Financial Literacy: Enhancing the Effectiveness of the Federal Government's Role
Released: 2012-04-26T00:00:00

Letter

Background

There is no single definition for financial literacy, which is sometimes also referred to as financial capability, 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 financial education—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. Federal, state, and local government agencies, nonprofits, the private sector, and academia all play important roles in providing financial education resources, which can include print and online materials, broadcast media, individual counseling, and classroom instruction.

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, many Americans may not be managing 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responsibility for their own retirement savings because traditional defined-benefit pension plans have increasingly been replaced by defined-contribution pension plans over the past two decades.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.

The Federal Government Plays a Wide-Ranging Role in Promoting Financial Literacy

Efforts to improve financial literacy in the United States involve a range of public, nonprofit, and private participants. Among those participants, the federal government is distinctive for its size and reach, and for the diversity of its components, which address a wide array of issues and populations. At our forum last year on financial literacy, many participants said that the federal government had a unique role to play in promoting greater financial capability. They noted that the federal government has a built-in “bully pulpit” that can be used to draw attention to this issue. Participants also highlighted the federal government’s ability to convene the numerous agencies and entities involved in financial literacy, noting that the government has a powerful ability to bring people together. In addition, some participants noted the federal government’s ability to take advantage of existing distribution channels and points of contact between the government and citizens to distribute messages about financial literacy. In our ongoing work, we have found examples of federal agencies acting on such opportunities—for example, the Securities and Exchange Commission has worked with the Internal Revenue Service to include an insert about its investor education resources, including its “Investor.gov” education website, in the mailing of tax refund checks.

At our first forum on financial literacy in 2004, participants noted that the federal government can serve as an objective and unbiased source of information, particularly in terms of helping consumers make wise decisions about the selection of financial products and services. Some participants expressed the belief that while the private sector offers a number of good financial literacy initiatives, it is ultimately motivated by its own financial interests, while the federal government may be in a better position to offer broad-based, noncommercial financial education.

In preliminary results from an ongoing review, we have identified that, in fiscal year 2010, there were 16 significant financial literacy programs or activities among 14 federal agencies, as well as 4 housing counseling programs among 2 federal agencies and a federally chartered nonprofit corporation. We defined “significant” financial literacy programs or activities as those that were relatively comprehensive in scope or scale and included financial literacy as a key objective rather than a tangential In prior work, we cited a 2009 report that had identified 56 federal goal.financial literacy programs among 20 agencies. That report, conducted by the RAND Corporation, was based on a survey that had asked federal agencies to self-identify their financial literacy efforts. However, our subsequent analysis of these 56 programs found that there was a high degree of inconsistency in how different agencies defined financial literacy programs or efforts and whether they counted related efforts as one or multiple programs. We believe that our count of 16 significant federal financial literacy programs or activities and 4 housing counseling programs is based on a more consistent set of criteria.

During his confirmation hearing, Comptroller General Dodaro noted that financial literacy was an area of priority for him, and he has initiated a multi-pronged strategy for GAO to address financial literacy issues. First, we will continue to evaluate federal efforts that directly promote financial literacy. In addition to our recent financial literacy forum, we have ongoing work that focuses on, among other things, the cost of federal financial literacy activities, the federal government’s coordination of these activities, and what is known about their effectiveness. Second, we will encourage research of the various financial literacy initiatives to evaluate the relative effectiveness of different financial literacy approaches. Third, we will look for opportunities to enhance financial literacy as an integral component of certain regular federal interactions with the public. Finally, we have recently instituted a program to empower GAO’s own employees. This program includes a distinguished speaker series, as well as an internal website with information on personal financial matters and links to information on pay and benefits and referral services through GAO’s counseling services office.

Having Multiple Federal Agencies Involved in Financial Literacy Offers Advantages as Well as Risks

Having multiple federal agencies involved in financial literacy efforts can have certain advantages. In particular, providing information from multiple sources can increase consumer access and the likelihood of educating more people. Moreover, certain agencies may have deep and long- standing expertise and experience addressing specific issue areas or serving specific populations. For example, the Securities and Exchange Commission has efforts in place to protect securities investors from fraudulent schemes, while the Department of Housing and Urban Development (HUD) oversees most, but not all, federally supported housing counseling. Similarly, the Department of Defense (DOD) may be the agency most able to efficiently and effectively deliver financial literacy programs and products to servicemembers and their families. However, as we stated in a June 2011 report, relatively few evidence-based evaluations of financial literacy programs have been conducted, limiting what is known about which specific methods and strategies—and which federal financial literacy activities—are most effective.

Further, the participation of multiple agencies highlights the need for strong coordination of their activities. In general, we have found that the coordination and collaboration among federal agencies with regard to financial literacy have improved in recent years, in large part due to the multiagency Financial Literacy and Education Commission. The commission was created by Congress in 2003 and charged, among other things, with developing a national strategy to promote financial literacy and education, coordinating federal efforts, and identifying areas of overlap and duplication. Among other things, the commission, in concert with the Department of the Treasury, which provides its primary staff support, has served as a central clearinghouse for federal financial literacy resources—for example, it created a centralized federal website and has an ongoing effort to develop a catalog of federal research on financial literacy. The commission’s 2011 national strategy identified five action areas, one of which was to further emphasize the role of the commission in coordination. The strategy’s accompanying Implementation Plan lays out plans to coordinate communication among federal agencies, improve strategic partnerships, and develop channels of communication with other entities, including the President’s Advisory Council on Financial Capability and the National Financial Education Network of State and Local Governments. The Financial Literacy and Education Commission’s success in implementing these elements of the national strategy is key, given the inherently challenging task of coordinating the work of the commission’s many member agencies—each of which has its own set of interests, resources, and constituencies. Further, the addition of the Bureau of Consumer Financial Protection, whose director serves as the Vice Chair of the commission, adds a new player to the mix.

In our recent and ongoing work, we have found instances in which multiple agencies or programs share similar goals and activities, which raises questions about the efficiency of some federal financial literacy efforts. For example, four federal agencies and one government- chartered nonprofit corporation provide or support various forms of housing counseling to consumers—DOD, HUD, the Department of Veterans Affairs, the Department of the Treasury, and NeighborWorks America. Other examples of overlap lie in the financial literacy responsibilities of the Bureau of Consumer Financial Protection, which was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). The act established within the bureau an Office of Financial Education and charged this office 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 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 a separate Office of Financial Education and Financial Access within the Department of the Treasury, a small office that also seeks to broadly improve Americans’ financial literacy. In addition, the Dodd-Frank Act charges the Bureau of Consumer Financial Protection with developing and implementing a strategy on improving the financial literacy of consumers, even though the multiagency Financial Literacy and Education Commission already has its own statutory mandate to develop, and update as necessary, a national strategy for financial literacy. As the bureau has been staffing up and planning its financial education activities, it has been in regular communication with the Department of the Treasury and with other members of the Financial Literacy and Education Commission, and agency staff say they are seeking to coordinate their respective roles and activities.

The Dodd-Frank Act also creates within the bureau an Office of Financial Protection for Older Americans, which is charged with helping seniors recognize warning signs of unfair, deceptive, or abusive practices and protect themselves from such practices; providing one-on-one financial counseling on issues including long-term savings and later-life economic security; and monitoring the legitimacy of certifications of financial advisers who advise seniors. These activities may overlap with those of the Federal Trade Commission, which also plays a role in helping seniors avoid unfair and deceptive practices. Further, the Department of Labor and the Social Security Administration both have initiatives in place to help consumers plan for retirement, and the Securities and Exchange Commission has addressed concerns about the designations and certifications used by financial advisers, who often play a role in retirement planning. Officials at the Bureau of Consumer Financial Protection told us that they have been coordinating their financial literacy roles and activities with those of other federal agencies to avoid duplication of effort.

Program Evaluation and the Bureau of Consumer Financial Protection May Offer Avenues to Enhance Effectiveness

In prior work we have noted the importance of program evaluation and the need to focus federal financial literacy efforts on initiatives that work. Relatively few evidence-based evaluations of financial literacy programs have been conducted, limiting what is known about which specific methods and strategies are most effective. Financial literacy program evaluations are most reliable and definitive when they track participants over time, include a control group, and measure the program’s impact on consumers’ behavior. However, such evaluations are typically expensive, time-consuming, and methodologically challenging. Based on our previous work, it appears that no single approach, delivery mechanism, or technology constitutes best practice, but there is some consensus on key common elements for successful financial education programs, such as timely and relevant content, accessibility, cultural sensitivity, and an evaluation component.

There are several efforts under way that seek to enhance evaluation of federal financial literacy programs. For example, the Financial Literacy and Education Commission has begun to establish a clearinghouse of evidence-based research and evaluation studies, current financial topics and trends of interest to consumers, innovative approaches, and best practices. In addition, the Bureau of Consumer Protection recently contracted with the Urban Institute for a financial education program evaluation project, which will assess the effectiveness of two existing financial education programs and seeks to identify program elements that improve consumers’ confidence about financial matters. We believe these measures are positive steps because federal agencies could potentially make the most of scarce resources by consolidating financial literacy efforts into the activities and agencies that are most effective.

The Bureau of Consumer Financial Protection was charged by statute with a key role in improving Americans’ financial literacy and is being provided with resources to do so. As such, the bureau offers potential in enhancing the federal government’s role in financial literacy. At the same time, as we have seen, some of its responsibilities overlap with those of other agencies, which highlights the need for coordination and may offer opportunities for consolidation. As the bureau’s financial literacy activities evolve and are implemented, it will be important to evaluate how those efforts are working and make appropriate adjustments that might promote greater efficiency and effectiveness. In addition, the overlap we have identified among programs and activities increases the risk of inefficiency and emphasizes the importance of coordination among financial participants. This underscores the importance of steps the Bureau of Consumer Financial Protection has been taking to delineate its roles and responsibilities related to financial literacy vis-à-vis those of other federal agencies, which we believe is critical in order to minimize overlap and the potential for duplication.

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.

For future contacts 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. Jason Bromberg, Mary Coyle, Roberto Piñero, Rhonda Rose, Jennifer Schwartz, and Andrew Stavisky also made key contributions to this statement.

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