of a GAO Forum: The Federal Government’s Role in  Improving Financial Literacy. GAO-05-93SP. Washington, D.C.:  November 15, 2004.
This is a work of the U.S. government and is not subject to copyright protection in the  United States. The published product may be reproduced and distributed in its entirety  without further permission from GAO. However, because this work may contain  copyrighted images or other material, permission from the copyright holder may be  necessary if you wish to reproduce this material separately.