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 , 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:
General Patterns of Saving and Investment
A recent research report by AARP has identified four basic pillars of retirement income security for the 21st century:
This same research report reveals that Americans age 50 and older:
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.
The Marketplace and Pace
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.
A Measure of Investor Knowledge and Vulnerability
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:
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.
Seeking a Baseline for a Literacy Strategy
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:
Respondents were asked to select their one most trusted source of financial-related topics. Nearly one-third (32%) of respondents pick a well-known financial expert or professional, while slightly less than one-quarter selects a local financial professional (24%) or AARP (23%). Only three percent of the respondents pick an insurance company.
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:
The findings also indicate that mature adults prefer methods that are:
Lessons to Explore
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:
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.
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