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Congressional Testimony
February 5, 2002 Tuesday
SECTION: CAPITOL HILL HEARING TESTIMONY
LENGTH: 3090 words
COMMITTEE:
SENATE BANKING HOUSING AND URBAN AFFAIRS
HEADLINE: FINANCIAL ILLITERACY
TESTIMONY-BY: PAUL O'NEILL, SECRETARY
AFFILIATION: U.S. DEPARTMENT OF THE TREASURY
BODY: Prepared Statement of the Honorable Paul
O'Neill Secretary U.S. Department of the Treasury
Hearing on "The State
of Financial Literacy and Education in America." First Hearing in a Series.
February 5, 2002
Chairman Sarbanes, Senator Gramm, distinguished
members of the Committee. Thank you for the opportunity to appear before you
this morning to talk about the vital importance of financial education. I am
especially pleased to do so in the company of Chairman Greenspan and Chairman
Pitt. Mr. Chairman, I commend you for focusing a national spotlight on this
critical topic, which is so closely linked to our economic future. It is one, I
might add, in which I have a deep and longstanding personal interest. 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.
Need for Improved Financial Education
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.
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.
Current Efforts to
Address the Problem
Considerable efforts are being made in the private
and public sector to promote financial education. Our staff has completed a list
of financial educational resources offered by the various Federal departments
and agencies that is attached to my testimony for inclusion in the record.
As the attached document shows, no fewer than 10 federal departments and
agencies, including the Treasury Department, offer a wide variety of financial
education programs and resources. In addition, many states, Wisconsin, Maryland,
and California, to name a few, have taken initiatives to raise the level of
their residents' financial knowledge. Similarly, financial service providers
have made extensive efforts in the banking, securities, and insurance industries
to teach the public how to properly use their products.
Faith-based
organizations and community groups have also promoted financial education. As we
all know, talking about money, and especially about the state of one's own
finances, can be difficult. Faith-based and community organizations tend to
foster the trust necessary for their members to discuss these personal matters
with them. Such groups can encourage people who have never saved before to begin
saving; to think twice about making an impulse purchase; or to consider more
deeply the need to focus not only on short-term consumption, but also on
long-term investment.
A Focus on the Schools
These current
efforts are important, yet much more needs to be done if we are to significantly
raise the ability of Americans to more effectively master their financial lives.
To be sure, our national strategy must address the financial educational needs
of Americans in all walks of life. This morning, however, I would like to focus
in particular on the need for more financial education in our nation's schools.
No better venue exists for us to reach such a large segment of the
population than through our schools. No better mechanism exists for providing
our nation's youth with the educational building blocks they will need to become
competent consumers and managers of household wealth. By beginning the financial
education process early, we can equip our youth with a foundation for making
sound financial decisions throughout their lives. Indeed, in those states that
have begun requiring personal financial education in high school, research shows
that high school graduates have higher savings rates and higher levels of
net-worth.
Of course, financial education must begin with basic
literacy. A child with insufficient reading skills will never be able to
comprehend a credit card application or a Truth in Lending disclosure. A child
lacking basic math skills will never be able to balance a checkbook or compare
credit card interest rates. Financial education programs will be successful only
for those children who have mastered basic academic skills. This is one of the
reasons why it was so important for the Congress to pass the President's
education bill - the No Child Left Behind Act of 2001 - signed into law on
January 8.
This landmark legislation provides the most sweeping reforms
of the Elementary and Secondary Education Act since it first became law in 1965.
Included among the bill's provisions are requirements that states set high
standards for achievement in reading and math and that they test every child in
grades 3 through 8 to ensure that students are making progress in achieving
those standards. The bill also includes specific language recognizing the
importance of financial education efforts by local schools.
State and
local educators are now undertaking the process of developing standards in math
and reading, and the educational curricula that will help their students achieve
those standards. In collaboration with Secretary Paige, I would like to take the
opportunity of this hearing to call upon schools to integrate financial
education into those standards and curricula - not as a separate discipline, but
as means of exposing children to basic financial and economic principles at the
same time they acquire core reading and mathematical skills.
Teaching a
child how to balance a checkbook reinforces basic addition and subtraction.
Learning how to calculate compound interest provides an excellent way to
exercise knowledge of percentages. Reading lessons can include stories about
children saving money to buy something special, or getting their first
after-school job. For older children, assignments in English literature can
easily be structured to include novels that not only build reading
comprehension, but also help students explore and analyze principles of economic
behavior.
Successfully interweaving financial education into math and
reading standards required by the President's education program would be a giant
leap forward in helping prepare our nation's youth to become financially
literate adults. In the short run, building financial education into courses
that are already required by all schools may be the most expeditious and least
expensive way to make our educational system more responsive to students'
financial educational needs.
At the same time, such efforts would
complement initiatives already underway in several states to incorporate
personal finance courses into school curriculums. Mississippi, Illinois, Idaho
and New York have been leaders in assuring that personal finance is at least
offered to all students before they graduate from high school. I would also note
that legislation or resolutions have now been passed in Tennessee, Delaware,
Louisiana, Michigan and Wisconsin to provide personal finance education courses.
And Delaware and Wisconsin have established task forces to review the issue and
make recommendations.
A Financial/Educational Alliance
In 1996,
I had the privilege of co-chairing the Pennsylvania Advisory Commission on
Academic Standards. This was a 17-member panel of non-educators, charged by then
Governor Tom Ridge with the job of reviewing education standards being developed
for Pennsylvania. Our goal was two-fold: to ensure that the concerns of
students, parents, and local businesses were considered in developing the
standards; and to serve as a reality check, if you will, so that the standards
reflected the real-world needs of students once they graduated and entered the
workforce. The effort was highly successful and today Pennsylvania is recognized
as having one of the highest quality education standards for its children.
Just as Governor Ridge called upon non-educators in Pennsylvania to
partner with educators in the successful development of "real world" education
standards, I believe the financial services sector can just as effectively
partner with state and local educators in the development of financial education
standards. For instance state banking superintendents, insurance commissioners,
and securities administrators all possess a wealth of expertise and experience
to contribute to the development of financial education guidelines. Private
financial institutions also have much to offer in terms of expertise, as well as
providing a source of additional resources to support teacher training and the
establishment of financial education curricula and programs.
At the
national level, the Treasury Department is focusing much of its existing
financial education programs on youth. Just last year, we launched the Money
Math program, a personal finance education kit for young people in grades 7
through 9. More than 110,000 middle school math teachers in 16,000 school
districts nationwide received the kits free of charge.
In terms of new
initiatives, I am pleased to announce that our Treasurer, Rosario Marin, has
agreed to organize an effort to recruit the support of state treasurers in
pressing for more financial education in the schools.
In addition, we
are working to find a suitable way in which we can recognize, in conjunction
with the U.S. Department of Education, local schools that have exhibited high
distinction in the area of financial education. By providing a national
spotlight for innovative educators who have developed successful programs for
teaching personal finance, we hope to motivate their colleagues in other schools
to follow suit.
In partnership with the Department of Education, I am
willing to do whatever I can to promote financial education in the schools. As
all of us know, education forms one of the most important bases of our free and
prosperous society, and financial education skills figure prominently in the
success with which we exercise our economic freedoms. As a grandfather of twelve
wonderful grandchildren, I know well that children are America's future, and I
would like to see an educational system that provides all American children with
these vital life skills.
Other Areas of Focus
Youth education
will not, of course, help the legions of adult Americans whose financial
education skills fall short. Let me mention some of the policy issues where we
have identified financial education as key to protecting and promoting the
financial health of the adult population.
We should extend our efforts
on financial education to retirement security. As you know, the President
requested that I, along with Labor Secretary Chao and Commerce Secretary Evans
examine retirement savings laws to determine whether any reforms are necessary
to promote the ability of all Americans to plan for a secure retirement. Last
week, the President announced our recommendations, which include proposals to
increase the freedom of American workers to choose how they wish to invest their
401(k) assets, as well as to prevent corporate officers from selling company
stock during a so-called "blackout" when workers are prohibited from trading in
their 401(k) plans. A key feature of our recommendations is to expand workers'
access to financial educational resources and professional investment advice, so
that they can have the tools they need to make informed investment decisions.
Moreover, investors cannot learn what companies do not disclose.
Recognizing that the Nation's corporate disclosure system is not working as well
as it should, the President has asked his Working Group on Financial Markets to
take a hard look at what we can do to fix it. Chairman Greenspan, Chairman Pitt,
CFTC Chairman James Newsome and I are looking for ways to realign our corporate
disclosure and accounting system with its basic purpose - to provide investors
with the information they need to make informed decisions about public
corporations' financial positions and prospects. Clear, accurate, and
comprehensive disclosures are essential to all Americans' ability to invest and
save. The key is accountability and responsibility for corporate officers and
directors, accountants and auditors. We are committed to the President's call to
hold corporate America to "the highest standards of conduct." I am confident
that the Working Group's recommendations to the President will point the way to
strengthening our disclosure regime.
Financial education is also a
centerpiece of First Accounts, a program in which Senator Sarbanes has a major
interest. First
Accounts is a grant program administered by the Treasury
Department and designed to move a maximum number of "unbanked" low- and
moderate-income individuals to "banked" status with insured depository
institutions. Without basic financial services, low- and moderate-income
individuals may have a reduced ability to manage their finances and may be
limited in planning and saving for the future.
We issued a Notice of
Funding Availability on December 27, 2001, and are providing applicants until
March 20, 2002 to respond. In addition, we sent hundreds of copies of this
Notice to community groups, faith-based organizations, labor unions in all fifty
states, and dozens of financial institutions and their trade associations. We
expect to use the First Accounts program to fund replicable model projects that
develop financial products and services for these individuals without the need
for ongoing public subsidies. In seeking applications, we have recognized that
financial education can be a key component in persuading more Americans to open
bank accounts. We will also undertake research to evaluate the success of the
funded projects and to understand what products, services, educational
initiatives, marketing techniques, or incentives are needed.
Finally, I
think it is important to make this observation: unwise financial decisions do
not always stem from a lack of financial education. All too often, bad choices
stem from economic despair. No amount of financial education will help
individuals build their retirement nest eggs if their incomes barely cover their
families' living expenses. No amount of financial education will help
individuals escape the high fees charged on short-term, unsecured loans if their
families are in need of food or medicine, and there is no other place to go for
the funds. With more money in their pockets, people will be better positioned to
make sound economic choices and provide for their and their families' economic
futures. As we aggressively promote financial education, we must not lose sight
of the larger goal to promote economic prosperity through the President's
economic program.
Conclusion
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.
LOAD-DATE: February 6, 2002