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Olivia Mitchell: Well, it's particularly
a challenge now that so many
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Americans, 50 million Americans,
have student loans. And many of
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them, in fact, are continuing to
have to repay those loans
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through retirement. 6% of Social
Security recipients are still
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having their Social Security
checks garnished for student loans.
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Dan Loney: Welcome to The Ripple
Effect, the podcast that takes
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you on a journey through the
minds of Wharton faculty. I'm
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your host, Dad Loney. And in each
episode, we'll be diving deep
00:00:30
into the inspiration behind the
groundbreaking research that
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Wharton professors have
conducted, and exploring how
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their findings resonate with the world today.
- Well, and great once
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again to speak with Olivia
Mitchell, who is an expert in
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the area of financial literacy.
She's Professor of Business
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Economics, and Public Policy, as
well as Insurance and Risk
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Management here at the Wharton
School. And she's also Director
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of the Pension Research Council.
Great to see you again.
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- It's wonderful to be back. Thank you.
- You know, it's interesting, you
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and I have talked about this for
many years now. And the idea
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and the concept of financial
literacy is one that I think a
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lot of people think about, but
maybe they don't truly
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understand. So from your
perspective, what encompasses
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financial literacy? - Well, financial
literacy is really a broad
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concept. But in particular, what
we've been focused on is
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people's ability to process
economic information, and to
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make informed decisions about
things like saving, investment,
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and spending during retirement.
- There is seen to be a gap in
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financial literacy for many
years now.
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So can we say that with all the
attention that now is starting
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to come forward with the
research that you and others
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have done, are we getting any
better? Is it getting better in general?
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- I wish we could say
things are getting better, and
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they may be a little bit at the
margin. But we've been doing a
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number of studies of financial
literacy across not only the US,
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but around the world. And there
are still grave shortcomings in
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what people know and what people
are able to do. So I think
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there's still much work to be
done, as much as I hate to say it.
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- How important is that?
That component of
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research as we move forward
here, as a driver to kind of
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open more doors around
financial literacy? - Well, I think the
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place to start is actually going
back 20 years when a colleague
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of mine, Annamaria Lusardi, and I
decided to, just really on a whim
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over dinner, discuss the
possibility of surveying older
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people, people in their fifties and
sixties, to find out how financially
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literate they were, and what
impact that might have had on
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their saving, on their investment,
and their retirement outcomes.
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And to our shock and dismay, we
found that people were sorely
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underinformed. So then that one
thing led to another, now we've
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been doing financial literacy
studies in over 80 countries
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around the world, focusing on
the young, focusing on the middle
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aged, focusing on retirees. And
there's definitely much more
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that needs to be done for each
of those groups. - But you and I
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have talked about -- and maybe it's
in part my perception that
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one of the areas we need to
focus on is being able to
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connect with our children as
young as possible to incorporate
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some level of financial literacy
in their lives, so that they are
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best prepared when they get
through high school, and they go
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out to work, or they get through
college and get out to work. And
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that seems to be one of the
biggest challenges, is being able
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to kind of set that framework,
although there are some states
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that are trying to do that right now.
- In fact, around 21 states,
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and Pennsylvania is the most
recent, have mandated that high
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schools provide financial
education as a mandatory course.
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And I think that's very much to
the good. Of course, there's
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still details, and the devil is
always in those details, about
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who's teaching the class. Is
that person capable and
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understanding of the subject?
What kinds of topics will the
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high school kids be interested in?
Because while they might not be
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interested right away in
retirement planning, they
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probably need to know about
credit cards, student loans, and
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all the other topics that
they're going to confront right
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away on leaving high school.
- You know, it's funny, because many,
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many years ago, it used to be
understanding a checking account
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and writing a check and all that
stuff. Now, in this age of
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digital, we have so much of that
at our fingertips through our
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smartphones and various apps
and such. - And a lot of young folks
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make many bad mistakes. There
was a case recently of one app,
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which had gamified investment in
the stock market. And it had
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also made it possible for people
to borrow on margin. These are
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kids. And in fact, a young man
had accrued $100,000
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in debt and committed
suicide as a result of that.
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So you can not only make big
financial mistakes, you can make
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big personal lifetime mistakes
unless you're better informed
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these days than we were back in our youth.
- So when you think
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about the research that you've
done, and the framework that
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we need, what do you think are
the greatest benefits of being
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able to have that type of a
framework in place when you
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think about individuals longer
term? - The key issue with
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financial literacy is that it's
an ongoing process. I myself
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started the so-called Bank of
Mom, when my children were
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little. And the Bank of Mom was
nothing more than a spreadsheet,
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and they would get 25 cents
allowance. And then if they
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wanted more money, they would
have to do chores. And so we'd
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add up the positive side, and we
add up how much they had to
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spend. And if they didn't have
enough, they couldn't spend it.
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So this was a way to start edifying
kids from a younger age about
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budgets. Later on, when it comes
to high school, as I said,
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credit cards become paramount.
My younger daughter, when she
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came to Wharton was sent 20
credit cards in the first month that she --
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- The offers for credit cards?
- Yeah, well, she got the
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cards, and immediately got into
financial trouble, and we had to
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have a little session cutting up
the cards and explaining
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interest and so on. She's done
better since then, I'm happy to add.
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Then subsequently, when people
get into the workforce, they're
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making a number of choices like,
what should I put into my 401(k)?
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What should I invest the money
in? And so again, there's
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multiple teachable moments.
- Right, and so off of that, the
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potential positive impact that
it can have for somebody over
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their lifetime, it can be vast
for having that understanding,
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and then being able to implement
it in a variety of areas of their life.
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- Absolutely right. The
reality is that we see that
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the young people that have been
educated in financial literacy,
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they incur less debt, they
save more, they plan more for
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retirement, they understand
better what the options are for
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investment. And now what we're
seeing is that people, when they
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hit retirement age, are doing a
better job making sure they
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don't run out of money in old age.
- You've talked about, in some
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of your research, the
component of financial literacy
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being an investment in human
capital. Explain that a little bit.
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- Well, we see financial
literacy much like other kinds
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of education. It takes time to
learn financial concepts and to
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apply them. And it takes --
sometimes it takes money so that
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you can hire someone or take a
course or what have you. So
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these are the two components
that are involved in investing
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in that knowledge. Moreover,
that knowledge can depreciate if
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you don't use it over time.
There's also always new
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financial products on the
market, adjustable rate
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mortgages and so forth, so that
the knowledge base needs to be
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continually built throughout
life. And so it is definitely an
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educational process. Many
employers are now offering
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financial training, literacy
training at the workplace. Why?
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Because they understand that
their workers are suffering
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financial stress due to debt.
The debt folks are calling them
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up at work and hassling them for
not paying their credit cards or
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what have you. So this is
something that really is in
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everybody's best interest, to
have a more productive and
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better informed workforce.
- And probably there are many
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instances of not having
that base that end up being
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missed opportunities. You were
mentioning before about
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retirement savings. But
components of that that could
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have led to a very secure
retirement period of your life
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that maybe some people don't
have, because they don't have
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the understanding or, you know,
of components or ideas
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that they should have gotten
involved in. - Well, indeed, most
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employers that have 401(k) plans
or their equivalent in the
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nonprofit sector will pick what
they call a default savings
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rate. That is if the worker has
no clue what to do, then the
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company will say, "All right,
we're gonna have a default
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savings rate of 5% of your
income." The reality in this day
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and age is 5% is probably not
enough. It probably ought to be
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at least three times that. And
so it's nice to have some guided
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advice, if you were, from the
employer, but if that number,
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that savings target is too low,
then the employee needs to have
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additional information to be
able to say, "Oh, you know, I
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might want to save a little more
if I can, when I can. I might
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want to save enough to get the
full match rate from the
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employer," for example. I
negotiated with my kids, I told them they had
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to save 25% of their paychecks
when they started working, and
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we settled on 18%, which I felt
was a huge success. - Yeah, well,
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and the other thing when
you're talking about kids is
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that if you start them out
early, just off of that, what
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they can potentially have in
their savings, even in their
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early time out in the workforce,
when they don't have a husband
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or a wife or a significant
other, when they don't have
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children, that's the time to
really get things started so
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that you can have that great
base as you move forward. - Well,
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it's particularly a challenge
now that so many Americans, 50
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million Americans, have student
loans. And many of them, in
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fact, are continuing to have to
repay those loans through
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retirement. 6% of Social Security
recipients are still having
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their Social Security checks
garnished for student loans. So
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if you can set people's feet on
the right path early on, don't
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get them involved in payday
loans, or only paying the
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minimum on the credit card, or—
buy now pay later is a very
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popular phenomenon. All those
things reflect a
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misunderstanding or financial
illiteracy about the
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consequence of not saving enough
and living within your means.
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- I know you've also done some
research looking at the lengths
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that some people will go to kind
of make sure that they have
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acquired that knowledge through
education, and the difference of
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having it and not having it. And
what that can mean longer term
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over somebody's life.
- Well, absolutely. For example, if you
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don't understand interest rates,
and heaven knows, that's been in
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the news a lot lately, they
won't refinance their loans when
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interest rates go down. Or they
pay too much for borrowing, or
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they fail to insure themselves
against living a very long time.
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If you're going to retire at 60
and live to 100, and mark my
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words, a lot of us will, that's
a whole long time to try to live
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on your savings if you haven't
concentrated on it properly
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early in life. - I know that we
talk about this a lot in the
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scope of what we see going on
here in the United States. Is
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this also something that plays
out in many countries around the
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world as well? - Absolutely. To
date, about 80 countries have now
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set up national programs on
financial literacy. In fact,
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Finland is interesting. Finland
has launched a new national
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strategy for becoming the
country with the highest
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financial literacy in the world
by 2030. I wish we in this
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country would follow that
shining example. But we are
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seeing progress, as I said,
especially at the state level,
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and many employers are doing
their part now to help people do
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a better job saving for
retirement investing. And by the
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way, not taking out their entire
nest egg when they hit
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retirement, but rather helping
retirees eke out their money
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over their lifetimes. - So as we
are here now in 2024, what do
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you think are the most important
components that either young
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adults or parents trying to help
their children really need to
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think about when they bring up
the topic of financial literacy right now?
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- Well, I don't know how it
was in your family. In my
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family, finances were not
discussed publicly. People's
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incomes were always very
private. And folks didn't really
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talk about things like how much
the rent was, or that kind of
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thing. I think that's -- there's
more that we can do to be more
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transparent. For example,
helping kids set budgets so that
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they understand how much
something costs, and how much
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work it takes to save to get
to be able to pay those those costs.
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I worked through high school, I
worked in college. Increasingly,
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the work experience is something
that a lot of kids don't have.
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And parents understandably
protect their kids from working
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too much or, you know, not getting their
schoolwork done. But I find that
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just living in the work world
early on is a really good way
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to start explaining and
understanding how costly it is
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to live, how much -- how careful
one has to be
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and ultimately, the value of saving.
- Olivia, great to talk to
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you again. Thanks very much.
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Olivia Mitchell, who is
Professor of Business Economics,
00:14:44
and Public Policy as well as
Insurance and Risk Management
00:14:47
here at the Wharton School.
00:14:49
- Thank you for listening to The
Ripple Effect. We hope you found
00:14:52
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