A Daunting Topic by Elizabeth Duke: How to Improve Consumers' Financial Education

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. 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. 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.

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A Daunting Topic by Elizabeth Duke: How to Improve Consumers' Financial Education

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