Hearing on "The State of Financial Literacy and Education in America."
Second Hearing in a Series.

Good morning, Chairman Sarbanes, Ranking Member Gramm, and other distinguished Members of the Senate Banking Committee. My name is "Tess" Canja. I am President of AARP. I appreciate this opportunity to offer our views regarding the status of personal financial literacy and education in America -- offered in support of the Committee’s examination of options for developing a national strategy. With a membership of over 35 million midlife and older persons age 50 and over, we consider the work being undertaken by this Committee regarding financial literacy to be critical in its focus and in its timing.

If there is a positive aspect of the debacle known as "ENRON" -- where thousands of employees and retirees have lost most of their retirement savings – it is the realization that it is in our national as well as our individual interest to make an effort to learn about, understand clearly, and strive to protect the openness and fair play of the investment process. Enron’s collapse also has shed some much needed light on a simple, fundamental truth – that Social Security’s guaranteed, defined benefits will be even more important to future retirees than they are to today’s retirees.

For our part, we at AARP continually work to weave personal financial literacy into the fabric of all our program and service offerings. To be certain, developing effective financial literacy programs and services should not be viewed by anyone as a substitute for clear and strong oversight and enforcement of investor protection laws and regulations.

About a decade and a half ago [1987], E. D. Hirsch published his thought- provoking book on Cultural Literacy. His was a slender volume, with the subtitle: "What Every American Needs To Know". Hirsch helped to spawn a national debate over what he argued was an absolute as well as a comparative decline of literate knowledge in the United States. This debate continues today, and your hearings reflect one important aspect of that debate – a concern over the status and need for personal financial literacy and education in America.

Complicating the challenge of developing a "civic-based" financial literacy strategy for adults, as well as curricula for primary and secondary education, is that there are today a wide variety of commercial initiatives being promoted as unbiased financial literacy services that have – in reality -- a "conflicted agenda". The objective of many of the latter type of literacy campaigns is to market new products and services and systems of service delivery.

We believe that promotional initiatives can be very useful in the introduction of new and better financial services. And we understand that the use of creative marketing techniques is an essential program and service requirement necessary to increase the public’s awareness of their need to become more financially literate -- and to make citizens aware of available resources and assistance. However, we see a need for a coherent and coordinated national strategy for making available a well-researched and well-evaluated progression of financial literacy programs and services. This strategy should be targeted at the life-spanning needs of busy adult Americans – and the orientation of the programs should be independent of ulterior commercial motivations.

Senator Sarbanes, in inviting me to testify today you requested that I share with the Committee an overview of what AARP has been learning about the status of, and the need for financial literacy and education among midlife and older Americans (those we generally identify as being 50 or over). AARP has long been active in efforts to assist midlife and older Americans improve their prospects for achieving personal financial security. In this regard, we have been active in conducting research, designing, testing and providing financial education and counseling services to our members, and to the broader midlife and older constituencies we aspire to serve. Currently we are engaged in an effort to:

• Assess the magnitude of the problems of insufficient savings among adult Americans;
• Identify and review research on the status of mature adult financial planning and management as it relates to savings and financial security; and
• Analyze existing savings education programs, focusing on those that have been formally evaluated.

A recent research report by AARP has identified four basic pillars of retirement income security for the 21^st century:

• Social Security,
• Pensions and savings/investments,
• Healthcare insurance coverage, and
• Earnings from working during one’s "retirement" years.

This same research report reveals that Americans age 50 and older:

• Controlled two-thirds of all household wealth in the nation in 1998.
• For most of these families, home equity made up the largest percentage of the total – except for the very wealthiest.

However, in an independent analysis of 1994 Health and Retirement Study data, prepared for AARP and released in 2001, a team of researchers at Colorado State University found that low levels of savings and high levels of personal and real estate debt are serious problems for many households nearing retirement. The net effect, the analysts conclude, is that many households have relatively little wealth to rely on for retirement income.

These findings raise important policy questions about how to improve the retirement income prospects for all Americans. One important component is surely to increase their financial literacy.

There has been a sustained trend of greater popular participation in the stock markets, and an increasing reliance on these investments for retirement income. Approximately one-half of American households own stock either directly or through mutual funds. According to the Investment Company Institute, investors that are 65 and older own 17 percent of mutual funds. Nearly 40 million American households with incomes under $55,000 own mutual funds.

According to the Census Bureau, more than 28 million Americans over age 65 rely to some extent on investment income to meet their living expenses. Three-quarters of older persons depend on investment income to meet 25 percent or more of their income. This trend is likely to accelerate as the baby-boomer generation ages and defined contribution pension plans replace defined benefit pension plans. According to the 1998 Federal Reserve Survey of Consumer Finances, 18 percent of American households have defined benefit plans, while 33 percent have defined contribution (401 (k) and 403 (b)) plans.

Interrelated with this trend of greater popular participation has been an explosion of information about investing, the stock markets, the economy and personal finance. The policy debate over the future of the Social Security program and its benefits has provided additional focus for AARP’s members and the American public as a whole – those just starting their working careers as well as those anticipating or in retirement – regarding the nature and risks of private investment.

And to be certain, the playing field is not level for all investors. Large institutional investors (e.g., pension and mutual funds) have the resources to retain their own independent market analysts. For most individuals interested in investing, the ability to deal with the complexity of and choices in the stock markets begins with the challenge of interpreting and assessing investment quality rating systems – no mean task.

AARP commissioned a national telephone survey and analysis of consumer behavior, experience and attitudes by Princeton Survey Research Associates. Interviews with 1,504 adults aged 18 and older were completed in November-December of 1998. This was during a period in which the stock market had been soaring. Four questions were asked to provide a general indication of the level of investment knowledge possessed by this sample of consumers. Responses to these questions were grouped into three age categories: younger respondents (age 18 through 49), midlife respondents (age 50 through 64), and older respondents (age 65 and over).

The questions were:

• Do you think most full-service brokers and financial planners are paid based on the quality of the advice they offer and how much their clients earn, or based on the amount and type of investments they sell to their clients?
• Only fifty percent (50%) of older respondents correctly indicated that the amount and type of investments sold to their clients was the basis of their pay;
• While over two-thirds of midlife and younger respondents (68% and 67% respectively) answered correctly.

• As far as you know, if you lose money in a mutual fund you invested in at a bank, will the FDIC, that is, the Federal Deposit Insurance Corporation, cover your loses?

• Only forty-two percent (42%) of older respondents (aged 65+), knew the statement to be false (the remainder answered incorrectly, indicated they did not know, or refused to answer);
• While fifty-one percent (51%) of those respondents in midlife (aged 50-64), were correct; and
• Fifty-seven percent (57%) of the younger respondents (aged 18-49) were correct.

• Next, do "no-load" mutual funds involve no sales charges or other fees?
• Only 30 percent of older respondents knew that the statement was false;
• While 36 percent of those in midlife answered correctly; and
• Forty-one percent (41%) of the younger respondents answered correctly.

• And finally, when an investor diversifies his investments, does his risk of losing money increase or decrease?
• Only twenty-six percent (26%) of older respondents correctly indicated that their risk of losing money would decrease;
• While forty percent (40%) of those in midlife answered correctly; and
• Slightly fewer, thirty-eight percent (38%), of the younger respondents answered correctly.

For all respondents, only 11 percent of this sample of consumers correctly answered all four of these basic questions, while 25 percent correctly answered three of the four questions. Among consumers under the age of 65, 12 percent answered all four questions correctly, while only 6 percent of the age 65 and older consumers could do so.

The responses to our simple set of investment questions are worrisome. Today the individual investor confronts a market characterized by multiple and increasingly complex investment choices, a proliferation of information sources of uneven and uncertain quality, and links the customer into a trading system designed for convenience and efficiency. However, the growth in the proportion of Americans investing in the stock market appears not to be supported by a corresponding knowledge about fundamental product features, charges and risks.

In April 2001, AARP contacted with Ipsos-NPD to conduct a study of persons age 50 through 59 to gain more information about their interests, preferences and behaviors (from a sample composed mostly of Baby Boomers nearing retirement age). The questions relate to financial planning and management. Among the key findings of this unpublished survey:

• How they rated financial topics to learn about:
• Respondents were given a list of 22 financial topics and asked to select five that they consider most important to learn about. More than six in ten (62%) say that Social Security benefits are important to learn about. Roughly half as many consider knowing how much money they’ll need in retirement (39%), sources of retirement income (39%), saving for retirement (30%), or pension benefits and 401 (k)s (29%) as important topics to learn about.
• No more than one-in-four picked any of the other topics, listed here in descending order in which they were selected as being among the top five: investing (24%), savings (22%), tax strategies (21%), interest in inheritance issues (20%), home-based business (14%), estate planning (14%), debt management (14%), financial planning (12%), IRAs (11%), home equity or reverse mortgages (9%), investment terms and concepts (8%), changing careers or career management (8%), and paying for education (7%).

• Preferred formats for receiving financial information:
• For each of the twelve financial topics about which they were asked, the largest percentage of respondents expressed a preference for receiving written information;
• Only three to seven percent preferred computer disks, workshops or seminars, audio or videotapes, or web-based formats, large print or Braille.

• Levels of confidence in a financially secure retirement:
• Roughly two in ten respondents say they are either extremely (5%) or very confident (14%) that they will have enough money to live comfortably throughout their retirement years. Roughly four in ten (42%) say they are somewhat confident in a financially secure retirement, while a similar percent (39%) say they are either not too confident (22%) or not at all confident (17%).

• Levels of involvement with various financial planning activities:
• The largest percentage of respondents say they have read their Social Security statement in the past year (56%). One-third (33%) say that they have contributed to a 401 (k) or other similar employer retirement plan while roughly two in ten say that they have determined their net worth (22%), or reviewed their pension information (20%).

• Media, individual or organizational sources of financial information:
• When asked how they receive media information about financial issues, over half (54%) say they get information from newspapers, while slightly fewer (47%) say they get such information from television. Four in ten respondents note that they receive financial information from print brochures (43%) and from magazines (42%), while roughly one-fifth get information from the Internet (21%), from books (20%), or from the radio (19%). Only four percent report that they receive financial information through computer software or videos.
• Respondents were also asked what individuals or organizations provide financial information to them. Four in ten say banks or other financial institutions (44%) or government programs or agencies (41%). Roughly one-third of the respondents say that their financial planner (33%), family or friends (32%), and their employer (32%) provide financial information to them. Between one-fifth and one-quarter of the respondents say they receive information from financial services companies (21%) and insurance companies (25%). Less than one in ten respondents say they receive information from national financial organizations (8%), religious organizations (5%), and community groups or clubs (3%).

• The most trusted source for financial information:

Complementing the Ipsos-NPD survey are the results from a survey AARP contracted for with Harris Interactive Inc., in September 1999, to explore how and why people over 50 years of age learn about new things. This research examines typical learning motivations, learning interests, and the life-event contexts in which learning takes place. In brief, the survey findings suggest that lifelong learning experiences that would likely hold the most appeal for mature adults include subjects that are:

• Personally meaningful,
• Taught in environments which provide a direct learning experience,
• Allow adults control over all aspects of the learning process, and
• Are not too expensive.

The findings also indicate that mature adults prefer methods that are:

• Easy to access,
• Require small investments of time and money to get started, and
• Allow learning to begin immediately.

A number of potential program guidelines have surfaced, derived from the limited survey and literature review reported above, that suggest further exploration and testing. Ideally, financial literacy programs should:

• Have a close linkage to basic literacy skills,
• Be based on clear and focused learning objectives and standards,
• Emphasize demystifying financial products and services,
• Engage people to learn when they are most receptive, that is, when they are:
• Near key life stage events, and
• Approaching the time for making a choice/selection of a financial service or product,
• Finally, the credibility of the program, and therefore its effectiveness is enhanced if:
• Traditionally respected sources of information are the source or sponsor of the program,
• There is (affordable and ready) access to a choice of programs and services, and
• A navigation (referencing) strategy is in place for making this information known and current.

It is premature to conclude too much regarding how best to address the inadequate state of financial literacy among adults in this country. Because of changing work patterns, a rapidly growing population of retirement-age Americans, increasingly complex financial products and services and greater personal responsibility for managing one’s own finances, the demand for "non-conflicted" financial literacy programs and services will continue to grow. This modest projection assumes that there will be an increased awareness and expectation by an alerted public that, by necessity, we must become more self-reliant.

At the same time, it is worth repeating our concern that support for adult financial literacy should not be viewed as a substitute for a clear and strong oversight and enforcement of investor protection laws and regulations.

We look forward to working with you, Chairman Sarbanes, and Members of the Senate Banking Committee, on both fronts – strengthening investor protections and strengthening the investor.

Thank you for this opportunity to testify before you today. I would be happy to answer any questions you may have.

Home | Menu | Links | Info | Chairman's Page