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What Is Financial Literacy And Why Does It Matter?

By Elizabeth Bauer


Americans aren't saving enough for retirement.

That's a trite statement.

Precisely how great the shortfall is, is in dispute, of course, as is the question of what remedies, if any, should be undertaken.

But what's the reason for this savings shortfall?  Discarding specifics like "no more traditional pension plans," there are three potential reasons, each taking some portion of the blame, and each interconnected with the other:

Americans don't have the knowledge needed to save for retirement.

Americans don't have the self-discipline to save for retirement.

Americans don't have the excess funds to save for retirement.

"Financial literacy" is the catch-all name for initiatives around education that, it's hoped, will remedy the first of these problems -- education that, it's hoped, will occur in schools, through high school graduation requirements which exist or are slated to come into effect in 21 states, according to Pew, but also through employer-sponsored programs, which are in place at 63% of employers according to the publication Plan Sponsor.

And just how financially illiterate are Americans?

The standard measurement, as developed at the Global Financial Literacy Excellence Center (GFLEC), is a set of three questions.  In May I wrote about a recent study comparing Americans' ability to answer these questions, relative to the rest of the developed world.  74% of Americans answered a survey question about compound interest correctly (about average globally); 53%, one on inflation (the global average was 63%); and 46%, one on risk diversification (again, right about at the average).


Americans aren't saving enough for retirement.

That's a trite statement.

Precisely how great the shortfall is, is in dispute, of course, as is the question of what remedies, if any, should be undertaken.

But what's the reason for this savings shortfall?  Discarding specifics like "no more traditional pension plans," there are three potential reasons, each taking some portion of the blame, and each interconnected with the other:

Americans don't have the knowledge needed to save for retirement.

Americans don't have the self-discipline to save for retirement.

Americans don't have the excess funds to save for retirement.

"Financial literacy" is the catch-all name for initiatives around education that, it's hoped, will remedy the first of these problems -- education that, it's hoped, will occur in schools, through high school graduation requirements which exist or are slated to come into effect in 21 states, according to Pew, but also through employer-sponsored programs, which are in place at 63% of employers according to the publication Plan Sponsor.

And just how financially illiterate are Americans?


The standard measurement, as developed at the Global Financial Literacy Excellence Center (GFLEC), is a set of three questions.  In May I wrote about a recent study comparing Americans' ability to answer these questions, relative to the rest of the developed world.  74% of Americans answered a survey question about compound interest correctly (about average globally); 53%, one on inflation (the global average was 63%); and 46%, one on risk diversification (again, right about at the average).



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