March 28, 2011
Financial Literacy: What Works? How Could It Be More Effective?
This paper highlights the extent and effects of financial illiteracy on American households, reviews previous efforts to promote financial literacy, and discusses new directions for such initiatives. None of the traditional approaches to financial literacy – employer-based, school-based, credit counseling, or community-based – has generated strong evidence that financial literacy efforts have had positive and substantial impacts. Nevertheless, the apparent success of financial planning efforts and simplification initiatives suggests that there are private actions and public policy strategies that can influence saving behavior. There is a key role for the private sector in enhancing financial literacy and the market is responding rapidly to try to fill the void. There also is an at-least equally important role for the public sector, via a campaign that revolves around a comprehensive website and through better coordination of existing policies toward saving. The authors conclude that improving financial literacy should be a first-order concern for policy-makers, and that gains could accrue not only to the affected individuals, but also to their family members and society at large.