Chairman Sarbanes, Senator Gramm, distinguished members of the Committee. Thank you for the opportunity to appear before you this morning to talk about the vital importance of financial education. I am especially pleased to do so in the company of Chairman Greenspan and Chairman Pitt. Mr. Chairman, I commend you for focusing a national spotlight on this critical topic, which is so closely linked to our economic future. It is one, I might add, in which I have a deep and longstanding personal interest.
In his inaugural address, the President stated "[t]he ambitions of some Americans are limited by failing schools and hidden prejudice and the circumstances of their birth. We do not accept this, and we will not allow it." Ownership, independence, and access to wealth should not be the privilege of a few. They should be the hope of every American. Financial literacy is an essential tool to make that hope a reality.
Need for Improved Financial Education
The U.S. financial system commands the respect and admiration of the world in large part because of the widespread availability of low-cost, high quality financial services. Technology and innovation have made possible a rich diversity of financial products to meet the individual needs of millions of American households and businesses.
Todayís expansive menu of financial product offerings, however, has added complexity to the decisions Americans must make in choosing the financial products that best serve their needs. I recall a time not so long ago when, for a large number of Americans, mortgage rates were fixed, savings went into a bank passbook account, consumer goods were bought on a cash-only basis, and pensions all had defined benefits for retirement. Today, mortgage financing comes in a variety of packages, credit card use is universal, and savings investment vehicles range from CDs to mutual funds to individual stocks to annuities. Moreover, the importance of knowing how to invest savings wisely has risen exponentially with the decline in popularity of defined benefit retirement plans.
To be sure, the evolution of our nationís financial system has created wonderful new opportunities for Americans to meet their needs as consumers, while at the same time, building wealth and security for their and their familiesí economic futures. However, Americans need to be fully prepared and financially educated to take advantage of these opportunities. If we do not understand the most important concepts of personal finance, such as how to budget, save, invest and use credit wisely, then we are missing our full potential as individuals, as well as our potential as a country.
We have significant room for improvement in the area of financial education. Recent studies illuminate this fact. In one test of financial basics given to high school students, the average score was a disappointing 51 percent, with only one-tenth of students scoring above 70 percent on the exam. Remarkably, only fifty percent of high school students understood the concept of compound interest. Results were similarly disappointing when adults were tested: their average score was only 57 percent.
There is a tragic human and personal cost that our society pays for this lack of financial knowledge. All of us know family or friends who have had money problems at some stage in their life. We all know the terrible price in suffering, stress, and humiliation that is faced by those in financial trouble. Four in ten Americans admit they are living beyond their means, primarily because of the misuse and misunderstanding of credit. Between 1990 and 2000, personal bankruptcies rose by 69%, again stemming primarily from credit misuse.
A lack of financial knowledge is especially problematic for the most vulnerable members of our society. The poor, the elderly, and minority groups can be victims of fraud and deception, predatory lending, and other such abuses. Financial education is a crucial weapon in our arsenal to protect our citizens from these types of attack. Understanding personal finance is a consumerís first line of defense against financial rip-offs and scams. Those most vulnerable to these attacks are precisely the people who have the most to gain by a concerted nationwide effort to raise Americansí level of financial knowledge.
Current Efforts to Address the Problem
Considerable efforts are being made in the private and public sector to promote financial education. Our staff has completed a list of financial educational resources offered by the various Federal departments and agencies that is attached to my testimony for inclusion in the record.
As the attached document shows, no fewer than 10 federal departments and agencies, including the Treasury Department, offer a wide variety of financial education programs and resources. In addition, many states, Wisconsin, Maryland, and California, to name a few, have taken initiatives to raise the level of their residentsí financial knowledge. Similarly, financial service providers have made extensive efforts in the banking, securities, and insurance industries to teach the public how to properly use their products.
Faith-based organizations and community groups have also promoted financial education. As we all know, talking about money, and especially about the state of oneís own finances, can be difficult. Faith-based and community organizations tend to foster the trust necessary for their members to discuss these personal matters with them. Such groups can encourage people who have never saved before to begin saving; to think twice about making an impulse purchase; or to consider more deeply the need to focus not only on short-term consumption, but also on long-term investment.
A Focus on the Schools
These current efforts are important, yet much more needs to be done if we are to significantly raise the ability of Americans to more effectively master their financial lives. To be sure, our national strategy must address the financial educational needs of Americans in all walks of life. This morning, however, I would like to focus in particular on the need for more financial education in our nationís schools.
No better venue exists for us to reach such a large segment of the population than through our schools. No better mechanism exists for providing our nationís youth with the educational building blocks they will need to become competent consumers and managers of household wealth. By beginning the financial education process early, we can equip our youth with a foundation for making sound financial decisions throughout their lives. Indeed, in those states that have begun requiring personal financial education in high school, research shows that high school graduates have higher savings rates and higher levels of net-worth.
Of course, financial education must begin with basic literacy. A child with insufficient reading skills will never be able to comprehend a credit card application or a Truth in Lending disclosure. A child lacking basic math skills will never be able to balance a checkbook or compare credit card interest rates. Financial education programs will be successful only for those children who have mastered basic academic skills. This is one of the reasons why it was so important for the Congress to pass the Presidentís education bill Ė the No Child Left Behind Act of 2001 Ė signed into law on January 8.
This landmark legislation provides the most sweeping reforms of the Elementary and Secondary Education Act since it first became law in 1965. Included among the billís provisions are requirements that states set high standards for achievement in reading and math and that they test every child in grades 3 through 8 to ensure that students are making progress in achieving those standards. The bill also includes specific language recognizing the importance of financial education efforts by local schools.
State and local educators are now undertaking the process of developing standards in math and reading, and the educational curricula that will help their students achieve those standards. In collaboration with Secretary Paige, I would like to take the opportunity of this hearing to call upon schools to integrate financial education into those standards and curricula Ė not as a separate discipline, but as means of exposing children to basic financial and economic principles at the same time they acquire core reading and mathematical skills.
Teaching a child how to balance a checkbook reinforces basic addition and subtraction. Learning how to calculate compound interest provides an excellent way to exercise knowledge of percentages. Reading lessons can include stories about children saving money to buy something special, or getting their first after-school job. For older children, assignments in English literature can easily be structured to include novels that not only build reading comprehension, but also help students explore and analyze principles of economic behavior.
Successfully interweaving financial education into math and reading standards required by the Presidentís education program would be a giant leap forward in helping prepare our nationís youth to become financially literate adults. In the short run, building financial education into courses that are already required by all schools may be the most expeditious and least expensive way to make our educational system more responsive to studentsí financial educational needs.
At the same time, such efforts would complement initiatives already underway in several states to incorporate personal finance courses into school curriculums. Mississippi, Illinois, Idaho and New York have been leaders in assuring that personal finance is at least offered to all students before they graduate from high school. I would also note that legislation or resolutions have now been passed in Tennessee, Delaware, Louisiana, Michigan and Wisconsin to provide personal finance education courses. And Delaware and Wisconsin have established task forces to review the issue and make recommendations.
A Financial/Educational Alliance
In 1996, I had the privilege of co-chairing the Pennsylvania Advisory Commission on Academic Standards. This was a 17-member panel of non-educators, charged by then Governor Tom Ridge with the job of reviewing education standards being developed for Pennsylvania. Our goal was two-fold: to ensure that the concerns of students, parents, and local businesses were considered in developing the standards; and to serve as a reality check, if you will, so that the standards reflected the real-world needs of students once they graduated and entered the workforce. The effort was highly successful and today Pennsylvania is recognized as having one of the highest quality education standards for its children.
Just as Governor Ridge called upon non-educators in Pennsylvania to partner with educators in the successful development of "real world" education standards, I believe the financial services sector can just as effectively partner with state and local educators in the development of financial education standards. For instance state banking superintendents, insurance commissioners, and securities administrators all possess a wealth of expertise and experience to contribute to the development of financial education guidelines. Private financial institutions also have much to offer in terms of expertise, as well as providing a source of additional resources to support teacher training and the establishment of financial education curricula and programs.
At the national level, the Treasury Department is focusing much of its existing financial education programs on youth. Just last year, we launched the Money Math program, a personal finance education kit for young people in grades 7 through 9. More than 110,000 middle school math teachers in 16,000 school districts nationwide received the kits free of charge.
In terms of new initiatives, I am pleased to announce that our Treasurer, Rosario Marin, has agreed to organize an effort to recruit the support of state treasurers in pressing for more financial education in the schools.
In addition, we are working to find a suitable way in which we can recognize, in conjunction with the U.S. Department of Education, local schools that have exhibited high distinction in the area of financial education. By providing a national spotlight for innovative educators who have developed successful programs for teaching personal finance, we hope to motivate their colleagues in other schools to follow suit.
In partnership with the Department of Education, I am willing to do whatever I can to promote financial education in the schools. As all of us know, education forms one of the most important bases of our free and prosperous society, and financial education skills figure prominently in the success with which we exercise our economic freedoms. As a grandfather of twelve wonderful grandchildren, I know well that children are Americaís future, and I would like to see an educational system that provides all American children with these vital life skills.
Other Areas of Focus
Youth education will not, of course, help the legions of adult Americans whose financial education skills fall short. Let me mention some of the policy issues where we have identified financial education as key to protecting and promoting the financial health of the adult population.
We should extend our efforts on financial education to retirement security. As you know, the President requested that I, along with Labor Secretary Chao and Commerce Secretary Evans examine retirement savings laws to determine whether any reforms are necessary to promote the ability of all Americans to plan for a secure retirement. Last week, the President announced our recommendations, which include proposals to increase the freedom of American workers to choose how they wish to invest their 401(k) assets, as well as to prevent corporate officers from selling company stock during a so-called "blackout" when workers are prohibited from trading in their 401(k) plans. A key feature of our recommendations is to expand workersí access to financial educational resources and professional investment advice, so that they can have the tools they need to make informed investment decisions.
Moreover, investors cannot learn what companies do not disclose. Recognizing that the Nationís corporate disclosure system is not working as well as it should, the President has asked his Working Group on Financial Markets to take a hard look at what we can do to fix it. Chairman Greenspan, Chairman Pitt, CFTC Chairman James Newsome and I are looking for ways to realign our corporate disclosure and accounting system with its basic purpose Ė to provide investors with the information they need to make informed decisions about public corporationsí financial positions and prospects. Clear, accurate, and comprehensive disclosures are essential to all Americansí ability to invest and save. The key is accountability and responsibility for corporate officers and directors, accountants and auditors. We are committed to the Presidentís call to hold corporate America to "the highest standards of conduct." I am confident that the Working Groupís recommendations to the President will point the way to strengthening our disclosure regime.
Financial education is also a centerpiece of First Accounts, a program in which Senator Sarbanes has a major interest. First Accounts is a grant program administered by the Treasury Department and designed to move a maximum number of "unbanked" low- and moderate-income individuals to "banked" status with insured depository institutions. Without basic financial services, low- and moderate-income individuals may have a reduced ability to manage their finances and may be limited in planning and saving for the future.
We issued a Notice of Funding Availability on December 27, 2001, and are providing applicants until March 20, 2002 to respond. In addition, we sent hundreds of copies of this Notice to community groups, faith-based organizations, labor unions in all fifty states, and dozens of financial institutions and their trade associations. We expect to use the First Accounts program to fund replicable model projects that develop financial products and services for these individuals without the need for ongoing public subsidies. In seeking applications, we have recognized that financial education can be a key component in persuading more Americans to open bank accounts. We will also undertake research to evaluate the success of the funded projects and to understand what products, services, educational initiatives, marketing techniques, or incentives are needed.
Finally, I think it is important to make this observation: unwise financial decisions do not always stem from a lack of financial education. All too often, bad choices stem from economic despair. No amount of financial education will help individuals build their retirement nest eggs if their incomes barely cover their familiesí living expenses. No amount of financial education will help individuals escape the high fees charged on short-term, unsecured loans if their families are in need of food or medicine, and there is no other place to go for the funds. With more money in their pockets, people will be better positioned to make sound economic choices and provide for their and their familiesí economic futures. As we aggressively promote financial education, we must not lose sight of the larger goal to promote economic prosperity through the Presidentís economic program.
The importance of high quality education to the future of our society and to our nationís economy can never be underestimated. I am reminded of a saying from the gentleman who graces the one hundred dollar bill - Benjamin Franklin, "If a man empties his purse into his head, no man can take it away from him." Those words written at the dawn of this great nationís history are as true today.
Financial education can be compared to a road map to the American Dream. I believe that we need to teach all Americans the necessary tools to read that map, so that they can reach the Dream.
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WHAT THE FEDERAL GOVERNMENT IS DOING TO IMPROVE FINANCIAL EDUCATION
U.S. TREASURY EFFORTS
Bureau of Public Debt (BPD):
MoneyMath: BPD launched the MoneyMath program to teach the importance of savings and financial literacy. MoneyMath is an education kit for grades 7 through 9, which includes lesson plans and supplemental learning activities focused on savings and investing, money management, and spending and credit. The kits were provided, free of charge, to over 110,000 middle school math teachers in 16,000 school districts nationwide. MoneyMath was kicked off at the NASDAQ MarketSite in New York City on May 7, 2001. The Securities Industry Foundation for Economic Education, sponsor of the Stock Market Game, agreed to incorporate the MoneyMath kit into their distribution system. Partners for the MoneyMath program include the Jump$tart Coalition, the Center for Economic Education, Merrill Lynch, the Fannie Mae Foundation, the MetLife Foundation, the NASDAQ Stock Market, and many others.
Savings Bond Program: Savings bond are marketed year-round to the public to encourage savings for retirement and other financial needs through US Savings Bonds.
Office of the Comptroller of the Currency
Office of Thrift Supervision
Bureau of the Mint
Office of the Treasurer
OTHER FEDERAL EFFORTS
The FDIC Consumer News, which is published quarterly, features a range of articles on personal finance topics, such as credit card use and identity theft. This publication is disseminated widely to approximately 60,000 subscribers. In addition, the FDIC has arranged to make copies of articles of interest that may have broad national appeal available through the Consumer Information Center in Pueblo, Colorado.
As part of the Financial Services Education Coalition, the FDIC helped write and publish "A Comprehensive Guide for Community Educators." The guide, which was issued in 1999, is used by community educators with a variety of audiences who do not have accounts with financial institutions or who need basic information about how to use accounts.
(See the Department of Labor description for Money Smart above.)
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