BusinessWeek Logo
Special Report July 23, 2009, 12:01AM EST

What Works in Financial Education

Financial literacy today is as important as learning to read and write, says Dartmouth's Annamaria Lusardi

By Amy Feldman

null

Dartmouth's Annamaria Lusardi

Annamaria Lusardi, a professor of economics at Dartmouth College and editor of Overcoming the Saving Slump: How to Increase the Effectiveness of Financial Education and Saving Programs, is one of the country's top researchers on financial education. In conferences and speeches, Lusardi argues that financial literacy today is as important as learning to read and write. After all, we have to make our own financial decisions now, whether we like it or not. BusinessWeek's Amy Feldman spoke with Lusardi about what works, what doesn't, and how to get people to do the right thing.

We've been hearing about financial education for a long time. But the financial crisis and rise of 401(k)s over pensions has increased its urgency. What are your thoughts on where we're at?

We are moving toward a world of more financial decision-making. I think of this as, almost, the Great Transformation. The economic system in which we live is going to be different as people take charge of these decisions that were previously made by either the employer or the government. In such a world, we cannot leave people financially illiterate.

Why has it been so hard to teach financial literacy?

Many of the programs are way too limited to have any effect. So we see, for example, an employer offering one retirement seminar a year. But if you give me an hour of physics, I am not going to be able to go out and fix my car. People say, "We have given a retirement seminar and people did not change their behavior." It doesn't surprise me that behavior did not change. People do not make decisions easily. Everybody wants to see the result next month, but education does not work like that. It takes a long period of time.

What does work?

Financial decisions are often very complicated, so we need to provide tools to make it easy to make decisions, or to simplify the decisions themselves. We have evidence that repeated programs do work. For example, the program to stimulate savings among low-income workers, who are least likely to save. With this individual development account, people are offered an account with a match to save for retirement or to buy a house or for education. It is accompanied by financial education. There is evidence that more people are more likely to change behavior.

That's interesting because the program combines behavioral economics, in which people are nudged to do the right thing, with financial education.

You really touch on what I was going to say. The best way to look at financial education is not as a substitute for other programs, but as a supplement. It's not that companies should not offer matching contributions, or that they should not do auto-enrollment [in which employees are automatically enrolled in 401(k)s unless they opt out]. What I do think is problematic is the idea that auto-enrolling people is a great way to solve the savings crisis. If people have credit-card debt, then enrolling them into a pension is not helping them at all. They need to first decrease that credit-card debt at 20% or 25% interest rate, and then save. That in particular has raised our concern. That's why we need to complement these programs with financial education.

The way you're talking about financial education, it sounds almost too broad—and too basic—to be done in the workplace. Is this something that should be done in schools?

There is no excuse not to start financial education in school. We need to educate people before they make financial decisions, not after. There should be a public policy about that.

Reader Discussion

 

BW Mall - Sponsored Links