Annamaria Lusardi is an economics professor at Dartmouth College and the director of a Financial Literacy Center at the school that was created in October. Lusardi will be the keynote speaker at the Rhode Island Jump$tart Coalition’s sixth anniversary celebration on May 6 in Providence. She answered five questions about the importance of financial literacy.
PBN: You are the director of the six-month-old Financial Literacy Center at Dartmouth. What are the center’s mission and goals?
LUSARDI:The mission of the Financial Literacy Center is to develop and test innovative programs to improve financial literacy and promote informed financial decision-making.
With support from the Social Security Administration, the center was established in October 2009 by the RAND Corp., Dartmouth College and the Wharton School of the University of Pennsylvania in order to develop educational tools and programs that help individuals prepare for their long-term financial stability.
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PBN: How will the average citizen benefit from the work of the Center?
LUSARDI: We are currently engaged in as many as 10 projects that span from developing tools to help people plan for retirement to assessing how much people understand about their Social Security benefits, including the information provided in annual Social Security benefits statements. Research projects funded by the center are looking at ways to enhance the Social Security statements, are designing and evaluating employer-provided financial education programs, and are designing video games to teach people about the workings of credit cards. We also aim to be a source of information for everyone interested in financial literacy and in financial education.
PBN: “Financial Capability in the United States” is described as the first-ever comprehensive study of U.S. adults’ money-management skills. What did you find?
LUSARDI: The findings from this survey paint a troubling picture of the state of financial capability in the United States. The majority of Americans do not plan for predictable events such as retirement or children’s college education. Most importantly, people do not make provisions for unexpected events and emergencies, leaving themselves and the economy exposed to shocks. In managing debt, many Americans engage in behaviors that can generate large expenses, such as sizable interest payments and fees.
Moreover, more than one in five Americans has used alternative (and often costly) borrowing methods (payday loans, advances on tax refunds, pawn shops, etc.) in the past five years. The most worrisome finding is that many people do not seem well informed and knowledgeable about their terms of borrowing; a sizeable group does not know the terms of their mortgages or the interest rate they pay on their loans. Finally, the majority of Americans lack basic [abilities to reason with numbers and other math concepts] and knowledge of fundamental economic principles such as the workings of inflation, risk diversification, and the relationship between asset prices and interest rates. There is also a sharp disconnect between self-reported financial knowledge and financial knowledge as measured by financial literacy quizzes. Even those who give themselves high knowledge ratings score poorly on the quizzes. Comparing terms of financial contracts and shopping around before making financial decisions are not at all common among the population.
PBN: You must be familiar with personal financial literacy efforts in other countries. How is the U.S. doing in comparison?
LUSARDI: Other countries have been more proactive and provided a set of tools and designed a set of financial education programs to help their citizens. A notable example is the United Kingdom. They collected data to measure the financial capability of U.K. citizens in 2005 and have implemented a set of programs targeted at each age group (from the young to the old). New Zealand has also been very active and very innovative in the initiatives they have designed to improve financial literacy. They have a marvelous Web page that citizens can use to get help with their financial decisions. But I see initiatives now in almost every country, including developing ones. Governments across the world have realized there are costs associated with financial illiteracy; they are bound to pay them down the road if they are not proactive now in promoting financial literacy.
PBN: What are your suggestions for young people?
LUSARDI: One of the most important decisions for a young person is the investment in education, i.e, whether to go to college or to continue education and training. This is a very important decision and in my view, the investment in education can often be the highest return investment one makes in a lifetime. I also think it is critically important for a young person to be financially literate. The world the young face and will face in the future is very complex and they need to have the appropriate financial skills. As it was impossible to live and operate efficiently in the past without being literate, i.e., knowing how to read and write, so it is very hard to live and operate efficiently today without being financially literate.
