The dollars and sense of financial literacy

By Allen Wastler
Allen Wastler is a former financial journalist with over 30-years of experience, including time at CNBC, CNN, and Knight-Ridder Newspapers.
Posted on Jan 12, 2018

America has a looming financial problem: too many people are living on the edge of their budgetary means. The reasons are both cultural and educational. But the problem is growing and likely to take a larger toll on society unless communities and businesses get involved.

“The reason why I think financial literacy is critically important is to motivate folks like us in this room to have discussions about financial empowerment,” said Hill Harper, a noted actor (CSI-NY), author (The Wealth Cure), and entrepreneur.

Harper’s comments came as he moderated a panel discussion among Brooklyn community and business leaders prior to a FutureSmartSM event at Barclays Center. 

Hill Harper leading the financial literacy discussion.

Such FutureSmart events are aimed at giving school-age kids exposure to financial concepts through fun, interactive sessions with Harper and other celebrities at sports venues around the country. But the events are also an opportunity to gather local business and community leaders and discuss the need for financial literacy and education initiatives.

“Financial education is a responsibility for us as corporate citizens,” said Josh Pruss, senior vice president for global partnerships, with Brooklyn Sports & Entertainment.

The need

There are some sobering figures about the state of the average American’s finances. According to an annual survey of American workers by PriceWatershouseCoopers;1

  • 61 percent would not be able to meet basic expenses if out of work for an extended time.
  • 60 percent consistently carry credit card balances.
  • 57 percent believe they will need to use retirement savings for non-retirement expenses.
  • 37 percent use credit cards for necessities because they can’t afford them otherwise.
  • 32 percent find it difficult to meet household expenses on time each month.

“Americans just do not have enough money saved and our level of stress is rising,” said Brian Trzcinski, director of market and business development for MassMutual, in presenting the numbers during the discussion. “Even when you consider that PwC reports 55 percent of Americans have changed their spending habits in the past 12 months to save more money, still too often people are using credit cards and tapping into retirement savings to keep afloat.”

The urgency

Nevertheless the need for financial literacy ̶ the basic understanding of financial concepts and practices ̶ is growing for four basic reasons.

First, more consumers are responsible for their finances. This is particularly true in the area of retirement planning, as more and more companies have shifted from pension plans to self-directed, qualified retirement plans. As health-care law changes have introduced more self-directed vehicles like health savings accounts and flexible spending accounts, even more responsibility has shifted to consumers.

Second, the financial environment is shifting, constantly. Consider that a decade ago the country was witnessing dramatically falling interest rates and market-asset devaluation. Now, the interest rate environment is poised to rise while the markets are hitting record highs. A “set-it-and-forget-it” investment and financial strategy simply doesn’t fit today’s world.

“The financial environment can be ever changing—sometimes in our control, many times out of our control,” MassMutual’s Trzcinski noted. “We can’t control market fluctuations and interest rate changes, but we can control our ability to better weather these ups and downs, as well as have a safety net in place for any financial emergencies that may arise.”

Third, people are living longer. On average, those who reach the standard retirement age of 65 can anticipate living another 20 years, according to the Social Security Administration.2 Longer life means there is a greater chance of encountering one or more of the risks to retirement income (inflation, excessive withdrawals, health care costs, etc.). This comes at the same time most people’s cognitive abilities to make financial decisions are likely to decline. The combination can be concerning. Knowing what options are available and how to plan for later years is essential.

Fourth, the range and variety of financial products available is growing at a breathtaking rate. From savings accounts to more recent vehicles like exchange-traded funds to relatively untested developments like cryptocurrency, the range of investment options available gets wider every day. Understanding what’s at stake and the risks involved is essential.

All these factors are making the need for financial literacy urgent.

Reasons and remedies

Part of the reason for the financial preparation shortfall is cultural. And to see the point, one panelist suggested looking at Japan, where the majority of households have some sort of emergency fund. Why? Because of the country’s long, often tragic, history with earthquakes and tsunamis.

“When you are thinking every day there may be an earthquake or something else unfortunate going to happen, you know you have to prepare for it,” said Orlando Camargo, a business and marketing executive who spent time in Japan. “That mentality is an important mentality to have for all of us. To know that someday, something could happen. And if you have that as a premise, it’s easy to think and prepare for the future.”

But general education in the United States about financial literacy and concepts has lagged.

According to the latest financial literacy component of an international test of 15-year olds, 22 percent of U.S. students score below the baseline level of financial literacy necessary for them to participate in society.3 This means that – at best – this cohort can handle “simple decisions about everyday spending” and perform basic addition, subtraction, or multiplication within contexts they recognize.

That puts U.S. students just below the global mean of 15 countries participating in the test, called the Programme for International Student Assessment (PISA) and coordinated by the Organisation for Economic Co-operation and Development. The test is conducted every three years. The most recent results are based on exams administered in 2015. Students in China finished at the top of the rankings, while students in Brazil ranked the lowest.

To change that, the education system has to start to recognize the value of a making the incoming generation financially literate, suggested another panelist.

“It’s just like anything else we value and want our kids to know about ̶ we’ve got to teach it early and often, and then assess it.,” said Joseph Peri, president of Junior Achievement of New York, part of Junior Achievement USA, one of the oldest and largest supplemental-education programs in the United States.

Junior Achievement affiliates across the country team up with MassMutual’s FutureSmartSM program.

And it is through such programs that America’s lack of financial literacy can be addressed.

“We get so excited about these FutureSmart events that we’ve decided to up our game,” said Dennis Duquette, president of the MassMutual Foundation, which oversees the program. “In 2016 we started making FutureSmart a digital experience. And through that experience we are able to scale the number of kids we reach in the United States. We have a goal of reaching 2 million children by 2020, and we’re well on our way!”

More from MassMutual…

Money and kids: Teaching by age group

Creating a kindness day

Tanda, hui, or ayuuto? The money pool way

________________________________

 

1PwC ,“Employee Stress and the Bottom Line”, September 2017.

2Social Security Administration, “Calculator: Life Expectancy,” 2016.

Organisation for Economic Cooperation and Development, “PISA 2015 Result (Volume IV): Students’ Financial Literacy,” May 24, 2017.

The information provided is not written or intended as specific tax or legal advice. MassMutual, its employees and representatives are not authorized to give tax or legal advice. You are encouraged to seek advice from your own tax or legal counsel. Opinions expressed by those interviewed are their own, and do not necessarily represent the views of Massachusetts Mutual Life Insurance Company.