The Importance of Financial Education Kelly D. Edmiston, Senior Economist Economic Education Advisory Council Meeting Federal Reserve Bank of Kansas City October 25, 2005

K. Edmiston, Federal Reserve Bank of Kansas City Overall Trends Transition from defined benefit to defined contribution plans Increased longevity and a tenuous Social Security system Increased number of financial products Increased complexity of financial products

October 25, 2005 K. Edmiston, Federal Reserve Bank of Kansas City Consumer debt levels have increased 124 percent since 1994 Revolving debt has increased 118 percent The average household has a credit card balance pushing $10,000 and total consumer debt of $15,000 Bankruptcy filing rates have increased over 100 percent since the early 1990s Consumer debt is a significant problem

October 25, 2005 K. Edmiston, Federal Reserve Bank of Kansas City The U.S. personal saving rate is dismal The U.S. personal saving rate has dropped from an average of 8 – 10 percent of income in the 60s, 70s, and 80s to less than one percent today

October 25, 2005 K. Edmiston, Federal Reserve Bank of Kansas City 401(k) participation is not too bad, but could be better 401(k) participation averages about 70 percent, but that share appears to be declining. The average 401(k) contribution rate is around 5.2 percent to 7.8 percent. Only 31 percent of the working population contribute the maximum allowed to their 401(k)s.

October 25, 2005 K. Edmiston, Federal Reserve Bank of Kansas City About half of people who change jobs cash out their 401(k) Of those holding company stock in their 401(k), 42 percent of the balance is company stock on average. One quarter of 401(k) plan participants hold only one investment option in their plan. 41 percent of 401(k) participants hold only one or two funds. While 401(k) savings rates are pretty good, many dont keep the money there for long, and they dont manage their account very well

October 25, 2005 K. Edmiston, Federal Reserve Bank of Kansas City A recent survey by the National Council on Economic Education revealed failing scores by 25 percent of adults and 60 percent of high school students

October 25, 2005 K. Edmiston, Federal Reserve Bank of Kansas City What Does the Research Say? Financial education at work increases participation in and contributions to employer-sponsored savings plans. Among moderate savers, a financial education course increases both retirement and non-retirement savings Financial education is particularly effective with LMI people, who have the greatest needs. State financial education mandates lead to greater asset accumulation in adults.

October 25, 2005 K. Edmiston, Federal Reserve Bank of Kansas City The Kansas City Fed Study How well do personal financial behaviors and personal financial well-being correspond with an objective and comprehensive measure of personal financial wellness given by the credit score? How do financial behaviors relate to knowledge of optimal financial behaviors? How does financial well-being relate to unproductive workplace activity related to personal finance?

October 25, 2005 K. Edmiston, Federal Reserve Bank of Kansas City How successful are financial literacy programs in changing personal financial behaviors? –what about credit counseling? –what about financial planning? What is the the bottom-line impact of financial education programs on employer-providers? The Kansas City Fed Study

October 25, 2005 K. Edmiston, Federal Reserve Bank of Kansas City