Enhancing Retirement Savings with School-Based Financial Education

This study, funded by a NEFE grant to George Washington University, analyzes findings from the Organization for Economic Cooperation and Development (OECD)’s 2012 Program for International Student Assessment (PISA) financial literacy data and their implications for the development of sustainable retirement systems.

Young American adults are more vulnerable than previous generations to future retirement insecurity. They are entering a system largely based on defined contribution retirement plans at a time when life expectancy is higher than ever.

Although nearly all Americans receive Social Security in retirement, it is intended to augment personal savings and company pensions, not serve as an equivalent replacement for employment income. The shortfall between Social Security and preretirement income has grown because most company pensions no longer exist. Individuals are responsible for making up the difference.

To adequately fund a retirement that could last 30 years or more, individuals must start planning and saving as soon as they enter the workforce. But because many young people start their careers with significant debt and low levels of precautionary savings, they are confronted immediately with difficult decisions on how to use their money — to pay down debts or to save for the future.

The very nature of the shift from defined benefit pensions to defined contribution plans has increased the number of complex decisions individuals are responsible for making: when to start saving, how much to contribute, how and where to invest retirement wealth, and how to handle retirement accounts during financial emergencies or job changes. All of these decisions require a working knowledge of financial concepts, yet this study shows that 15-year-old Americans do not have an adequate level of financial literacy for the United States to maintain a retirement system that relies so heavily on individual decision making.

In this context, low levels of financial literacy is a problem unique to the United States. Whereas a growing number of countries have developed and implemented a national strategy for financial education in order to improve the financial literacy of their populations, mandates for financial education in the U.S. are determined by the states. Only 17 states require high school students to take a course in personal finance (Council for Economic Education, 2016 Survey of the States). Data show financial literacy among American high school students does not match the level that is necessary to be successful in a retirement landscape driven more by individual decisions than societal protection.

Executive Summary

Final Research Report