Financial Literacy--The Big Problem No One is Talking About

06/03/2016 09:18 am ET Updated Jun 03, 2017

"The number one problem in today's generation and economy is lack of financial literacy." Alan Greenspan

While I agree that financial literacy is a real problem, this seems like a pretty bold statement given all of the other problems Americans face today: unemployment, threats from terrorists, an ineffective education system, hunger, homelessness and affordable healthcare to name a few. While determining the biggest problem might be debatable, financial literacy is the clear winner as the biggest challenge America faces which we are doing nothing about.

Look at annual government expenditures toward addressing these problems: healthcare, $1 trillion; defense, $700 billion; education, $600 billion; unemployment, $100 billion; food aid, $100 billion; homelessness: $50 billion. I estimate we spend less than $100 million annually on financial literacy programs. This number is only an estimate because the amount isn't even big enough to be accounted for accurately and there is no comprehensive program. Rather, America's strategy to eradicate financial literacy is executed by no less than 20 agencies with over 50 disparate programs. We spend a whopping two cents on financial literacy for every $100 spent on education.

There is an urgent need for better financial literacy when you consider that:

● 40% of adults gave themselves a C, D or F on their knowledge of personal finance and almost 80% believe they could benefit from financial advice regarding everyday decisions
● 60% of adults admit to having no budget
● Fewer than half of Americans spend less than they make or have savings for emergencies
● Over one-third of Americans pay only the minimum credit card balance
● Average family credit card debt is $15,000 and student loan debt is $33,000
● 85% of Americans are concerned about retirement preparedness and the median retirement account balance is $3,000 and $12,000 for working-age households and households approaching retirement respectively
● A depressing 50% of American households have no savings and parental role modelling is the single biggest influence on youth financial habits, creating a virtuous cycle of insecurity

While these current statistics are daunting, the negative impact of financial illiteracy will only increase in the future, thanks to a few key trends.

First, safety net programs are eroding. Traditionally, corporations and government have assumed much of the risk associated with funding retirement through social security and defined benefit programs like pensions. Today's social security program is unsustainable and corporations have migrated to defined contribution plans like 401(k)s, where employees bear the risk of life expectancy and investment performance. With a competitive global marketplace, increased job mobility and decreasing union participation, the responsibility for retirement security will increasingly reside with the individual. Americans must be better equipped to manage their finances than ever before.

Second, the financial risks a family faces late in life are increasing. Time between retirement and death has increased by over 300% in the past 50 years, increasing the risk of outliving one's savings during retirement. Additionally, healthcare costs have outpaced inflation and long-term care is more likely required. Americans must save more for retirement than previous generations.

Finally, obstacles to achieving financial independence are increasing. As the importance of financial security is increasing, so are the challenges to achieving it. When it comes to earning an income- the first step toward financial security - the cost of education has grown substantially faster than inflation, making it more difficult to acquire skills required for the best careers. Career employment with a single employer is also less likely, resulting in less job security and more career transition which will negatively impact a family's risk profile. In addition to saving, you must effectively manage your money which is more complex than ever. Financial deregulation and innovation have created a complicated financial landscape of credit, investing, and insurance products which are hard to evaluate. And with interest rates at all time historic lows, we are likely to see an era of low absolute returns on investments.

This problem can be addressed, but it will require a comprehensive strategy focused on three areas:

Applied personal finance collegiate curriculum. Institutions of higher learning must provide an "applied" personal finance curriculum that offers the same rigor and discipline found today in business and science fields of study. We need cutting edge research and best practices regarding how individuals manage their own human resources and capital in the context of family consumption and investment decisions while also navigating the practical risks of life such as unemployment, life expectancy and healthcare. To date, academia has offered only anecdotal lessons and little rigorous study regarding this critical life skill.
National K-12 personal finance training. While history, English, math and science are critical subjects, there is no more important life skill than understanding how to effectively develop and monetize your labor and manage your assets. Yet only 17 states require some form of formal personal finance training and only five states require a standalone personal finance course. There is a need for a comprehensive, well-resourced financial literacy program that is a not an afterthought to our existing curriculum, but rather a core foundation of our K-12 education with the same rigor and intensity we apply to other disciplines.
Tax policy that empowers Americans. Current individual tax policy myopically focuses on one aspect of financial health: income. We would be well-served to modify the individual tax code to more closely resemble business. Like the individual tax code, businesses are taxed on income. However, the business code creates incentives to promote responsible behavior such as investing in the business, spending on research, growing employment, training employees, and providing health benefits. Individual tax policy should incentivize investments in education and entrepreneurship, increased savings, and risk management through insurance. Token incentives like today's 401(k) designed to promote retirement savings are inadequate given the trends outlined above.

Financial literacy is not just an individual problem - it threatens our nation by weakening our global competiveness and national security while exacerbating intractable political disagreements relating to allocating scarce resources among competing priorities. Modest commitments to improved education at the secondary and post-secondary levels, combined with better tax policies represent exceptional investments in our American way of life. Not only do we have an opportunity to empower our citizens with financial literacy tools and sound policy; we have an obligation.

Douglas P. McCormick is the author of FAMILY INC: Using Business Principles to Maximize Your Family's Wealth (Wiley; April 2016). www.familyinc.com