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Thank you Rick for your leadership at FINRA, and thank you also to Gerri Walsh and the entire FINRA Foundation team for the work you do to make financial education more accessible, more meaningful, and more appropriate for Americans navigating our financial system. Our country’s financial system is only as good as the ability of Americans to understand it, use it, and benefit from it—and consequently, your work provides significant public benefit on behalf of the common good.
Today, we applaud you for the release of this year’s National Financial Capability Study. This Study, for the past seven years, has provided critical insights into the financial security of Americans. The insights drawn from your study come from a methodology that uses the individual’s experience as a basis. I think this is the best way to draw your conclusions—to have them rest upon the foundation of how Americans experience and conceptualize their current and future financial state. Indeed, it can be no other way.
Improving upon the financial capability of our country’s people can only happen if we understand the experience of what it is to participate in our country’s financial systems and processes. In other words, the experiential is the essence of what we need to start with as we attempt improvements. Even if our systems are perfectly clear to the market participants who designed them, if the personal experience with them leads to frustration and cynicism, then improvements need to be made.
So starting with the experiential is critical. And this is the approach of the National Financial Capability Study and is a feature that makes this study and its conclusions a credible starting point for ways in which we can be improving upon the financial capability of our country.
I dwell on this approach for a reason: Managing finances can be a complex matter. Our financial regulatory system isn't the easiest to understand, and we have a diversity of financial services providers that engage in a wide variety of financial activities and offer a wide variety of financial products. Every effort of the Treasury Department is an effort to make our financial system work for the people of our country. We do this in terms of our work regarding financial inclusion, our work regarding the safety and soundness of the banking system, our work regarding insurance products, and our work regarding the payment systems.
As one example, at the Treasury Department, we are doing significant work to make sure that one of our country’s financial systems—its student loan financing system—is a system that works for student loan borrowers. We can look at the composition of student loans on the federal balance sheet, and we can draw particular conclusions. But none of these conclusions are completely reliable without the notion of the experiential. And to that need, over the last 25 months we have been engaged in a series of visits to college and university campuses where we talk to student loan borrowers.
This is a fascinating continuing exercise because we ask students whom we gather to be part of these roundtable discussions what their experience actually is in terms of financing their higher education. There is no particular methodology involved in these discussions, no specific set of questions asked in any specific order, but by listening, we learn that the experience of a student loan borrower—at the stage in which the loans have not yet become due—is often one of confusion and bewilderment. These visits have reaffirmed what we know as policymakers: That you can’t simply believe “if you design a program, they will come.” Because they will come, but they may not understand. It’s not enough to create programs where the processes seem to look streamlined and the systems seem to look good in a memo or a report. The program has to work for the participants in the real world, and it has to be responsive to their experiences.
Understanding even what a loan is has emerged as one of the biggest surprises for us in talking to student loan borrowers who are participating in what may very well be the earliest and most consequential financial decision of their entire lives.
But there are other reactions too that our student loan team at Treasury articulate after they return from their discussions with student loan borrowers: Students are telling us that they are embarrassed that they needed to take out loans at all; students are telling us that they wish they had parents who could help them choose the best investment value for them; students are telling us that they don't know that you can have your loan forgiven after a period of steady payments based on the income level of your jobs post-graduation; students are telling us that they wonder whether they should drop out and work instead, despite the fact that they have accumulated huge levels of debt. And we listen to them carefully, take these reactions back to our Treasury building, and we are once again reminded of the surpassing importance of financial education—we are reminded of how financial education is the missing key, the missing component for providing the context for better financial decision making. When it comes to financial education, we need more of it, we have to know how to deliver it, and it has to be better.
So yes: the release of the National Financial Capability Study today helps us assess where we are in that need for stronger, better, more objective and relevant financial education. Your study is giving us a set of reactions from people regarding their sense of financial security and capability. It is a timely critical set of observations.
And from the Study, we see this is where we are:
The 2015 National Financial Capability Study highlights a number of positive trends in the metrics we use to measure financial capability. The Study tells us that Americans are saving more and are experiencing higher levels of financial satisfaction. It tells us that substantially more people are reporting no difficulty in covering monthly expenses and bills, and fewer people report having a large unexpected income drop in the past year. This progress is promising. It reflects some momentum to the economic recovery since the great recession, and it appears to be enabling more Americans to secure a foothold in the middle class.
However, this year’s study also tells us that increases in financial well-being have not all been broadly shared. While fewer Americans might be having difficulty making ends meet, the study notes, “The signs of improvement in financial capability are not universal. Many groups—including African-Americans, Hispanics, millennials, and those without a college education—are at a disadvantage when it comes to making ends meet, planning ahead, managing financial products, and financial knowledge.”
Many Americans are still struggling to manage debt and plan and save for the long term. Many Americans lack opportunities to invest in the future, and many don’t have access to financial education that could help them make better informed decisions. Simply put, Americans are still not all able to harness their full potential to contribute to the productivity of our society and to achieve a prosperous and secure future for themselves and their families.
In its survey of Americans, the latest release of the National Financial Capability Study suggests several manifestations of this lingering insecurity.
Emergency Savings and Short-Term Thinking
One manifestation is households’ continuing need for emergency funds. While the number of Americans with emergency funds has increased considerably since 2009, one half of respondents in the National Financial Capability Study still did not have enough savings to cover expenses in case of sickness, job loss, economic downturn, or other emergencies.
By necessity, many Americans’ financial plans are focused primarily on the short-term. Almost half of the participants in this study said the most important time period for their financial planning and budgeting is the next few months to a year; and less than a third of respondents consider planning periods of five years or more to be most important.
How to encourage longer-term financial planning remains a challenge. Earlier this year the President proposed a new fund—the Financial Innovation for Working Families Fund—at the Treasury Department. This fund would build on Treasury’s Financial Empowerment Innovation Fund by encouraging research and the development of products, services, and strategies to help families better weather financial shocks and take steps to build longer-term financial security.
Higher Education
A second manifestation of the need for improved financial capability comes in the National Financial Capability Study’s findings regarding student loan debt. The Study’s findings have resonated with the discussions that Treasury’s Student Loan Team has had with student loan borrowers. Student loan borrowers do not know how they will pay off their student loans, and this uncertainty has the effect of stigmatizing student loan borrowing—to the point that students might consider dropping out of school. This combination of no degree with high levels of debt reduces financial capability for years to come.
Today, more than a quarter of American adults, and nearly half of those under age 34, have student debt. Among those with student loans, nearly half are concerned that they will not be able to pay them off. If students don’t believe they can make affordable monthly payments and these student loans become delinquent or defaulted, the financial consequences they face will hamper their financial security. In addition, if students do not know how to compare the quality of colleges and universities, the value of their investment will be reduced.
This Administration has taken a number of steps toward strengthening our student loan program to provide borrowers a better experience and more affordable repayment options. For example, we have expanded repayment plans that base affordable monthly payments on income, lowered most student loan interest rates, helped create a College Scorecard to help students compare the quality of various higher educational institutions, and are working to ensure that servicers help borrowers stay current and receive the information they need to repay their loans responsibly.
Saving and Investing for the Long-Term (Retirement)
A third manifestation of the need for improved financial capability comes in the National Financial Capability Study’s findings regarding saving for retirement. Helping translate hard-earned income into a secure and dignified retirement is critical for the sustained financial success of Americans and their families; and robust levels of retirement savings also have substantial macroeconomic effects far beyond the individual household.
But, as we see from the study, too many Americans are not planning for retirement. This may be because they are focused on managing debts, or building up near-term emergency savings. It may also be due to a lack of availability and accessibility of a long-term savings product. Troublingly, the study indicates that more than half of Americans are worried about running out of money in retirement.
For many Americans, the best existing opportunity to save and invest is through a workplace retirement plan, like a 401(k). But many Americans lack any access to a workplace retirement savings or pension plan. Ideally, all employers would provide opportunities for workers to save and invest. But understanding that many employers do not, and that many people work for themselves, the President has proposed—in every budget request since he took office—automatically enrolling workers without access to a workplace retirement plan into an IRA. This would provide an additional 30 million Americans with access to a retirement plan.
In addition, Treasury launched myRA—which is short for “my retirement account”— to provide Americans the opportunity to start saving in a way that is safe, simple, and affordable. myRA is designed to address the barriers preventing people—especially young people—from investing in their future by providing a reliable, no fees, no minimum starter retirement savings account that is available to Americans no matter where they work.
Conclusion
In sum, the National Financial Capability Study reveals for us the cracks in many Americans’ sense of financial security, but also points out opportunities for addressing these cracks. There is much that we do to help more Americans attain greater financial security and resilience. Improved access to quality financial education is a part of attaining this security and resilience. One last shout-out to the Study’s findings: Too few Americans have access to financial education—less than a third of respondents in the Study reported having been offered financial education at a school, college, or workplace, and only one-fifth reported that they participated. Undertakings like this Study, and the work of leaders in this room, are helping us better understand where financial education is needed, and how to shape both the content and delivery strategies to make such education relevant and useful.
I want to thank Rick for his leadership and commitment to this challenge. On behalf of Secretary Lew and the Treasury Department, we thank you for serving on the President’s Advisory Council on Financial Capability, which has helped the Administration improve financial capability for Americans.
We appreciate all the work FINRA and the wider community of leaders and experts gathered here today have done to advance a framework for addressing these pressing challenges, and we look forward to doing what it takes, with you, to build a nation of people who are financially secure, financially included, and financially capable.
Thank you.
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