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Guest Commentary February 5, 2002
The Need for Improved Financial Education
The Honorable Paul O'Neill
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.
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.
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Today's 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 nation's 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 families' 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 consumer's 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 Americans' level of financial knowledge. ...
The importance of high quality education to the future of our society and to our nation’s 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 nation’s 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.
Paul O'Neill, a Republican, is the Secretary of the Treasury. The above commentary has been adapted from the prepared remarks of Secretary O'Neill before a hearing of the U.S. Senate Committee on Banking, Housing and Urban Affairs, February 5, 2002. To contact him, Click Here.
The above column has been distributed by PoliticsOL.com.
