The Costs and Consequences of Financial Illiteracy

There are many shocking statistics which highlight the seriousness of the financial illiteracy pandemic in this country. These statistics paint a disconcerting picture of the future for many Americans but do the choices of a few pose a risk to the many? If this issue was truly impacting only a few there would be measurably less reason to be alarmed. However, the choices of many may indeed pose a risk to the few in this case. The following statistics should indeed sound alarms about the financial future of many Americans.

• 45% of Americans have not saved a dime toward retirement.

• The median retirement account (IRA, 401(k), 403(b), etc.) balance is only $3,000 for working-age households and only $12,000 for households approaching retirement.

• In nearly 67% of working households with earners between ages 55 and 64 years, at least one earner has saved less than one year’s income for retirement.

• Approximately 69% of Americans have less than $1,000 in total savings and 28% reported having no savings at all.

• 40% of Americans making $100,000 or more per year have less than $1,000 in savings.

• 62% of seniors aged 65 and older have less than $1,000 in savings, with one in three seniors having no savings account at all.

• 47% of single seniors and 22% of married seniors are almost completely dependent on Social Security.

• 70% of non-retired Americans plan to work as long as possible during retirement and only 25% of non-retired Americans say they have no plans to work during retirement. (For more, see: Why Financial Literacy Is So Important.)

(Sources: National Association of Government Defined Contribution Administrators, Congressional testimony, 2016 BankRate.com survey, Social Security Administration.)

The Gold-Plated Years?

This sounds more like “gold-plated years” as opposed to the “golden years” most people visualize. However, this massive alarm should be heard by everyone (including legislators, employers, community leaders, etc.) because there may be consequences for those who do plan appropriately for their future not just those who have not. Should you be concerned about the potential costs of the lack of financial literacy in America? Will these costs be absorbed by our society? Should these potential costs be a factor in your financial planning? Yes, yes and yes.

The costs and consequences of financial illiteracy are only beginning to be recognized outside of the financial services industry. Understanding why savings and retirement planning is lacking and why so many households are woefully unprepared for a financial emergency, let alone a lifetime in retirement, starts with better education. Apparently, many households are unfamiliar with even the most basic economic concepts needed to make savings and investment decisions.

Financial illiteracy is widespread and this appears to be a global issue, not just a concern for Americans. According to numerous research studies and surveys, people across all age brackets in many countries are challenged by basic financial computations. It’s no wonder the implications for saving, retirement planning and other significant financial decisions, like obtaining a mortgage, are so serious.

Workers and retirees have increasingly been forced to take personal responsibility for their retirement and other savings, as defined benefit pension plans are replaced with defined contribution plans and government entitlement programs face insolvency. As a result, consumers now confront a bewildering array of financial decisions and a wide range of financial products and investment accounts. Add to that compounding factors, such as divorce and skyrocketing healthcare costs, and the retirement picture is muddied even further for many Americans. (For more, see: The U.S. Ranks 14th in Financial Literacy.)

The Unforeseen Potential Costs of a Plan to Fail

Our society has evolved over the last many generations to a point where personal responsibility appears to be fleeting. While signs of this issue are apparent in many areas of society, the concept of “wealth redistribution” as a remedy is gaining popularity. Many would certainly argue few things could be less American but the reality is people vote with their pocket book. What could such a scenario look like?

For starters, many observers expect to see changes to the Social Security system. Social Security is only meant to be one form of retirement savings. In fact, the Social Security Administration says that Social Security is intended to replace 40% of the average retiree’s income. However, far too many people are almost completely reliant on a Social Security system which is under funded. Some of the changes discussed in the halls of Congress include raising the full retirement age, means-testing or phasing out of benefits for the wealthy. However, Congress may have a very different definition of wealthy than you do. One would certainly hope any changes to the Social Security system would be gradual, but the time is coming where financial plans will include scenarios which exclude Social Security benefits.

If changes to the Social Security system continue to be the third rail of politics, tax increases could certainly do the trick. Changes to the tax code remain the “saveur du jour” for Congress to redistribute wealth. Increases in personal income, capital gains and dividend tax rates are definitely potential sources of revenue to plug the systemic costs associated with the gaping hole in America’s retirement plans. However, don’t rule out the prospect for higher property taxes, sales taxes and perhaps new ways to tax consumption like a value-added tax system.

What if the “cost” associated with the gaping hole in America’s retirement plans were more subtly felt? Perhaps a massive drag on gross domestic product (GDP) growth? If we can agree America has thus far had little penchant for saving, doesn’t this by definition mean we have brought forward some, perhaps a lot of, future consumption? A stagnant economy most certainly affects us all and is a much stealthier “cost” of the failure to plan. Such a scenario would be a drag on more than just the economy and would likely impact investment returns across all asset classes.

Nobody could possibly know exactly how this will play out. However, it is important to recognize the impact will almost certainly be felt by everyone not just those who failed to plan. The picture as it is currently being painted suggests it is becoming ever more important for households to acquire financial literacy. (For more, see: The Cost of Poor Financial Literacy? $10B a Year.)