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Although Americans are more financially literate than ever before, Teresa Ghilarducci, an economics professor, says workers are actually worse off than previous generations when it comes to retirement.
The culprit? Broken system. Ghilarducci joins TheStreet to discuss why financial literacy is insufficient for retirement security and needs reform.
Related: The average American faces a major 401(k) retirement dilemma.
Full video transcript below:
Conway Gates: So, how important is financial literacy if we are all making more of our own decisions. And I’m a little confused because even CEOs, even if you’re in Congress, you have to make your own financial decisions as well. So why don’t all people come to the table to make it easier.
Teresa Ghilarducci: This is a great question. The question is why. If everyone is having a problem, why don’t the people in power do something about it. Because they should feel it too. The problem with our system is actually the haves and the have-nots. We have a well-oiled and well-organized 401(k) system. And if you’re a participant, you’ll be a participant if your employer offers it as the federal government does for all its employees. So, automatically, your lawmakers are immune to what everyone else is experiencing. Professors who do a lot of work on this, we are sitting pretty. We either work for a state and have our own pension plan there, or we have an old plan called TIAA.
So we’re a little unsympathetic to what the people who work for us do. So the separation of expertise is a real big barrier to policy making. You asked me about financial literacy. We have the greatest financial knowledge in this country ever. Workers are now more educated regarding money. They took out debt for school. They have already learned more about mortgages than ever before, but they are worse off than their parents or grandparents. So it’s not that people don’t know enough. That’s the problem. It’s a structure that doesn’t fit the people we have.
Conway Gates: Why are they worse off?
Teresa Ghilarducci: Yes, because they are not in the retirement plan. We’re sitting here on the floor of the stock exchange. Everyone here knows that the most powerful force in finance is compounding. And if you just start saving just 3% of your salary when you’re in your 20s and keep the same percentage and never withdraw it. This is a big deal in the American system. If you never take it out, you’ll have enough Social Security to maintain your standard of living. If you start at age 30. Well, you have to do 6%. If you start at age 40, you should save more than 10%. If you start at age 50. And a lot of people ask me, well, I should save for retirement. It’s only been 10 years down the road. They have to save 50%.
So, not everyone has to be in this system where they can double you if you’re in a defined benefit plan, or a traditional plan, where your employer sets it up for you and invests it for you. You’re like me, who’s been in the same retirement plan for 40 years. I’m lucky. It’s amazing that I even know what the rest of America is doing. I was able to install it. So I can say I’m really smart, but I was lucky. So I think luck and wealth have a lot more to do with it than just financial knowledge. And then some people have to take on debt, you know, and that compounds in the other direction as well.
