When Kelly Cook and her husband tackled the daunting task of buying their dream home in Lebanon, Ohio, they got help from an unexpected source. Struggling to come up with a down payment, the couple discovered a program intended for moderate income homebuyers caught in a similar financial bind. But it didn’t involve the government doling out money and handing over the keys. Instead, for the first time ever, the Cooks worked hand-in-hand with their own, personal financial coach – before, during and after they purchased their modest $135,000, four-bedroom ranch home on a shady cul-de-sac in the small southwest Ohio town.
“We were like everybody else, we got our paychecks, paid our bills, and figured out how much money we had left over at the end of the month,” said Cook, 39, an information technology project manager “But our coach got us thinking, what’s your plan long-term, like 20 years from now? How much do you need to retire? It was forcing me to look at my overall financial health. We just weren’t saving enough. This sort of broke everything down and helped us do that.”
The Cooks were among nearly 300 families matched with financial coaches through an ambitious financial literacy effort funded by the Social Security Administration. That initiative – a first-ever attempt to pull together the nation’s top financial literacy experts – created research centers at a handful of top universities, including the University of Wisconsin, Boston College, and the Rand Corp., with Dartmouth College as a partner. The purpose was to weed through all the well meaning but often ineffective financial literacy programs out there, often criticized as duplicative or superficial. The effort also was to address the biggest problem of all, when it comes to financial literacy education: No one knows if any of it works.
The new idea aimed to fix that, but not through the typical strategy of putting out a bunch of policy papers. Instead, the purpose was to create programs that could be copied elsewhere, and measured for success, a key goal. Among early projects:
- Using personal financial coaching, as in the Cook’s example, to keep people from overspending after buying a home and ending up in foreclosure.
- Helping people figure out their best options when claiming retirement benefits.
- Creating videos to teach investment concepts like diversification and risk to young adults entering the workforce.
Annamaria Lusardi, a leading financial literacy researcher and economist and director of the Rand Center, described it as groundbreaking. It was, she said, “the most serious attempt ever undertaken” to figure out what really works in financial literacy education, led by “the very best people in the field.” The initiative also had a special emphasis on helping low-income and minority households that often lack access to literacy counseling and other financial services.
In the wake of a financial crisis that saw millions of Americans sign up for mortgages with terms they didn’t understand, pulling together the best and brightest to establish standards for financial literacy might seem non-controversial, and unlikely to stir up political opposition. Who could argue against helping consumers make smarter financial choices, especially regarding retirement?
Only things didn’t quite turn out that way. The government’s first try at setting standards for workable and effective financial literacy programs flopped in spectacular fashion – yet drew almost no public attention.
But the rise and fall of the Financial Literacy Research Centers deserves notice. Cut off from funding just two years into their mission, their demise serves as a window into how partisanship, mistrust, and most of all, deeply ingrained government dysfunction, deep-sixed an idea once supported by libertarians and liberal social policy advocates alike. That idea became a casualty of the bitter budget battles of the past few years, with the zeal to eliminate the program most likely costing more money than it saved. And its failure offered further proof that while financial literacy gets plenty of lip service from the White House to Congress – with high profile events every April to mark financial literacy month – the support doesn’t go far beyond public relations.
In the end, there wasn’t even enough bipartisanship to save something as nonidealogical as teaching money skills. The elimination of the centers also stunted momentum for financial literacy education, a field growing in importance as financial products become more complex. Lusardi, whose studies documenting how little people understand about their finances has raised the urgency of the issue, said consumers face even bigger financial challenges ahead. And making the wrong decision will prove particularly costly.
General Motors, for example, recently offered thousands of retirees the option of annuitizing their pensions and receiving a monthly check, or accepting a single lump-sum payment – a choice more employees likely will face as additional companies reduce their pension obligations.
“I assure you, many people will take the lump sum, whether or not they actually understand the decision,” Lusardi said. “You’ll have to deal with a lot of people losing this money to scams, or mismanaging this money. It’s very expensive to deal with that. It’s so much cheaper to think of ways to inform people of how to make this decision down the road.”
But two years worth of money and effort to help consumers with those kinds of decisions went down the drain. Funding for the research centers wasn’t just reduced; the entire effort was shut down entirely, an unusually aggressive budget-cutting move. It meant stopping everything in mid-steam: Dismantling the centers, firing or reassigning staff, and ending promising projects, or scrambling for money to string them out a bit longer. The centers were intended to be a five-year effort.
With a long sigh, J. Michael Collins, an expert on consumer finance and financial literacy at the University of Wisconsin, expressed the frustration of building up a major financial literacy education research effort, only to see it torn down prematurely.
“In some ways,” he said, “it would have been better not to have done it at all.
AN UNLIKELY PROPONENT
As the nation’s homeownership rate soared to record levels during the mortgage boom, financial savvy became intertwined with owning a home. Angelo Mozilo, former CEO of the failed subprime lender Countywide, boasted of trying to close the homeownership gap for minorities through his no-document loans. Countrywide’s version of financial literacy, as outlined in a lawsuit by the California Attorney General, included providing consumers with “home loan experts” to help them secure the right kind of mortgage – a subprime loan from Countrywide, of course.
But as the mortgage market collapsed, the ability of consumers to manage their money became a priority. “I used to go to all these financial literacy conferences for years and no one was there,” Lusardi said. “Suddenly, everyone was there. “ Lusardi’s research revealing troubling gaps in basic financial knowledge among consumers raised further concerns. In one study, only one third of people over age 50 could correctly answer basic questions regarding compound interest, inflation and stocks.
The issue took on an even higher profile with conservative Rick Santelli’s CNBC rant that launched the Tea Party movement, which included his call for mandatory financial literacy education instead of a homeowner bailout. Consumer advocates decried the approach as a substitute for regulating abuses. The new Consumer Financial Protection Bureau included as a responsibility streamlining financial literacy education programs, but it had no director for the first year and a half, as the White House and Congress wrangled over its leadership.
In the meantime, the nation’s highest profile financial literacy initiative remained the Jumpstart Coalition for Personal Financial Literacy, a nonprofit advocacy group. Jumpstart is well known for its surveys of high schoolers’ financial skills. But its clearinghouse of financial resources for consumers comprises material supplied by its corporate partners, which include credit card companies, banks, and auto lenders. Educational resources are mixed in with the marketing. President and CEO Laura Levine acknowledged that with limited funding, “there just isn’t the money” to vet it all.
In schools, tight funding also limited the movement to mandate financial literacy education, with such programs often the first to be cut in a budget crisis.
Lenders filled the void. Wells Fargo settled a lawsuit charging it targeted minority borrowers for higher rate subprime loans by funding a financial literacy center in downtown Washington. Subprime companies like CompuCredit overcharged credit-impaired consumers while directing them to financial literacy education resources on their web sites.
As far back as 2006, a government report cited as troubling the overlap of financial services industry marketing with financial literacy. It was hard for consumers to know whether the information was “clouded by potential financial gain,” the report said. And it blurred the line between marketing and education. But little changed.
“I put my hand on my wallet when I hear a bank or someone from the financial services industry talk about financial literacy,” said Ira Rheingold, executive director of the National Association of Consumer Advocates. “ You need to be aware that the person giving you financial advice is the same one who also wants your money.”
Enter into this morass Jason Fichtner, an unlikely proponent of government programs of any sort, let alone those advocating improved financial literacy.
Fichtner is now a senior research fellow at the free market supporting Mercatus Center at George Mason University. But during the George W. Bush administration, Fichtner served in several positions at the Social Security Administration, including as Acting Deputy Commissioner of Social Security, Chief Economist, and Associate Commissioner for Retirement Policy. Fichtner has also served as Senior Economist with the Joint Economic Committee of Congress.
Fichtner came to the SSA after the Bush administration already had begun promoting the idea of privatizing Social Security. Regardless of what might happen with privatization, however, Fichtner saw SSA as the government agency with the most vested interest in people becoming financially secure. He began to think of financial literacy in a different way. Why not use an already available delivery system – annual Social Security statements – to help educate consumers, particularly regarding crucial decisions like what age to retire?
“Those statements are the major source of communication from the federal government on financial literacy for 150 million Americans,” Fichtner said. “They’re a perfect resource.”
Retooling the statements would mark a major marketing change for the SSA, which otherwise tended to reduce communicating with the public mainly though what Fichtner described as “tchotchkes” – nail files with reminders on them to “file” for retirement benefits electronically. Or commercials featuring former child actress Patty Duke. Or fact sheets that no one ever saw and information buried on its website. The biggest problem of all – for 30 years, the SSA had in many ways, been giving out misleading retirement information.
The agency was essentially pushing a break even analysis – if you retired at 62, and began collecting your benefits early, you wouldn’t face any financial penalty. You would, in fact, be ahead financially.
But that’s only partially true. The amount you receive when you first get benefits sets the base for the amount you will receive for the rest of your life. If you live to the average life expectancy, you will receive about the same amount in lifetime benefits no matter whether you choose to start receiving benefits at age 62, full retirement age, age 70 or any age in between.
But if you live longer, and many people do, then taking benefits early results in a financial penalty later in life – and especially during your 80s and 90s, when Social Security benefits are very important to maintaining financial security.
“If it were explained better, it might make a difference in how people decided whether to collect their benefits early,” Fichtner said. “We weren’t telling them that if you lived past 76 years old or so you’d be behind for the rest of your life.”
The agency decided the statements should be refined, and the tchotchkes had to go. In place of the nail files, key chains and buttons, Fichtner developed a slide rule that helped consumers calculate the early retirement question more precisely.
By 2008, most Americans were receiving the revamped statement and many received special inserts, one directed at older workers on deciding when to begin retirement benefits, and another aimed at workers ages 24 to 35, describing the importance of personal saving.
Fichtner felt the agency could do more. Maybe it could use its reach to create a special insert for women, who tend to suffer the most financially in retirement. Maybe it could even lead the way toward figuring out what financial literacy strategies really work, and creating programs that could be widely replicated.
Fichtner wanted to build on earlier research by scholars like William Gale of the Brookings Institute, who had found some promising approaches, such as one on-one financial coaching, as in the Kelly’s example. Or catching people at teachable moments, like when they made decisions on contributing to their 401 (k) retirement plans. He wanted the agency to paying attention to the wording of a question, and how it affects consumer decisions, as well as using tactics that induce consumers to save.
Given the controversy over privatizing Social Security, Fichtner wanted any financial literacy effort to remain separate from politics, with as much bipartisan backing as possible. So he road tested his idea with experts on both ends of the political spectrum, ensuring their support.
By 2009, the SSA had awarded $7.6 million in grants for the research centers. The new Obama administration allowed Fichtner to stay on. Fichtner, Lusardi, and the other researchers felt the time was right to move beyond brochures from lenders and policy papers that no one read to something that would make a difference to consumers. Everything seemed to be falling in place.
No one realized, as they began putting the centers together, how quickly everything would soon unravel.
LITERACY ROCK STARS
In 2010, things seemed to be going well for the project. Centers were established at the University of Wisconsin, Boston College, and Rand.
At the University of Wisconsin, Collins envisioned something similar to the school’s Institute for Research on Poverty, a trusted resource for decades on welfare reform and other low-income financial issues.
“We were focusing on vulnerable populations, “ Collins said. “We said that low-income people, minorities, lesser educated consumers, and people who face foreclosure or bankruptcy, are a special class. They are experiencing an unusual level of insecurity that deserves special scrutiny.”
The program in Ohio involving the Cooks was part of the UW effort. Instead of the usual homebuyer education – requiring borrowers to sit through a seminar sponsored by their lender – the new approach aimed to help them build assets and increase their wealth by managing their money well, not just by purchasing a house.
An initial survey of consumers taking part in the project seemed to validate its importance. Of the 575 total families, less than one-third participated in an employer sponsored retirement plan, and fewer than half knew how to find information about their Social Security estimates, said Stephanie Moulton, an Ohio State University professor and principal investigator for the program.
The Cooks, and the other buyers, completed an online financial health checkup, detailing and organizing their budget, savings, spending and investments. Some 278 families then were matched with financial coaches. The program was modeled after Weight Watchers, but aimed at finances rather than pounds. The financial coach regularly checked in with participants after their home purchase to see how things were going, mirroring the Weight Watchers strategy.
For the Cooks, the coach guided them through everything from avoiding scams marketed to new homeowners to understanding the differences between term and life insurance, to examining their Social Security statements for the first time to accurately figure out how much money they’ll get in retirement.
“We covered everything,” Cook said. “Instead of doing a monthly mortgage, we switched to a biweekly mortgage. She explained all that. She asked about bills that were piling up, we talked about my student loans and what I could do to get them down. She told me about several good websites I could research to refinance my car to get a lower interest rate. And she made sure I know how to monitor my credit score.
Checking in regularly with her coach, she said, “ was absolute, 100 percent reassurance that I was not going to get in over my head.”
Meantime, finance professor Jeffrey Brown and colleagues at the University of Illinois at Champaign-Urbana were looking at a different area of financial literacy, called framing. Decisions that consumers made about their money often depended on the way the choice was presented to them. For example, more workers put money into employer-sponsored plans when they have to actively opt out of savings, versus merely deciding whether to participate.
“Framing is really important, because the way you frame information can dramatically affect the way you think about problems and the actions you take,” Brown said.
Brown also knew that much of how people get their financial literacy information comes from word of mouth – a conversation at a coffee shop with friends. And that often times, that information is just wrong.
Research showed most people thought that if they went back to work in their 60s they’d face a penalty on their retirement benefits. So some turned down jobs. “They looked at it as a 50 percent tax on their Social Security benefits,” Brown said.
But it’s not that simple. Workers who retire and collect benefits between ages 62 and 67, and who earn above about $14,000 or $15,000 per year, will, in fact, see their benefits reduced. In most cases, they’ll lose half the amount they earned above the income limit; if they earn an additional $7,000 in a year, their benefits will be reduced by $3,500.
But often unexplained to workers is that after age 67, they’ll get those benefits paid back, although the amount will vary depending on the individual retiree’s financial situation. The deduction isn’t so much a tax, as a type of deferral. But it’s not explained under those terms to most retirees. Instead, it’s often described just as a penalty, artificially discouraging retirees who might want to pursue additional income in a weak economy.
“If you asked people, If you’re thinking of going back into the workforce and you’d face a 50 percent tax on your earnings, would you do it?’ The answer would be very different if you asked the question differently,” Brown said.
He and his colleagues began testing different ways to frame the earnings question with consumers, along with other choices regarding decisions on claiming benefits. As the programs grew, so did the momentum.
Lusardi’s research increasingly drew media attention. In Washington, in November 2010, she drew together a conference of more than 400 top researchers, from around the globe. Although their names weren’t familiar to the public, they were the rock stars of the financial literacy world – Olivia Mitchell, a respected scholar from the Wharton School at the University of Pennsylvania. Alicia Munnell, director of the Center for Retirement Research at Boston College. Harvard economist David Laibson.
The researchers shared results from their first years of work. Momentum was on their side. Second-year funding of $9 million for all the centers was approved. Finally, after years of nail files and brochures, financial literacy was on a roll. It seemed like everyone was on board.
“There were no politics involved with this,” noted David John, a senior researcher with the conservative Heritage Foundation, who specializes in retirement savings. “Privatization never came up. The goal was the bipartisan recognition that we needed to help people have better understanding of their retirement savings, and a better understanding of financial literacy, so that we could improve the overall context of Social Security. It was not with any sort of hidden agenda, in the slightest.”
Only from unexpected sources, it seemed there was.
“THEY JUST PULLED THE PLUG”
In the spring of 2010, Social Security Commissioner Michael Astrue showed up to testify at what he thought was a routine Congressional hearing on the Agency’s budget–and instead, “found himself totally blindsided,” as Fichtner recalls.
Former Rep. David Obey, D-Wis., then Chairman of the House Appropriations Committee, challenged the Agency’s authority and legitimacy to carry out a financial literacy research initiative and questioned whether the money might be better spent on other SSA responsibilities, according to the hearing transcript.
Obey also pressed Astrue over Fichtner’s role as Chief Economist for SSA. Rep. Betty McCollum, D-Minn., chimed in, challenging Astrue to detail his views on the privatization of Social Security. Astrue declined, citing longtime policy.
There was more. SSA’s Office of the Inspector General was asked to investigate the centers and issue a report. In stating why the IG was asked to investigate, the IG’s October 2010 report cited “concerns” from Congressional staffers over the way the grants to the centers were awarded.
The allegations and the launch of the IG report clearly served as a sign that someone was out to derail the financial literacy effort. Fichtner called it “basically a roadblock to slow us down.” And it did.
Still, no one expected what happened next: Later, in the fall of 2010, all the continued funding for the centers was zeroed out in budget proposals. Not just reduced, but recommended for elimination entirely, by 2012.
The recommendation came in the midst of pitched budget battles in Congress, and it looked in December like future funding for the centers might be gone. The money survived for a few more months. But fighting to keep the centers became a losing battle.
In budget parlance, zeroed out is far worse than being reduced. “Once you get zeroed out, it’s a sign you’re dead,” Fichtner said. Few in the SSA wanted to fight for it, given the controversy, along with other budget cuts the agency faced. With so many financial literacy programs scatted across different agencies, there was no champion, and no single savior, to come to its rescue. And there was other opposition as well.
A mistrust of Fichtner over his ties to the Bush Administration and its support for privatization also was behind the objections of some Congressional staffers who fought to kill the project, according to at least six researchers involved with the centers.
Contacted for comment, Kathryn Olson, Democratic staff director for the Subcommittee on Social Security of the House Ways and Means Committee, pointed out that she doesn’t act on her own, but at the behest of the committee. She declined requests for additional comment. Obey also did not respond to requests for comment.
Munnell, the Boston College researcher who served on the Council of Economic Advisors in the Clinton Administration, even tried to lobby for the Centers, but to no avail. Early on in 2011, it was clear all the future funding for the centers would end, just two years after they were launched, and three years short of their expected lifespans.
“I was shocked,” Lusardi said. “They just pulled the plug.”
In the midst of all of this, the IG report came out. It didn’t recommend killing the project. It concluded that organizers needed to do a better job of communication in awarding grants. It also noted that several outside financial experts felt the SSA had “an exceptional opportunity” with the centers to improve financial literacy education.
Any lingering hopes for the centers ended for good in February of 2011, when a GAO report requested by Sen. Tom Coburn, R-Okla., made a media splash, including a Wall Street Journal story. It noted the government had some 56 financial literacy programs spread across various agencies – more “proof” of wasteful government spending.
The reality that Congress was getting rid of the Financial Literacy Research Centers just as researchers were tackling that exact problem didn’t merit any news coverage.
OPPORTUNITY COSTS
What was lost, beyond the wasted time and effort of all involved, is what economists call the opportunity costs – all the things that didn’t get done.
In Ohio, only 573 of the 1,800 families pegged for the financial health check-up and coaching program were able to participate, once the program was gutted.
Fichtner never got to put together and distribute the special retirement statement for women. At all the centers, researchers scrambled to find money to fund projects that were started, and then stranded. Among them: Providing more retirement education to Spanish-speaking workers; encouraging retirement and other savings among low-income employees; and helping people understand annuities.
At the University of Wisconsin, Collins, faculty director of the school’s Center for Financial Security, saw a larger cost. About 1,000 people once involved in programs at UW, providing education or counseling, are gone. The $10 million the center was expected to generate for Wisconsin won’t materialize. But there’s more.
“At all three centers, we took faculty who were good at something, who were doing work in financial security, which is a very new field, or financial health or coaching, and we keyed them up for two years,” Collins said. “Then we said, ‘Oh, it’s not looking so good, try to do all this with a lower amount of money.’ Then we said “There’s no money.’
“It was such a yo-yo. We sent a message by doing this. We said we’re done with personal finance and with worrying about vulnerable populations. We probably lost a generation of researchers and grad students who could have really contributed to our knowledge of it.”
Lusardi doesn’t expect to ever be able to draw the world’s top financial literacy experts together again to focus on financial security, anytime soon, given the experience. Like Collins, she remains perplexed by the whole experience. So little money, in the bigger scheme of things.
Fichtner left SSA to work at the Mercatus Center and to teach economics and public policy at Georgetown University, the School of Advanced International Studies at Johns Hopkins University, and Virginia Tech. It’s unlikely, he said, that he would ever work in government again, considering this experience.
Most consumers were no doubt completely unaware of the entire saga. Their lives went on, as usual, as did the workings of the financial services industry. Last March, a study by the Journal of Consumer Research reported that consumers are easily confused when comparing numbers on loan terms. A majority of them said in a survey they think 36 months is longer than three years.
In May, Wells Fargo settled a suit in Memphis over charges of discriminatory lending by awarding it $3 million for financial literacy. Just a few months later, a new report by several top economists found that nearly half of all Americans die with less than $10,000 in financial assets, and mostly dependent on government retirement benefits at the end of their lives.
