Consumer Assumptions Altered by Crisis. Financial Future Impacted

Federal Reserve Governor Elizabeth Duke told anrnaudience that while financial education has always been important in helpingrnconsumers make better economic decisions, thernrecent economic crisis has shifted the playing field, making financialrneducation even more critical. </p

Duke spoke at a conference on the “Future of Life-Cycle Saving and Investing” co-sponsored byrnBoston University School of Management and the Boston Federal ReservernBank.  </p

Because of the financial crisis, many families have fewerrnfinancial resources and options. As a result the pace and timing of their saving andrninvesting life cycle have been disrupted. For example, unemployment levels among recent graduates are high and startingrnsalaries have declined.  This means thatrnthe young will have to delay the start of saving and investing and they arernliving at home longer, often disrupting their parents’ budgets. </p

Many consumers who should be saving for retirementrnare doing the opposite. A Vanguard study showed that hardship withdrawals fromrn401(k)s increased by 49 percent between 2005 and 2010 and other types ofrnwithdrawals increased by 56 percent.</p

At the same time, the responsibilityrnfor retirement savings is shifting from the employer to the employee andrnindividuals are being forced to change retirement plans. The Social SecurityrnAdministration reports that in 2009 and 2010, the proportions of persons claimingrnbenefits at age 62 began to rise after several years of decline most likelyrnbecause of the weak job market. “Opting to receive a smallerrnsocial security annuity earlier in life is just one of many hard decisionsrnAmericans have had to make in order to balance their short-term and long-termrnfinancial needs,” Duke said.  All of thisrnmakes it more important that individuals have an understanding of what theyrnneed in retirement and their investment options.</p

Disruptions make the alwaysrndifficult task of managing one’s longevity risk harder and require a level ofrnfinancial knowledge other generations have not needed.  Millions of older households will need tornassess their pension distributions and make decisions about payout options forrntheir defined benefit plans or about purchasing of annuities.  Younger workers, who will probably not havernpensions, will face complicated decisions about what they will need in retirementrnand how to get there; all done in a world of increasingly more complexrnretirement products.</p

“In short,” Duke told the audiencernof educators, “your efforts to identify, address, and meet the financialrneducation needs of consumers in all stages of the life-cycle have never beenrnmore urgent.” </p

The financial crisis has changed allrnof our assumptions about the future and consequently consumer behavior is also changing.  It is unclear whether these changes representrntemporary or more permanent shifts in thinking and planning for the future but,rnas an example, consumers are continually changing their attitudes towardrnhomeownership as the housing crisis evolves along with developments in the broader economy. FULL STORY</p

Consumersrnappear to be increasingly disconnected from mainstream financial services; morernlikely to use alternative products such as reloadable stored-value cards ratherrnthan credit cards.  These don’t carry thernsame federal protections as credit or debit cards and do not establish arnrelationship with a financial institution for other purposes such as checkingrnaccounts or auto loans. </p

“As more and more new products arernintroduced to the financial marketplace, it becomes more important forrnconsumers to be able to evaluate and compare products’ benefits and potentialrncosts,” Duke said.   </p

The basic skills for navigating thernfinancial world are developed in school so it is important to include skills inrnnumeracy, language arts and decision making in curriculum and measure them byrntesting.  “I also think that the workrnmany of you are doing to make financial lessons more appealing to school agedrnchildren is extremely important given the competition for attention from mediarnand web-based entertainment and games.” </p

Financial education is a life-longrnendeavor.  Consumers need clear andrnrelevant financial information at critical “teachable” moments such as whenrnbuying a car or planning for retirement. rnEducators have to identify as many of these moments as possible andrndetermine how to best support positive outcomes as those moments.</p

Howrnfinancial education is delivered has a significant impact on itsrneffectiveness.  New technologies presentrnexciting opportunities to deliver timely financial lessons and the technologyrnsuch as apps for smart phones is making it possible to get informationrninstantly.  Duke said she is particularlyrninterested in how technology can better serve lower-income populations whornmight be more interested in stretching their paycheck than in investing it. </p

Duke cited several studies thatrnevaluated the effectiveness of specific education programs but said “the factrnis that we have very limited data on how effective financial education is inrnimproving financial well-being. The Financial Literacy and EducationrnCommission, of which the Federal Reserve is a member, has only recentlyrndeveloped a core set of financial competencies, and has yet to establish thernknowledge, skills, and behaviors that will meet these competencies.”  She suggested the need to answer somernimportant research questions:</p<ul type="disc"<liWhat do people need to know tornimprove their long-term economic well-being and how does that vary byrndemographic groups? </li<liHow do people obtain and processrnfinancial information? What sources do they use? Do outcomes vary by the sourcernor timing of the information? </li<liCan we merely impart knowledge tornimprove outcomes or do we need to change consumer behavior as well? How can policymakers do this? </li