- THE STATE OF FINANCIAL LITERACY AND EDUCATION IN AMERICA

[Senate Hearing 107-969]
[From the U.S. Government Publishing Office]

S. Hrg. 107-969

THE STATE OF FINANCIAL LITERACY AND
EDUCATION IN AMERICA
=======================================================================

HEARING

before the

COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

THE STATE OF FINANCIAL LITERACY AND EDUCATION IN AMERICA

__________

FEBRUARY 5 AND 6, 2002

__________

Printed for the use of the Committee on Banking, Housing, and Urban
Affairs

U. S. GOVERNMENT PRINTING OFFICE
88-644 WASHINGTON : 2003
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512-1800
Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

PAUL S. SARBANES, Maryland, Chairman

CHRISTOPHER J. DODD, Connecticut PHIL GRAMM, Texas
TIM JOHNSON, South Dakota RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York WAYNE ALLARD, Colorado
EVAN BAYH, Indiana MICHAEL B. ENZI, Wyoming
ZELL MILLER, Georgia CHUCK HAGEL, Nebraska
THOMAS R. CARPER, Delaware RICK SANTORUM, Pennsylvania
DEBBIE STABENOW, Michigan JIM BUNNING, Kentucky
JON S. CORZINE, New Jersey MIKE CRAPO, Idaho
DANIEL K. AKAKA, Hawaii JOHN ENSIGN, Nevada

Steven B. Harris, Staff Director and Chief Counsel

Wayne A. Abernathy, Republican Staff Director

Aaron D. Klein, Economist

Daris Meeks, Republican Counsel

Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator

George E. Whittle, Editor

(ii)

C O N T E N T S

----------

TUESDAY, FEBRUARY 5, 2002

Page

Opening statement of Chairman Sarbanes........................... 1
Prepared statement........................................... 40

Opening statements, comments, or prepared statements of:
Senator Shelby............................................... 4
Senator Dodd................................................. 4
Senator Bennett.............................................. 5
Senator Corzine.............................................. 6
Prepared statement....................................... 41
Senator Enzi................................................. 7
Prepared statement....................................... 42
Senator Stabenow............................................. 14
Prepared statement....................................... 43
Senator Akaka................................................ 15
Prepared statement....................................... 44
Senator Carper............................................... 16
Prepared statement....................................... 45
Senator Schumer.............................................. 17
Senator Johnson.............................................. 21
Prepared statement....................................... 46

WITNESSES

Paul H. O'Neill, Secretary, U.S. Department of the Treasury,
accompanied by: Sheila Bair, Assistant Secretary for Financial
Institutions................................................... 2
Prepared statement........................................... 46
Alan Greenspan, Chairman, Board of Governors of the Federal
Reserve........................................................ 18
Prepared statement........................................... 54
Response to written questions of Senator Akaka........... 65
Harvey L. Pitt, Chairman, U.S. Securities and Exchange Commission 21
Prepared statement........................................... 56

Additional Material Supplied for the Record

Statement of the National Association of Federal Credit Unions... 68
Data and Statistics assembled by the staff of the Senate Banking
Committee...................................................... 70
----------

WEDNESDAY, FEBRUARY 6, 2002

Opening statement of Chairman Sarbanes........................... 77
Prepared statement........................................... 113

Opening statements, comments, or prepared statements of:
Senator Gramm................................................ 78
Senator Miller............................................... 79
Senator Akaka................................................ 79
Prepared statement....................................... 113
Senator Corzine.............................................. 85
Senator Dodd................................................. 89
Senator Stabenow............................................. 94
Prepared statement....................................... 114
Senator Schumer.............................................. 109
Senator Carper............................................... 111

WITNESSES

David Dreier, a U.S. Representative in Congress from the State of
California..................................................... 80
Susan Molinari, National Chairperson, Americans for Consumer
Education and Competition...................................... 81
Prepared statement........................................... 114
Steven Brobeck, Executive Director, Consumer Federation of
America........................................................ 85
Prepared statement........................................... 116
H. Patrick Swygert, President, Howard University, appearing on
behalf of Historically Black Colleges and Universities......... 87
Prepared statement........................................... 120
Response to written questions of Senator Akaka........... 146
Don M. Blandin, President, American Savings Education Council
(ASEC)......................................................... 90
Prepared statement........................................... 124
Esther ``Tess'' Canja, President, AARP........................... 93
Prepared statement........................................... 132
Response to written question of Senator Akaka............ 146
Raul Yzaguirre, President and Chief Executive Officer, National
Council of La Raza............................................. 95
Prepared statement........................................... 137
Response to written question of Senator Akaka............ 147
Denise Voigt Crawford, Texas Securities Commissioner, Texas State
Securities Board............................................... 98
Prepared statement........................................... 140

Additional Material Supplied for the Record

Statement of Adam J. Bass, Senior Executive Vice President,
Ameriquest Mortgage Company.................................... 148
Statement of Michael J. Caslin, III, Chief Executive Officer,
National Foundation for Teaching Entrepreneurship (NFTE)....... 154
Statement of Robert F. Duvall, President and Chief Executive
Officer, National Council on Economic Education................ 183
Statement of Lynda Glass, on behalf of the American Bankers
Association.................................................... 186
Statement of the American Financial Services Association and the
American Financial Services Association Education Foundation... 191
Statement of the Credit Union National Association (CUNA)........ 204
Statement of the National Association of Federal Credit Unions... 209
Statement of the Women's Institute for a Secure Retirement....... 211

THE STATE OF FINANCIAL LITERACY AND
EDUCATION IN AMERICA

----------

TUESDAY, FEBRUARY 5, 2002

U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.

The Committee met at 9:30 a.m. in room SD-106 of the
Dirksen Senate Office Building, Senator Paul S. Sarbanes
(Chairman of the Committee) presiding.

OPENING STATEMENT OF CHAIRMAN PAUL S. SARBANES

Chairman Sarbanes. Let me call this hearing to order.
Today, we begin the first of 2 days of hearings on the
state of
financial literacy in the United States. We are very pleased to
have this panel with us. This panel had originally been
scheduled for September 20. But in view of the developments of
September 11, we shifted the subject to the financial markets
and the measures taken to assure their timely reopening and
functioning.
Actually, they reopened after only a few days of
interruption. And on its first day, the New York Stock Exchange
handled the largest volume of transactions in its history. And
I want to express my commendation to the three of you, Treasury
Secretary O'Neill, Chairman Greenspan, and Chairman Pitt, for
your expert contribution to that effort.
I know that they were very intimately involved and Chairman
Pitt I think was in New York for a good part of that week
before the reopening took place. That was a very impressive
accomplishment and I want to put that on the record this
morning.
We are going to depart a bit from the usual procedure.
Secretary O'Neill has a commitment on the House side which was
made some time ago and which he needs to honor. But he very
much wanted to be with us this morning because he has a keen
interest in the subject matter of the Committee's attention.
So, we are going to take Secretary O'Neill's statement and,
if he has time, perhaps ask him a few questions, before he
departs. And then we will go back to the normal course with
statements from the Members of the Committee and then we will
hear the testimony of Chairman Greenspan and Chairman Pitt.
So with that, Secretary O'Neill, we are very pleased to
recognize you. We appreciate your being with us and we
particularly appreciate your own keen interest in the subject
matter of the Committee's hearing this morning.

STATEMENT OF PAUL H. O'NEILL, SECRETARY

U.S. DEPARTMENT OF THE TREASURY

ACCOMPANIED BY: SHEILA BAIR

ASSISTANT SECRETARY FOR FINANCIAL INSTITUTIONS

Secretary O'Neill. Mr. Chairman, Members of the Committee,
I thank you so much for accommodating me in this way so that I
would have an opportunity to be here with you.
I do have a prepared statement of some length that I think
comprehensively covers the subject of the Committee's
attention. And rather than read through it, if I may, I would
just make a few comments and then see if you have a few
questions for me before I have to depart for the Ways and Means
Committee.
Chairman Sarbanes. The full statement will be included in
the record.
Secretary O'Neill. Thank you, Senator.
As you noted in your own opening remarks on financial
literacy and, more broadly, education, particularly the
foundation of education for every human being, is something
that I have come to care a lot about and to be involved in in
many different ways over the last 30 years.
Just to mention a few of those, during the period of 1989
to 1992, I was the Chairman of President Bush's 41's Education
Policy Advisory Committee and helped to formulate the national
education goals that were established in that time period.
During Governor Ridge's time in Pennsylvania, when I was in
Pennsylvania, I chaired the State education standards
committee. And through the whole period that I was in
Pennsylvania, I chaired a group of people at the local level
who were dedicated to the idea that every child can learn. It
is just a matter of our organizing ourselves to achieve that
purpose for every human being.
More directly to the subject of financial literacy, it is
more and more imperative, it seems to me, that every American
citizen be financially literate. This ties very well to my
notion that by the age of 10, every child should have the
ability to read and write and compute at a level that, if they
never saw the inside of a formal educational institution again,
they would have the foundation stones that, if they had the
will, would permit them, with access to a library, to develop
their brain power and their knowledge to the fullest possible
extent.
In order to do that, one needs to have all of the
foundation stones, which means reading and reading
comprehension and computational capability, and an ability to
express oneself in writing at a competent level.
I believe if we can--let me say better--when we reach that
objective, financial literacy will be what will come along
without special attention. In the meantime, we do have problems
I think in the subject of financial literacy with the
population that is adult, or nearly adult, because they have
not achieved or received these foundation skills in their
earlier years. This Committee and other Committees of Congress
have focused particularly and specifically on the issue of
financial literacy, I think appropriately so.
We in the Treasury Department have several efforts that we
are pursuing to help with the accomplishment of this objective.
And, as I say, for myself, education is the foundation of a
civil society and this aspect of education fits very neatly
into the legislation that was passed last year with the
President leading the charge, saying, no child should be left
behind.
I would make a plug for what I would consider to be a
subordinate idea to the President's no child left behind, which
is an idea that says, every child, one at a time. In my
experience in working on this subject at the local level, I
found that schools do not learn and classrooms do not learn,
the issue of learning and attaining knowledge that is necessary
to function as an adult human being, happens one at a time. I
believe we are not going to achieve the objective of no child
left behind until we recognize that fundamental issue, that
people learn one at a time, and we so organize ourselves to
assure that every child is learning and that we assess the
learning process on a very regular basis, so that where we are
not creating building blocks in a person's mind, we recognize
it early and not wait until a child gets to be 10, but
discover, as we now do, that 20 percent of them cannot read and
write and compute. At a national level, 20 percent of 10 year
olds cannot read and write and compute. It is not to say that
they cannot do it well. They cannot do it, period.
So it is obvious that we have very fundamental issues to
deal with. Financial literacy, in my judgment, should be
integrated into the basic learning process. And it is not too
early to start when we teach people how to add and subtract.
Mr. Chairman and Members of the Committee, with that, I
would be happy to take a few questions before I have to go.
Chairman Sarbanes. Well, we understand your time
constraints. Let me ask you one question and then I will yield
to some of my colleagues.
Senator Corzine and I wrote to you back in the summer when
we saw the announcement that the Department of the Treasury was
considering a financial literacy initiative and indicated that
we thought that was a very high priority. And in fact, Senator
Corzine got a very important amendment into the Education Act
with respect to providing financial literacy programs in the
school system.
One of the things that I have been very interested in is
these first accounts, trying to get the unbanked into the
banking system. That is not directly a financial literacy
issue, but if they become part of the banking system, I think
they would receive a lot of protections and benefits.
We have provided a substantial sum of money to try to get
first accounts going to serve low- and moderate-income
individuals. I
am interested in how the Treasury is doing in implementing that

program.
Secretary O'Neill. Senator, as I recall, the rules have
been issued and distributed at the end of December. We are
looking to beginning to make grants under that program banner
in the next 3 months.
So, we are moving ahead and we are very anxious to see how
this works. It has been an initiative shared by the Treasury
Department and you particularly and Members of this Committee.
And we are anxious to get it into place and see how it works.
Chairman Sarbanes. Good. Well, we intend to follow that
very closely and we look forward to continuing to work with you
on that.
Senator Shelby.

COMMENTS OF SENATOR RICHARD C. SHELBY

Senator Shelby. Thank you, Mr. Chairman.
Mr. Secretary, isn't accurate information, financial
information, essential to every economic decision made, whether
it is at the very high levels of finance or the low levels of
the man on the street or the woman on the street?
Secretary O'Neill. Yes, sir, no doubt about it.
Senator Shelby. And without that, financial literacy would
not matter, would it? You have to have accuracy. You have to
have truth.
Secretary O'Neill. It is necessary to know when you do not
have what you ought to have.
Senator Shelby. You could be the most literate person in
the world and still not be informed if there was one set of
information here and one set for you on the street.
Secretary O'Neill. That is certainly true.
Senator Shelby. And that should not be, should it?
Secretary O'Neill. Absolutely not.
Senator Shelby. Thank you, Mr. Chairman.
Chairman Sarbanes. Senator Dodd.

STATEMENT OF SENATOR CHRISTOPHER J. DODD

Senator Dodd. Thank you, Mr. Secretary, for being here.
I am going to raise this with both the other witnesses
later on, and my colleagues have heard me talk about this over
the years, and it relates to the literacy issue. That is, among
young people and credit cards.
Chairman Sarbanes. Yes.
Senator Dodd. I have tried on I do not know how many
occasions to adopt some legislation, most recently, I think,
this past year, that would require that if you are under 21,
when you demonstrate an ability to pay or have someone cosign
or, third, either one of these things, to show that you have
taken some literacy course in what the responsibilities of debt
are.
The statistics are still pretty stunning. I have them right
here. Seventy-eight percent of college students have at least
one credit card. The debt now is almost $3,000. It has gone up
46 percent since 1998. Nine percent of students carry balances
of debt in excess of $7,000, almost 10 percent. We had the
number of bankruptcies declared by people between the ages of
18 and 25, went from 60,000 in the 1990's to 118,000 in 1999.
Seven percent of all personal bankruptcies are taken by
people under the age of 21. That is stunning, those statistics,
and they seem to be getting worse.
Again, I do not want to deny anyone a credit card. All I am
suggesting in the first two instances, you either demonstrate
an ability to pay, which any older person would have to do,
cosigned, or that you would be required to have some knowledge
of credit.
I wonder if you might just comment on that, without seeing
the specifics of the bill. I am not asking you to endorse a
bill, but just to comment on the general proposition.
Secretary O'Neill. For all of us who have children or
grandchildren, who have gone through a learning experience with
credit cards, we can relate to some of the statistics that you
are talking about.
You watch young people go through their own learning
experience. It is so easy to turn up a card and to end up with
unserviceable debt. One would wish the young did not have to
learn lessons we have already learned for ourselves. But it is
a very complex issue because, at the same time, we are saying,
well, maybe children or young people should not have access
without some special provisions until they are 21 years old.
Eighteen year olds are serving in Afghanistan.
So there are certain times and rights of passages, I
suppose. And for me, at least, the question of what the Federal
Government should do on behalf of we the people in setting
demarcation lines and limits on individual freedom, is really a
complicated issue.
And while I can relate to the concern that you are
expressing that, not just young people, but many people, have
an inadequate financial literacy and abusing and, in fact,
destroying, their creditworthiness, are really complicated
issues.
I think at the Federal level, we need to be very careful
about how much we interfere with the rights of individuals to
make their own decisions, including ones that turn out not to
be everything we would hope they might be.
Senator Dodd. To be continued, I guess. Thank you.
Chairman Sarbanes. Senator Bennett.

STATEMENT OF SENATOR ROBERT F. BENNETT

Senator Bennett. Thank you, Mr. Secretary, and thank you
for your testimony, both written and oral.
Let me just share with you an experience I had when I was
teaching a class on financial management. After I had gone
through the formal presentation and opened the floor for
questions, a woman said to me, I just had a windfall of about
$1,000 that I was not expecting. I have this money. Tell me an
investment that I can put this in that will be worthwhile.
I said to her, do you have any credit card debt? She said,
yes. I said, all right. I have an investment that will pay a
minimum of 16 percent, that has absolutely no downside risk
whatsoever, and the 16 percent is guaranteed.
She said, well, that is wonderful. What is it? I said, pay
off your credit card bill. She said, no, no, no, no. I am
making my payments on the credit card. But I want this money to
grow. I want it to be something.
We had this exchange and I could never get her to accept
the idea that paying off her credit card was a good investment.
It becomes a semantic kind of thing. We think of an investment
and money growing as a good thing and we think of our credit
card payments as the regular course of doing business, and we
never quite get the understanding that paying off debt at a
certain level, certain carrying cost, is an investment at that
level. Whereas, debt at a lower level, say a mortgage and the
benefits you are getting out of it, tax-wise and other, with
rent, is a good kind of thing.
I just leave that with you to plug into whatever
information you may be putting out because most Americans do
not speak the language that leads them to understand where
their financial interests will best be served.
Secretary O'Neill. Senator, I think your example
illustrates in a very important way how much this issue of
financial literacy is ingrained into decisions that people make
every day in their lives all over this country. And it is why
this is such a worthy subject that you all have undertaken the
work on. I am committed, as I am sure my friends here are, to
helping in every way that we can to do our part to raise the
standard of financial literacy for the American people.
Mr. Chairman, I must go. I thank you all very much for
letting me lead off.
Chairman Sarbanes. Let me just get Senator Corzine, who has
had a keen interest and who wrote you this letter----
Secretary O'Neill. I will explain to the Ways and Means
Committee, Senator Corzine, why I am late.
[Laughter.]

STATEMENT OF SENATOR JON S. CORZINE

Senator Corzine. I will be brief. I would hope that we
could work together following on a concept that you talked
about with regard to education, which I think most of us would
put solidly on the same side that you would be on basic
education.
I think that there is a need for curriculum and real
proactive
educational process, or otherwise, people do not understand
what
interest rates are, compound interest, how to put together tax
returns and how to deal with mortgages.
I was a little concerned that you were arguing that the 10
year old who learns how to read and calculate will
automatically get the result. That does not seem to be the case
even among students that are having adequate educational
experiences with regard to reading and arithmetic and other
issues. So are you familiar with some of the statistics of how
poorly all of our students do with regard to some of these
various fundamental issues?
Secretary O'Neill. Indeed, I am. And I pointed out, one of
the confounding things in all of this is that the national
statistics show that 20 percent of our children cannot read and
write and compute at all. If they cannot read and write and
compute at all, teaching them financial literacy when they are
12 does not seem like a very rewarding process to me.
So, I was making the case that we need to establish the
basic things. And I would say this. In my own experience in
looking at the data, I am absolutely convinced that every 10
year old has the capability to learn to add and subtract and do
multiplication and division in their head at 12 times levels.
With those foundations, it is possible to understand all the
rest of esoteric mathematics. But without that foundation, we
are not going to get there.
What I am saying is, I think it is important that we
integrate financial literacy concepts into the regular
curriculum and not treat it like a separate subject. It can be
part of reading. It can be part of elementary arithmetic,
building a foundation up, so that, in fact, by the time a child
finishes the 8th grade, they should have most of the
foundations to understand most of what one would consider to be
financial literacy, including the credit card example that
Senator Bennett gives. And then I would say just one more
thing. If you include in financial literacy all of our citizens
understanding the tax code, I am not sure I agree with you that
that is possible.
Senator Corzine. All I would cite is 82 percent of high
school seniors in a 2001 survey failed a 13 question personal
financial quiz. I am sure that that encompasses the 20 percent
that you are talking about that did not get the basic skills.
But it also includes a whole wealth of kids who may have those
fundamental skills. And so, I think that question of whether
you have particular curriculums or whether it is embedded is a
fair debating point among educators.
Secretary O'Neill. The tax code was a joke. I am sorry.
Chairman Sarbanes. Well, Mr. Secretary, I was just going to
say, as you depart, maybe Senator Enzi wants to leave you with
a final thought.

COMMENT OF SENATOR MICHAEL B. ENZI

Senator Enzi. Recognizing the importance of the Ways and
Means Committee, just tell them that I let you go, even though
I was the second person here.
[Laughter.]
Secretary O'Neill. Thank you all very much. It was nice to
be with you.
Chairman Sarbanes. Thank you. I understand Sheila Bair is
going to stay behind. So if we have further questions--she is a
very worthy stand-in.
Secretary O'Neill. She is a wonderful public servant and
she is really on top of these issues in great detail. So, I
commend her to you and I am sure that she will give you great
answers to any questions that you may have for Treasury.
Chairman Sarbanes. Thank you very much, Mr. Secretary.
Secretary O'Neill. Thank you.
Chairman Sarbanes. We look forward to working with you on
this issue.
I will say to the Committee Members, we will revert to the
regular procedure. I have a short statement that I would like
to make here at the outset, and then I will recognize other
Members and then we will go to Chairman Greenspan and Chairman
Pitt.
There is a vote scheduled at 10:30 a.m., so, I would hope
that we can move along and hopefully get the testimony in
before that time. We would have to adjourn briefly and come
right back.
As I indicated at the outset, we had originally scheduled
this hearing for September 20. It was obviously put off. It
seems always things are happening that could warrant putting it
off, and I do
not know that this circumstance is any different right now. But
I
wanted to press ahead.
I would say to my colleagues that I hope we can stay away
from monetary policy in the question period, particularly with
Chairman Greenspan. The Chairman is scheduled to come back
before the Congress in just a few weeks, both House and Senate,
to present the Fed's semiannual monetary policy report to the
Congress. And of course, we will have a hearing here at the
beginning of next month because the Chairman will go to the
House side first devoted to that subject. So, I hope we can
focus with both of the Chairmen on the financial literacy.
And I would also say to my colleagues, a week from today,
the Committee will begin the first in a series of hearings on
the issues raised by Enron, but not only by Enron. But other
things that have occurred in the corporate world.
We will have a series of hearings stretching through the
rest of this month and into next month. We intend to go into it
in a very thorough and comprehensive way. We will get the
benefit of a lot of very expert opinion. And we hope at the end
of that process to be able to move ahead with what we think
will be an appropriate work program.
I want to say just a few words about the financial literacy
issue that is before us today. I think this is very important.
It is by no means a magical solution. It will not solve all the
problems that confront consumers with respect to financial
decisions. I frankly think that you need a framework, which
also includes strong legal protections, vigorous enforcement,
and best industry practices with respect to the availability of
responsible credit. In fact, I agree here with a three-pronged
approach, which was outlined to the Committee last year by
Roger Ferguson, the Vice Chairman of the Federal Reserve Board,
at his confirmation hearing, when he said, ``legislation,
careful regulation, and education are all components of the
response to these emerging consumer concerns.''
There is substantial evidence that Americans do not have an
adequate basis for making sound decisions about their personal
and household finances, especially given the myriad choices
they face.
Now, Senator Shelby touched on an important point and that
is, you may be very financially literate, but if you are not
given the proper information, you cannot do very much.
But a number of organizations have sought to assess the
level of Americans' grasp of financial matters, and their
survey evidence consistently shows very substantial gaps.
We know that there are some costly consequences of
financial literacy: Increasing reliance on the high-cost fringe
financial sector by men and women who find themselves closed
out of mainstream banking institutions.
Millions of people in this country are without bank
accounts. They are, in effect, unbanked, a status which usually
carries with it heavy financial penalty. To conduct even the
most essential transactions, like paying bills or cashing
paychecks, unbanked Americans must rely on financial operations
which have large and often hidden fees. Furthermore, without
access to banking facilities they face serious obstacles to
saving and accumulating assets, and to building credit.
The growth of various predatory lending practices, when
people are persuaded to borrow on terms they do not fully
understand and cannot afford. Single-premium credit life, yield
spread premiums, various pay-day lending, all contribute to an
environment in which consumers are very vulnerable to
overcharges and to hidden costs.
There is an issue that I hope to develop in this Committee
at some point and that is the exploitation of remittances.
Millions of Hispanic and, indeed, other workers support
families in their home countries by sending a portion of their
earnings home in the form of remittances. This has long been a
common practice among newly-arrived Americans. Today's workers,
however, are paying very high fees for the service, as much as
20 percent in some cases, and they are given an exchange rate
which is both highly disadvantageous and often not disclosed.
The amounts are quite large taken in the aggregate. And I think
it warrants examination. In fact, the return of a larger
percentage of these remittances to the home country would be a
form of economic assistance that would amount to a considerable
amount of money once one looked at the figures.
If financial literacy is important in the short-term, as we
go about the business of our daily lives, I think it is also
critical to
our future. It is constantly asserted that Americans are
spending
too much on consumption now, with little thought to the years
ahead. America's personal savings rate has averaged an anemic
1.6
percent for the last year, while consumer debt has grown at a
much faster rate.
Secretary Summers actually saw a benefit of an emphasis on
financial literacy that might result would be to raise the
savings rate in the United States. That is a macroeconomic
benefit, which, if it were to occur, I think would be very
significant.
We also know that the largest generation in this Nation's
history is approaching retirement. One example of the
challenges facing us with respect to retirement is the status
of women who face particular challenges as they grow older.
Millions of women, either because they have been widowed or
divorced, find themselves in charge of their household's
finances at or near retirement age, without having had
significant financial education. At that point, they are
expected to make very complex financial choices which will
affect them throughout their retirement.
These hearings, which have been long in the planning stage,
take on a special urgency in the context of our present
circumstances. The economy is in recession. Its future course
remains unclear. Recent events in the markets threaten to
undermine the confidence on which the functioning of the
markets depends.
I believe that it is long past time for the public and
private sectors to come together in a national strategy to
raise the level of financial education in our country. These
hearings are a first step in that direction.
Tomorrow, we will hear from a number of organizations that
have been working to enhance financial literacy. But today, of
course, we begin with our three public-sector witnesses who I
think are uniquely qualified to examine this question. I look
forward to hearing from both of them. Chairman Greenspan has
actually on a number of occasions highlighted the importance of
this issue. Last year, in an address to the Federal Reserve's
Consumer Affairs Research Conference, the Chairman stated:
``Efforts to increase awareness of, and access to, information
that promotes financial literacy are increasingly seen as
necessary to ensure that consumers can meet their immediate
obligations, as well as achieve their broader goals of buying a
home, funding higher education for themselves or their
children, and preparing for retirement.''
And, of course, Chairman Pitt's agency, the SEC, bears a
unique responsibility now, when, for the first time in our
history, over half of our population qualify as investors,
either directly or indirectly. Many of these people have had
little preparation for these financial responsibilities which
they now confront.
So, I thank the witnesses for appearing this morning and I
yield to Senator Shelby for any statement he may have.
Senator Shelby. Thank you, Mr. Chairman. I will be brief.
First of all, I want to thank you for pursuing this
hearing. I think it is very important. I think it is important
for all of us to recognize what we can and cannot hope to
achieve when considering a topic as broad as financial literacy
here.
I think we can find ways to better inform American
consumers and investors so that they are more likely to achieve
their financial goals in the marketplace.
But we cannot eliminate risk from the world. Fundamentally,
our market system requires the existence of risk and reward to
function. In order for markets to efficiently operate,
individuals must be able to properly identify and assess the
risks and the rewards. Without timely disclosure of the
appropriate information, analysis is impossible. Decisions are
merely guesses.
Furthermore, where criminal activity occurs and little is
done to prevent or appropriately punish it, people are not true
market participants. Rather, they are unknowingly playing a
rigged game that they can never win at any level. I believe we
must recognize that individuals are responsible for their
choices. Recognizing this, however, does not mean abandoning
people in the marketplace. Instead, it requires the complete
opposite.
Congress must ensure, Mr. Chairman, that markets provide
full and timely disclosure and ensure that the law is actively
and uniformly enforced. Under these conditions, the market will
provide the greatest benefits to all of us and then financial
literacy will take care.
Thank you.
Chairman Sarbanes. Thank you very much.
Senator Dodd.
Senator Dodd. Thank you very much, Mr. Chairman. And again,
thanks to our witnesses.
It is going to be an important 2 days. It is not going to
probably attract the same degree of attention that other
hearings focusing on Enron specifically will in the short-term.
But in the long-term, what we do on this subject matter may
have as much to do with minimizing the kinds of problems that
at least we know about now in the Enron situation from
occurring again. So, Mr. Chairman, I think this is extremely
worthwhile. It is very forward-looking.
Senator Corzine mentioned the statistic of 82 percent of
high school seniors--I think it is seniors--that fail the basic
quiz on what interest rates were and credit cards and the like.
There is a series of data and statistics, Mr. Chairman,
that you have assembled. I think the Committee staff assembled
it, which I am going to ask unanimous consent be made a part of
the record. I assume it would be, anyway. But some of them are
just stunning in their revelation. There is a chart that
indicates where they have come from.
I would certainly agree with Senator Shelby and others.
Obviously, having accurate information is absolutely critically
important. But when you read that two-thirds of investors
believe that there is an agency some place, or an organization
that ensures you against losing money in the stock market, you
get some idea of the gap that exists, even with people who are
making investments.

So these numbers are terribly important to look at and be
aware of. I mentioned to the Secretary of the Treasury the
numbers relating to credit cards and, again, credit card debt.
I realize that there are a lot of factors for this, but it is
just alarming to me when I see the tremendous increase in the
amount of consumer debt in the last few years.

In 1995 through 1998, the median amount of family debt
jumped from $23,000 to $33,000, an increase of 42 percent in 3
years. Debt service payments constitute approximately 14
percent of Americans' disposable income. And the ratio of debt
to after-tax income in the average household was 85 percent.
Today, it is 104 percent.

Going on down with the numbers, Americans are more in debt
to credit cards than they are to education obligations. And the
numbers I mentioned earlier about young people--again, I
realize the tremendous value that credit cards provide to
people who would not have been able to become consumers without
that kind of assistance, but it is getting out of hand, it
seems to me.

I do not have any quick solution for you, but it seems to
me that the subject of literacy and consumer debt are not
unrelated. We have to find some way to connect these, and we
need to do something more than just warning people about it. It
seems to me that we need some guideposts here about what people
can do, what credit card companies can do, what steps they
ought to be taking to minimize that risk is important.

I think that these are extremely important hearings and I
look forward to the testimony of both of these very powerful
witnesses.

Chairman Sarbanes. Thank you.

Senator Bennett.

Senator Bennett. Thank you, Mr. Chairman. I will follow
your admonition to avoid talking about monetary policy with
Chairman Greenspan.

Chairman Sarbanes. It is a great temptation, I realize
that.

Senator Bennett. It is a great temptation. But there is a
temptation that I cannot resist, and everything has been said
about consumer education that I think needs to be said, and I
will not go on to repeat it.

I am concerned about the level of economic literacy in the
Congress. We are having a debate about stimulus packages, about
what stimulates the economy and what does not.

Yesterday, Robert Bartley had an editorial in the Wall
Street Journal, quite frankly, on this issue of Keynes and
Phillips Curve and other issues which dominate the policy
debates around here.

I know that the Nobel Committee seems to alternate between
giving a Nobel Prize to a very conservative economist and the
following year, a Nobel Prize to a very liberal economist, so
they are hedging their bets that no matter who comes out, the
Nobel people will say that it was a Nobel Laureate that led us
to the promised land, either way.
[Laughter.]
And if Chairman Greenspan could find his way clear to
comment a little on the question of economic education in terms
of fiscal policy, I would be very grateful. If he decides to
hide behind your
caveat and say, we will deal with that later, I would
understand
that as well.
Thank you, Mr. Chairman.
Chairman Sarbanes. I am reminded of President Truman's
story that he wanted a one-armed economist. And they asked him
why. He says, I am tired of getting this, on the one hand and
on the other hand advice.
[Laughter.]
Senator Corzine.
Senator Corzine. Thank you, Mr. Chairman. I welcome the
witnesses and thank them for their thoughtful presentations
that they will be making.
This is an issue that I think is fundamental to the sound
workings of free markets. If you are committed to the economic
system that we have and that has prospered in America, I think
it has to be built on an understanding of the workings of it.
I am extraordinarily troubled by the kinds of statistics,
level of understanding among our students. But, frankly, it is
a life-long issue. Those most vulnerable in our society appear
to pay the highest price for lack of financial literacy. I
think the Chairman cited some of those statistics on
remittances and I think you can see 9 and 10 percent charges
for cashing checks for the unbanked. And then we find quite
frequently that predatory lending that comes with refinancing
homes of seniors and others that are often cited.
So, we have a problem that faces our total population. I
think it begins with a solid curriculum as one begins their
educational process. A lot of us went back to business school
so we could understand what compound interest was about and
other kinds of issues. And I just do not think this is a
priority and we end up with results that I think make Americans
more vulnerable than would otherwise be the case.
So, I think this hearing, it is terrific that we are
spending the time on this. I hope we can flesh it out in
something that is in practical terms, other than saying that
people ought to inform themselves more, because I think that
this is something that, not unlike science, not unlike other
complicated issues in life, needs some detail in the
educational process, and adult education would be fine, too. I
look forward to it. I have a longer statement that I would like
to put in the record that it is terrific what we are doing.
I also want to thank Senator Enzi and Senator Akaka for
their help on the financial literacy issue that we included in
the ESEA education reform bill.
Chairman Sarbanes. Thank you. The statement will be
included in the record.
Senator Enzi.
Senator Enzi. Thank you very much, Mr. Chairman. And I do
thank you for holding this hearing. I know that it was planned
months ago and was to be held at about the time that the
September 11 events happened.
We did have the same panel before us at that time. But our
topic changed to stock market stability. And I think it made an
impact, thanks to the caliber of the people that were able to
be at that hearing. I think it made a difference in convincing
America that the stock market was still capable of functioning
and that it still would do a good job.
It is imperative that we do focus on financial literacy.
And it is a little different area of discussion than you
normally get to do, or than we normally get to do. But it is
very basic to the future of our country.
As Senator Corzine mentioned, we did an amendment to the
Elementary and Secondary Education Act, no child left behind,
that allowed flexibility so that money could be spent for
financial literacy. I think that is a good first step.
I have taken a look at some of the education plans or some
of the courses that are being provided in schools, and one of
the distressing things that I found was that, while they
allocate the students a certain amount of money to work with,
say $2,000 a pay period, one of the things that they usually
forget to do is take out withholding and Social Security and
Medicare first. And that leaves that as a much later literacy
shock for those kids. They do need to learn at an earlier age
that death and taxes are the only things that are sure.
Evidently, the programs that are in place are not making it
because we have this huge college students' credit card debt. I
think it is an average of $2,748. That translates into some
adult problems after they get out of college.
I used to be the mayor of a boom town. This was 25 years
ago. And the people that come to a boom town are the young
people who do not have jobs. They leave their source of normal
financial advice, which are their parents--now they do not
always take that advice, but the advice is often given, and it
is still something that they have to mull through their minds.
These kids came to Gillette and made an average of about
$60,000 a year. That was far more than their parents had ever
dreamed of making. What we discovered was that you could go
broke on $60,000 a year. This was in the 1970's, and at that
time, $60,000 was worth a lot more.
We tried to find a way to get some financial literacy
programs going, and it is hard to find a credible source. The
ones that were willing to do it were the churches. But the
churches are the ones who are always asking for money.
The banks would be a good source, but they are looking for
bigger customers, usually, than the people who are in financial
difficulty. So, I will be asking to see what you think would be
good sources of advice for these people. Now, I am encouraged
by some programs that are happening.
In my home State, the Wyoming Community Development
Authority has joined with Fannie Mae and they are educating
first-time homebuyers. And they are doing this by distance
education. They are having a lot of applicants--it is a
relatively new program--but they are about to have their
thousandth customer.
Incidentally, the financial institutions give a little
break in the interest rate if people take this financial
literacy course on how to buy a house. It gets into several of
the other aspects of financial literacy as well.
Wyoming students have been doing well on tests. Eighty-two
percent of school seniors fail nationally. We have a much
better rate in Wyoming. It still can be improved quite a bit.
And of course, the Enron situation shows that people need to
have a little bit more financial literacy when it comes to
dealing with their 401(k) plans, a little reminder not to put
all the eggs in one basket. Other financial literacy lessons
will be coming out of hearings that will be held in the next
several months. So, I think this is really a prime area of
investigation that we need to do and I am so pleased that we
have such a distinguished panel to do it.
I thank the Chairman for having this hearing.
Chairman Sarbanes. Thank you, Senator Enzi.
Senator Stabenow.

STATEMENT OF SENATOR DEBBIE STABENOW

Senator Stabenow. Well, thank you, Mr. Chairman, for
holding this hearing. And to our witnesses, Chairman Greenspan
and Chairman Pitt, welcome.
I share along with all of my colleagues a great interest
and belief that this is a critical, long-term issue and part of
the solution as we move forward on a number of fronts.
Last December, back in my home State of Michigan, I
attended an event at Eastern High School in Lansing, Michigan,
where the Michigan Jump$tart Coalition for Personal Financial
Literacy released the findings of a statewide survey in
conjunction with the National Institute for Consumer Education,
and it was much like what we have been hearing today in terms
of the numbers. I am very pleased to see that the Michigan
legislature in a bipartisan way is moving forward on literacy
education. I commend them.
One of the interesting findings in the survey that was
released back in December in Michigan was the fact that
students who
participated in the Stock Market Game, which is a national in-
vestment game, did better in the survey than people who had
entire courses in money management or even an entire course in
economics.
And I say that only because I believe that from the
standpoint of learning, that we need to be looking at
interactive learning,
reality-based learning and that, clearly, on the survey,
students were learning much more through an interactive
approach than they were through other more traditional classes
that had been
developed.
I also wanted to recognize, as others have, Freddie Mac for
their ``Don't Borrow Trouble'' campaign, which they brought to
southeastern Michigan, to the Detroit area.
Mr. Chairman, I know that you have been a real leader and
at the forefront of that and I want to thank them because the
efforts of Freddie Mac, as well as Fannie Mae, their
counterpart, I think are critical in tackling abusive lending,
especially as these two companies move increasingly into the
subprime lending market.
But we have some real challenges for adults, as colleagues
have raised, as well, in addition to the next group of adults
as our children are moving up through the system.
Mr. Chairman, I would ask that my entire statement be
placed into the record and I again welcome those who will be
speaking to us in the next 2 days and I hope that we can
develop some recommendations as well as, in the long run, in
predatory lending some legislative actions that will help
address those critical issues.
Chairman Sarbanes. Thank you very much, Senator Stabenow.
We will include your full statement.
Senator Akaka.

STATEMENT OF SENATOR DANIEL K. AKAKA

Senator Akaka. Thank you, Mr. Chairman, for convening this
first hearing on the state of financial literacy and education.
And I want to add my welcome to Secretary O'Neill, Chairman
Greenspan, and Chairman Pitt to this morning's hearing. I look
forward to their views on this important subject.
Mr. Chairman, I wish to make a brief statement and ask that
my full statement be included in the record.
Chairman Sarbanes. Your full statement will be included in
the record.
Senator Akaka. I became actively involved in this issue in
1999, after reading a study on financial literacy conducted by
the National Council on Economic Education. The disturbing
results of that study caught my attention. In a basic economics
test, half of the adults and two-thirds of the high school
students received failing scores. More than half of the
students and adults did not have a basic understanding of
economic concepts such as money, interest rates, and inflation.
After reviewing these test results, I investigated further the
lack of financial literacy in our society.
Americans of all ages and backgrounds face increasingly
complex financial decisions as members of the Nation's
workforce, managers of their families' resources, and voting
citizens. Many find these decisions confusing and frustrating
because they lack the tools necessary that would enable them to
make wise, personal choices about their finances.
Increased education about basic economic concepts will help
people to make better financial decisions and increase
opportunities for participation in today's global economy. All
citizens need to
be prepared, starting from youth, to make informed decisions
re-
garding fundamental undertakings such as purchasing a first
home, financing a college education, and saving for a
comfortable retirement.
The reauthorization of the Elementary and Secondary
Education Act included the Excellence in Economic Education Act
as an amendment, which I introduced along with my colleagues,
Senator Corzine and Senator Enzi. This legislation will
significantly improve the knowledge of fundamental, yet
critical, economic principles among our country's young people.
The measure aims to
increase student knowledge of, and achievement in economics by
providing our Nation's teachers with the tools to enhance
teaching methods of economics. This legislation encourages
economics-
related research and development, dissemination of
instructional
materials, and replication of best practices and programs. It
increases private and public support for economic education
partnerships between schools and local businesses and private
industry.
I was also pleased, Mr. Chairman, to support another
financial literacy amendment sponsored by Senator Corzine that
was also included in the legislation.
Today's hearing is the beginning of a national dialogue on
financial literacy and education. I applaud the efforts of
Secretary O'Neill, Chairman Greenspan, and Chairman Pitt to
bring attention to this issue, and I look forward to your
recommendations on how to increase financial literacy.
Again, I want to thank you, Mr. Chairman, for convening
these hearings on financial literacy. Thank you very much.
Chairman Sarbanes. Thank you, Senator Akaka, and thank you
for your initiatives in this field, which have already made a
significant contribution.
Senator Carper.

STATEMENT OF SENATOR THOMAS R. CARPER

Senator Carper. Thank you, Mr. Chairman.
Gentlemen, welcome. We are delighted to have you back
before us and thank you for coming today.
A long time ago, I used to be State Treasurer for Delaware,
at a time when we had the worst credit rating in the country,
closed out of the credit markets, could not borrow money, could
not balance our budgets. We were a mess. I became a State
Treasurer when I was 29 years old. It was a lot of fun.
[Laughter.]
Today, we have a new State Treasurer. His name is Jack
Markell. He does not have to worry about any of those things.
And what he is focused on is financial literacy, and taking the
problems to a lot of our schools where we focus big time on the
three R's--reading, writing, and arithmetic. And he has really
done a nice job in helping to introduce a fourth R in our
schools. I call it relevance. Why is it relevant that we know
how to read, write, and do arithmetic? And one of the reasons
is so that we can be financially literate and make some wise
decisions about our investments in our future.
I watched in the wake of Enron and others have alluded to
this. There are some real smart people who did not really know
what was going on there. Some of them were folks at big
accounting firms. Others were analysts at top Wall Street
firms. We had some people at rating agencies who really did not
know what was going on very well.
They are well trained. They know those three R's, and the
fourth one as well of relevance. But they missed the signals
and missed the boat for a lot of people.
I do not know that we can ever hope to work with kids and
their parents in schools and communities in Delaware so that
they can catch what those other folks missed. I think that is
probably the triumph of man's hope over experience. But we can
sure do a better job and we are trying to do it in our own
small way in our little State. And I am encouraged to hear what
others are doing, too.
I do not know to what extent this is one that Congress
needs to focus on, to work on, but I think we all can do
something and we ought to do something. And I am encouraged by
your presence here and your attention to these matters that we
are all going to do our share.
With that having been said, Mr. Chairman, I would like to
ask that the rest of my statement be added to the record and we
will hear from the folks that we really want to hear from.
Thank you.
Chairman Sarbanes. It will be included in the record.
Senator Schumer.

COMMENTS OF SENATOR CHARLES E. SCHUMER

Senator Schumer. You mean me, Senator Carper?
[Laughter.]
Senator Carper. No, I do not.
[Laughter.]
Senator Schumer. But I thank you. I know we are trying to
move along here, so----
Chairman Sarbanes. Senator Carper did not realize that you
had arrived.
[Laughter.]
Senator Carper. If I had, I would have acknowledged it.
Senator Schumer. Exactly.
[Laughter.]
Anyway, thank you. First, I want to thank you, Mr.
Chairman, for having this hearing. It is such an important
issue. It is not a sexy issue, but, boy, oh, boy, is it needed.
I am so glad that you have made this a major effort of the
Committee this year and I am thankful that we have such
distinguished people at the table for the same reason.
I guess I do not think we have assessed, at any level, what
our education ought to be. I would like to know, for instance,
why financial literacy should not be part of the core
curriculum at all of our high schools.
Much of the work of this Committee is because people do not
have financial literacy. The Chairman has been doing a great
job on predatory lending. The deeper and deeper you get into
predatory lending, a lot of the problem is that people just are
so afraid to deal with the bank on a mortgage, that they go to
some scoundrel who says, I will package the whole thing for
you. And they do not even realize the higher interest rates and
all the other problems that occur.
Credit card borrowing--again, same problem. People just do
not realize it. And this affects their lives daily. Our
financial world has gotten so complicated, not just for
mathematicians or economists, but for average folks. And our
school curriculum has done nothing to catch up with it.
I would like to know why this course is not required either
in addition to the high school curriculum, or tell me, if they
do not have room, is it more important to know trigonometry or
know financial literacy? I remember side, angle, side, or
cosigns and tangents. And it has not affected my life much, I
do not think.

[Laughter.]
At least as best I know.

[Laughter.]
And you know, a general broad education is important for
everybody. But there is such a crying need for this kind of
education, that I think we ought to do a real assessment.
It seems to me that in our pantheon of values and what we
want our high schools to teach, this is left out and lots of
other things are put in that may be important, but seem to me
not to be close to as important as this.
It is probably not the role of our Committee or even
Washington, except in certain ways to prod. I am not sure of
that. But I would just like to urge all of our high schools to
consider making financial literacy a mandatory course.
With that, Mr. Chairman, I yield back my time.

Chairman Sarbanes. Thank you very much, Senator Schumer.

Chairman Greenspan, we would be happy to hear from you.

STATEMENT OF ALAN GREENSPAN, CHAIRMAN

BOARD OF GOVERNORS OF THE FEDERAL RESERVE

Chairman Greenspan. Thank you very much, Mr. Chairman and
Members of the Committee.
I am pleased to be here this morning to discuss the
importance of improving financial literacy and learning for
consumers.

Chairman Sarbanes. Mr. Chairman, I think if you could draw
that microphone in a little closer, it would be helpful.

Chairman Greenspan. Throughout our banking history, we have
seen significant adjustments to enable markets to respond to
the demand for services. Structural changes in recent years
have heightened competition, encouraging market efficiencies
that continue to help drive down costs and foster the emergence
of increasingly diverse and highly specialized organizations.
These organizations provide consumers with increased access to
a variety of credit and saving instruments.
For an increasingly complex financial system to function
ef-
fectively, widespread dissemination of timely financial and
other
relevant information among educated market participants is
essen-
tial if they are to make the type of informed judgments that
pro-
mote their own well-being and foster the most efficient
allocation of capital.
Indeed, surveys repeatedly demonstrate a strong link
between education and the use of new financial technologies.
For example, data from the Federal Reserve's Survey of Consumer
Finances suggest that a higher level of education significantly
increases the chances that a household will use an electronic
banking product. Specifically, in 1998, the typical user of an
electronic source of information for savings or borrowing
decisions had a college degree, a level of education currently
achieved by only about a third of American households.
Overall, the most recent data from the Survey of Consumer
Finances exhibit a mixed picture of the financial status of
households, providing evidence that we need to reach out to
those who have not been able to participate fully. For example,
while the
median real net worth for all families increased 17\1/2\
percent between 1995 and 1998, this trend did not hold where
the head of the household had a high school level of education
or less, family earnings were less than $25,000 annually, or
the ethnicity of the respondent was nonwhite or Hispanic.
Through 1998, we found that families with incomes below $25,000
did increase their direct or indirect holdings of stock, and
more reported that they had a transactions account. However,
they were less likely to hold nonfinancial assets, particularly
homes, which constitute the bulk of the assets for those below
the top quintile according to income.
In considering means to improve the financial status of
families, education can play a critical role by equipping
consumers with the knowledge required to make wise decisions
when choosing among the myriad of products. This is especially
the case for populations that have traditionally been
underserved by our financial system. In particular, financial
literacy education may help to prevent vulnerable consumers
from becoming entangled in financially devastating credit
arrangements. In the quest to stem the occurrence of abusive,
and at times illegal, lending practices, regulators, consumer
advocates, and policymakers all agree that consumer education
is essential to combating predatory lending. An informed
borrower is simply less vulnerable to fraud and abuse.
Financial literacy can empower consumers to be better shoppers,
allowing them to obtain goods and services at lower cost. This
effectively increases their household budgets, providing more
opportunity to consume or save and invest. In addition,
comprehensive education can help provide individuals with the
financial knowledge necessary to create household budgets,
initiate savings plans, manage debt, and make strategic
investment decisions for their retirement or their children's
education.
While data to measure the efficacy of financial education
are not plentiful, the limited research is encouraging. A
recent study by Freddie Mac finds that homebuyers who obtain
structured homeownership education have reduced rates of loan
delinquency. Similarly, an evaluation conducted by the National
Endowment for
Financial Education on its high-school-based programs found
that participation in financial planning programs improved
students' knowledge, behavior, and confidence with respect to
personal finance, with nearly half of participants beginning to
save more as a result of the program.
These findings underscore the importance of beginning the
learning process as early as possible. Indeed, in many
respects, improving basic financial education at the elementary
and secondary school level is essential to providing a
foundation for financial literacy that can help prevent younger
people from making poor financial decisions that can take years
to overcome. In particular, it has been my experience that
competency in mathematics--both in numerical manipulation and
in understanding its conceptual foundations--enhances a
person's ability to handle the more ambiguous and qualitative
relationships that dominate our day-to-day financial
decisionmaking. For example, through an understanding of
compounding interest, one can appreciate the cumulative benefit
of routine saving.
Some school systems have introduced financial management
classes as part of their high school curricula and many
employers are taking up the challenge as well. At the Federal
Reserve Board, for example, interest in financial education
prompted an employee committee to hold a seminar on financial
planning strategies, and our Consumer and Community Affairs
staff hosted educational programs for Federal Reserve
employees, providing information on qualifying for a mortgage,
managing debt, and budgeting.
Both individually and through longstanding partnerships
with a variety of local, regional, and national organizations,
each of the 12 Federal Reserve Banks and the Board provide
extensive information on these topics to a wide range of
audiences, including school-age children, low- and moderate-
income families, and minority and immigrant populations. The
scope of these activities ranges from the sponsorship of
competitions on economic principles for high school students
and workshops on wealth-building strategies to the development
of computer-based tools for understanding the underlying
considerations for mortgage loans and creating household
budgets and savings plans.
The Federal Reserve, thus, has a continuing interest in
measur-
ing the effectiveness of financial literacy approaches. For
example, we hosted a forum highlighting best practices in
credit education and we have included studies that evaluate the
impact of such training initiatives in our call for papers for
the Community Affairs Research Conference scheduled for the
spring of 2003.
Additionally, our Community Affairs and Public Information
Offices have embarked on a national initiative to highlight the
importance of financial literacy and heighten the visibility of
economic education programs.
In closing, Mr. Chairman, let me simply reiterate that the
pace of technological change and competitive pressures can only
increase. Building bridges between community organizations and
our educational institutions and private business will be an
essential aspect of our efforts to increase familiarity with
new technological and financial tools that are fundamental to
improving individual economic well-being. And the success of
such efforts will have a
significant bearing on how well prepared we are to meet the
challenges of an increasingly knowledge-based economy.
Thank you, Mr. Chairman. I would appreciate it if my full
remarks are included in the record.
Chairman Sarbanes. Your full statement will be included in
the record. We very much appreciate it and we appreciate your
own efforts and leadership on this issue. It has been quite
important.
I would point out to my colleagues, we only have a few
minutes left on this vote. I am going to recess the Committee
briefly, so we can go and vote and then we will hear from you,
Chairman Pitt.
[Recess.]
Senator Dodd [presiding]. The Committee will come to order.
Senator Sarbanes asked if we could continue to move along
so we will not hold people up here. Let me ask staff, where are
we at this point?
[Pause.]
Chairman Pitt, I do not know if you are in the middle of
your statement or just about to give it?
Chairman Pitt. I was just about to give it.
Senator Dodd. Before I do that, I know my colleague from
South Dakota was here--here he is, Tim Johnson. He just wanted
to make a few brief comments before we turn to Chairman Pitt.

COMMENTS OF SENATOR TIM JOHNSON

Senator Johnson. Thank you, Mr. Chairman. I apologize for
juggling several Committees simultaneously this morning,
complicating things.
I have a formal statement. But rather than sharing my
fabulous insights on financial literacy with you and taking up
some time here, I think we are better off to return to the
panel for their testimony. But I would like to submit my full
statement for the record, and I look forward to the testimony
here, which I think is, indeed, going to be very valuable for
the Congress this year.
Senator Dodd. Thank you very much, Senator.
Chairman Pitt, we welcome you to the Committee. We know you
are busy. You have been on the job a couple of months. Are you
having fun yet, Mr. Chairman?
[Laughter.]
Chairman Pitt. Almost. We are almost there.
[Laughter.]
Senator Dodd. Thank you for being here today. Obviously,
your statement and all related documents that you think are
worthwhile, will be included in the record. And with that, we
would appreciate hearing from you.

STATEMENT OF HARVEY L. PITT, CHAIRMAN

U.S. SECURITIES AND EXCHANGE COMMISSION

Chairman Pitt. Thank you, Senator Dodd.
I am pleased to appear before the Committee on behalf of
the
Securities and Exchange Commission to testify about financial
literacy and education in today's securities markets.
At the outset, I would like to commend the Chairman of the
Committee, Senator Sarbanes, for his perseverance in scheduling
these hearings at the beginning of this legislative session,
and for his prudence in waiting to hold them until an
appropriate time following the events of September 11. I am
especially gratified that Chairman Sarbanes and the Committee
have taken the initiative to raise the visibility of this
important issue.
As the events of last September demonstrated, our capital
markets are the world's strongest and most resilient. As the
events of last November demonstrated, even the best system can
be gamed. These events demonstrate that financial literacy is a
crucial foundation for partnership in our capital markets.
People need to be able to read, write, and speak basic
financial concepts in order to make informed investment
decisions.
The SEC's goal is to protect investors and we will pursue
securities law violations and financial fraud aggressively. But
an educated investor is the best defense against fraud.
There is no magic bullet that will accomplish our Nation's
financial literacy goals. No one program can reach all groups.
Educating people about how to manage their money effectively
and achieve
retirement security demands cooperation and partnership on all
levels--public and private, national and grassroots. The
Federal Government can play an important role in achieving
financial literacy, both by working with localities in the
private sector to initiate financial education, and by creating
and making freely available neutral, unbiased information on
saving and investing.
The Commission partners with a number of public and private
organizations. We give presentations to schools, investor
clubs, and religious organizations. We host investor town
meetings across the United States. We produce and distribute an
extensive array of free educational material. This information
is on our website--www.sec.gov. And our website also has
interactive tools. For example, we created a mutual fund cost
calculator which allows investors to compare the costs of
holding different mutual funds. We also have an extensive
tutorial on the uses of margin. But even the best educational
materials will not do any good if people either do not know
about them or fail to use them.
For example, people looking for investment tips on the
Internet do not necessarily look at our website first and
review our educational materials. To try to reach this
audience, we recently created a fake scam website--
www.mcwhortle.com--which was based on actual Internet scams
that we have investigated and shut down. This site promises
unbelievable investment returns--400 percent in 3 months.
Unfortunately, there are real scams out there that make
similar promises and real people who fall for them. A visitor
to this site who tries to invest receives a message explaining
the warning signs of Internet fraud and links to educational
materials.
I have included sample pages from the McWhortle site as an
attachment to my written testimony. The McWhortle site
graphically illustrates what we have been telling investors for
years--if it sounds too good to be true, it probably is.
Guaranteed returns are not. Check out the company before you
invest. If you are being pressured to invest, especially in a
once-in-a-lifetime deal ``that just cannot miss,'' just say no.
Understand your investments. If you do not understand an
investment, do not buy it. Beauty is not everything. Do not be
fooled by a pretty website. They are remarkably easy to create.
This project cost taxpayers very little. It cost us $50.
But it is paying huge dividends. Already, we have had more than
a million hits on the McWhortle site. The McWhortle site is an
excellent example of how we partner with others for better
results. Cosponsors of our site are the Federal Trade
Commission, the National Association of Securities Dealers, and
the North American Securities Administrators Association.
I have included in my written materials some of the
hundreds of favorable e-mails we are receiving from investors
who have visited our fake scam.
We have other scam sites out there as well, including one
where we have partnered with the Treasury Department. Crooks
figured out a long time ago how best to separate people from
their money and it is about time that we used the same tactics
to fight back.
Beyond educating investors, we are also looking to improve
the quality of information they receive. Confidence in our
markets begins with the quality of the financial information
investors use to decide where to invest their hard-earned
dollars. Comprehensible and reliable information is the
lifeblood of strong, vibrant markets.
In his State of the Union address, the President called for
more strict accounting standards and tougher disclosure
requirements. He wants corporate America to be made more
accountable to employees and shareholders and to be held to the
highest standards of conduct. We share and embrace these
principles. We are firmly committed to making disclosures more
meaningful and intelligible to average investors.
To that end, this spring, we will hold our first-ever
Investor Summit to solicit investor input. To the extent that
we can improve the clarity and integrity of what investors
read, we will succeed in improving financial literacy in
America. We look forward to continuing to work closely with
this Committee, as well as others, to advance financial
literacy in America.
I will be happy to try to respond to any questions the
Members of the Committee may have.
Chairman Sarbanes. Thank you very much, Chairman Pitt. I
will yield to Senator Dodd and I will do my questioning a
little later.
Senator Dodd. Thank you, Mr. Chairman.
Thank you both again for your participation today. I think
the benefit of having some of the comments made by some of our
colleagues here earlier indicate the broad-based support for
the subject matter at hand and how we can deal with it.
Let me say, Chairman Pitt, to you, I think the idea of a
summit this spring, this is something that your predecessor did
around the country on various occasions. I know he did one in
Connecticut we participated in where we had an open forum for
people in the Stanford, Connecticut area, and we had, I think,
300 or 400 people who showed up for it, just a discussion on
what the SEC was doing, a variety of questions. It was an open-
ended forum.
I think he did those around the country, at least a number
of them. So, I think those are very sound ideas for getting out
and listening to people around the country.
Chairman Pitt. I agree with that, sir.
Senator Dodd. I commend you for it and I think it will help
a great deal.
I wanted to raise, if I could, the issue of your budget. I
listened to you yesterday testify for a while anyway in the
House Committee. And one of the issues you raised was the pay
parity issue.
I was surprised to read Mitch Daniels, the Director of the
Office of Management and Budget, say that the pay parity was
not warranted. You get a 4 percent increase in this budget. I
know the budget was only submitted yesterday, but, obviously,
news of events of the last several weeks, one might have
thought that there might have been some readjusting of the
numbers to put some additional resources.
I know you asked for about $500 million for the agency.
This present budget is around $440, I think is the number.
Correct me if I am wrong on some of these figures. So there is
a modest increase. Yet, obviously, there is going to be greater
demands placed on your agency and the ability to attract and
keep people is going to be very important.
And I realize that you have a responsibility. There are
overall budget issues. But this is just too important, in my
view. We are going to be asking you, I suspect in the coming
weeks, you are going to be on your own initiative through the
regulatory process, I think taking some additional initiatives,
if I heard you correctly yesterday.
To what extent can you comment on whether or not this 4
percent is going to be adequate, just based on what you would
like to do. Forget what we may ask you to do. In addition, for
instance, I was stunned to know that there are only 25 or 26
people in the Accounting Enforcement Division. Correct me if I
am wrong on that number as well.
Senator Corzine and I suggested maybe doubling that number.
Maybe it is not needed to go that high. But it seems to me that
if you just did that alone, that is going to put additional
pressures on your existing budget.
So, I realize that it is a little awkward to ask this
question of you, knowing that you have been appointed by the
Administration. But I do not know how in the world we are ever
going to deal with these issues if your budget is so
restrained, that you either lose people, cannot attract people,
or cannot do what you would like to do, let alone what Congress
may ask the SEC to do, in light of the Enron situation.
Chairman Pitt. Well, let me say that I do not feel any
awkwardness in responding to your question.
When I was before this Committee for my confirmation
hearing, both you and the Chairman raised the question of
whether I would be forthcoming with the Committee and tell you
what my views were in terms of personnel. And I assured you
that I would do that, and I intend to live up to that
commitment, as well as every other.
When I first got to the SEC, and I have been there
approximately 5 months, but when I first got to the SEC, my
thought was that we would submit basically a no-growth budget
providing for normal inflation plus an additional $76 million
to fund pay parity, in the expectation that we would get it.
I thought that after I spent 2 or 3 or 4 months seeing how
the agency operated, I could come back and give you an
intelligent view about whether we had needs or not.
Now, in the interim, unfortunately, first we had September
11, and now Enron. And the fact is that focusing on our
manpower needs has been deferred. I start from the proposition
that we should use the people and monies we have efficiently
before we come back and ask for more.
On the pay parity aspect of it, I will say that we were
disap-
pointed with the decision of the Office of Management and
Budget.
We made that known to them, that we thought that that was a
mistake. I intend to work with them and try to persuade them as
we go forward that, at a minimum, funding pay parity is
absolutely critical to the agency. If not, the efforts of this
Committee and of the Congress in adopting pay parity will in
effect have created a worse problem for us. If there were no
pay parity, no one would have expected to receive it. But now
that we have a statute, not funding it creates a significant
problem for me in retaining personnel. But I believe that we
will be able to work with both the Administration and the
Congress and reach a successful resolution of this issue.
Senator Dodd. I thank you for your candor and your comments
on that. I think that you can count on many of us up here to
assist you in that effort.
Let me ask you about the accounting enforcement area
because I raised the issue with you. First of all, am I correct
in my numbers? Is that about the number of people you have?
Chairman Pitt. I do not have the numbers in front of me,
Senator, but I believe you are right. That is the approximate
number of accountants at Headquarters in the Enforcement
Division. In the Regional and District offices approximately 50
accountants work on enforcement matters.
Senator Dodd. That is about the size of a Congressional
office, a House office. I think maybe they have more employees
than 25, to put it in some context here. Can you give us some
idea of what you think about that? Do you believe at this
juncture there is a need for more personnel? Or do you believe
it is just a question of focusing the attention of the existing
personnel on the problem?
Chairman Pitt. One of the issues I think that has arisen
since Enron has occurred is the fact that there seems to be a
great deal more focus by corporations on the validity of their
accounting procedures. It is unfortunate that it took something
like Enron to achieve this result. But I would say that our
Enforcement Division over the last 3 or 4 months has opened up
an enormous number of major investigations.
I believe that we are staffing what we have now and
staffing it adequately. But as the workload increases, and
assuming it does, and if we are to take on additional
responsibilities in response to Enron, either by our own
regulations or by legislation from this Committee, it may well
be that we either have to divert manpower from other areas or
we may have to suggest that we need additional manpower. We are
not at that point yet, but I want to make certain that the
public is confident that if there are any incidents of improper
behavior, we will go after them with great vigor.
Senator Dodd. I thank you. And as I said, you might want to
talk to Arthur Levitt and some of the people who organized
those summits or mini-summits that he had around the country,
going back to the literacy issue, which I think were very, very
successful. I think he enjoyed them, as well as learned a lot
from the average small investor. So the summit this spring I
think is a good idea, but you may want to incorporate that as a
regular series of activities for you as Chairman of the SEC.
Chairman Pitt. I think that the town hall meetings that
former Chairman Levitt came up with were an excellent idea. It
is something that we intend to continue and maintain.
The Investor Summit is a somewhat different concept because
the people who invest as individuals and particularly people in
middle- and lower-income levels, have no lobbying groups. They
have no organized representation. They cannot even respond to
our rule proposals because often they do not know about them.
This is a way to give them a forum to come to us, and they can
do it either on the Internet or in person, so that we hear
first-hand what their concerns are.
In addition, with respect to the specific problems of
Enron, we have put forth the bare bones of a suggested
methodology to respond to these issues and we will be holding a
series of roundtables specifically designed to deal with those
issues, and those will be in locations other than Washington.
Senator Dodd. Thank you, Chairman Pitt.
Mr. Chairman, I thank you.
Chairman Sarbanes. Before I yield to Senator Shelby, I just
want to note, the pay parity was part of a package that reduced
significantly the fees that were being levied. It never
occurred to me, I have to say, that we should make the
reduction in the fees contingent upon giving the pay parity.
But, obviously, we should have done that.
My own view is that--I went down there when the President
signed that bill. But it seems to me that the OMB has, in
effect, broken the spirit, obviously, of the package. The
argument for doing it was very strong at the time. It is even
stronger now, having been, as you noted, held out to people,
and then snatched away. And I think, actually, that we, in a
sense, have just been done in on it. Who would have thought
that in order to get, the package implemented, that we should
have linked it and established a contingency. It is not your
problem. We will address it down the line.
Chairman Pitt. I do want to say this, though, that we have
had very encouraging conversations with OMB, and my hope is
that working with them, we will be able to reach an appropriate
resolution of the problem. But they have been responsive, at
least, to our reaching out to them and having discussions.
Chairman Sarbanes. White House Budget Director Mitchell
Daniels, Jr. said in an interview Friday that the
Administration does not consider the SEC's request for pay
parity justified. The removal of fees was in the amounts----
Senator Dodd. It is huge.
Chairman Sarbanes. Yes, billions.
Senator Dodd. Many of us had some real reluctance about
that for the very reasons, that it was going to create this
kind of a problem. I voted for it reluctantly.
Chairman Sarbanes. Fourteen billion dollars over 10 years,
about $1\1/2\ billion a year, $14 billion over 10 years. The
pay parity was an important part of that package, at least for
many of us. I think it is just breaking faith. But,
nevertheless, Senator Shelby.
Senator Shelby. Thank you.
Chairman Greenspan, isn't accurate information essential to
every economic decisionmaker, from you, as Chairman of the
Board of Governors of the Federal Reserve, to the consumer
doing his or her grocery shopping?
Chairman Greenspan. It certainly is, Senator, largely
because when you are dealing with an essentially voluntary
system, which is what our society is, people make judgments.
They exchange values amongst themselves, all based on
information in some form or another. And for the system to work
properly, you need a pricing system which reflects the value
judgments of consumers. If you do not have that, the system
will be suboptimal. This means that accurate information
readily available is essential for the system to function. To
be sure, it is not a sufficient condition, but it is certainly
a necessary condition.
Senator Shelby. Chairman Pitt, if consumers and investors
believe that others have access to information which they do
not, it is going to affect their buying and investment
activities, isn't it? Couldn't this have serious consequences
for the overall economy?
Chairman Pitt. Absolutely.
Senator Shelby. They will have no confidence in the market,
the capital markets.
Chairman Pitt. The essential factor here is confidence in
our markets and the notion that nobody has an unfair advantage.
One of the things in light of Enron that we are committed to
doing and doing quickly is to restore confidence in our system.
It is a good system. It has flaws. They need to be fixed. And
we are going to fix them.
Senator Shelby. If accurate information, honest
information, matters so much, which we all agree it does,
shouldn't we find ways to strongly discourage those who impede
the flow of information or would disclose outright false
information which you see from time to time, and we have seen a
lot of lately?
Chairman Pitt. The answer is yes, but there is at least a
slight caveat that I would add to that.
One of the things that we are proposing is a rule that
would
require companies to disclose on a current basis unquestionably

significant information.
Under the law, the way it is now, or the way that the
Federal
securities laws have been written, a company can avoid
liability by telling no one significant information. In fact,
that is the whole predicate of Regulation FD. You can satisfy
it by telling nothing to anyone. We want to establish an
affirmative disclosure requirement so that companies are
required to make meaningful disclosures at the time they occur.
Senator Shelby. Is it going to take legislation, us working
with you, to do that? Or can you do that in the SEC?
Chairman Pitt. I believe we need to work together because I
do not want to make far-ranging changes without this
Committee's concurrence. But I believe we have all the
authority we need to make these changes.
Senator Shelby. It seems to me like we are constantly
hearing about restatements, audit failures, and buy-stock
analysis. This is just endless.
For instance, I imagine some pretty smart and sophisticated
people took the time to research companies like Waste
Management, Sendit, Microstrategies, Enron, and Global
Crossing, and then got taken for a big ride.
What does it take to survive in the marketplace? Does it
take a PhD in finance? We are talking about education,
financial education. I think it first takes honesty in the
markets because if there is fraud and shark dealing or
something close to that, people will have no confidence in the
capital markets, will they?
Chairman Pitt. Senator, I agree with you. And if it takes a
PhD for people to be able to invest, we have failed. I believe
that there are a number of things that need to be done in
addition to making disclosure much more comprehensible.
Financial statements cause one's eyes to glaze over. We
want to have plain-English financial statements. We want to
have accounting principles that deal with the concepts rather
than trying to
create a cookbook list of things that auditors can look at and
then paint a picture of the company that is not accurate.
Senator Shelby. I know my time is gone, but how do you as
Chairman of the SEC, and perhaps we in the Congress, deal with
the honesty situation in the reporting of financial statements?
In other words, if things are off the balance sheet,
partnerships and so forth, they are put off there to keep them
off. It is intentionally off the balance sheets, debt and so
forth. That is obviously to an ordinary person misleading of
the financial condition of a given company. And yet, the
average person would not know that.
Chairman Pitt. That is absolutely correct. Part of the
problem is that more than a decade ago, a request was made to
the Financial Accounting Standards Board to deal with these
SPE's or Special Purpose Entities. And with some modest
exceptions, they are still not resolved as to how to come out
on those issues.
Senator Shelby. Can you resolve it? Obviously, they are not
going to be able to resolve it. Can you resolve it as the
Chairman of the SEC, to where these instruments will be part of
the overall financial statement, where people can read them and
know what the true liabilities of a company are?
Chairman Pitt. Several weeks ago, I went up to the FASB and
I met with them. We indicated that the process was not working,
that we were not satisfied with it, and that we needed a
response on this particular issue before the end of the year,
which they have committed to do.
I believe that the SEC has authority to do it directly. But
I think having a private sector standard-setter is the right
way to go as long as it actually sets standards. If it does not
function, that is a problem.
Senator Shelby. It has broken and it has failed. The
private accounting system has failed in all these instances that
we are talking about.
Chairman Pitt. Let me say, I believe that for about the
last 8 to 10 years, the tardiness of the FASB has been
transparent, but nothing has been done to fix the problem. We
intend to fix it and we intend to fix it quickly.
My own view is, if you can have the private sector set the
standards, that is ideal. But if they won't set the standards,
we will
either find another body that will, or we will do it ourselves.
Senator Shelby. Why don't you do it yourself, because it
has shown to everybody that they have not had the standards?
They have not done it. It is the fox watching the henhouse. We
have known that.
Chairman Pitt. It is not supposed to be the fox watching
the henhouse.
Senator Shelby. We are talking about reality here.
Chairman Pitt. Yes. It is not supposed to be the fox
watching the henhouse. But you raise another important problem
with respect to the FASB.
It gets all of its financing from the accounting
profession. We have said that we are not satisfied with that.
We do not want the accounting profession to directly finance
the FASB.
But having in place a group of people who are
knowledgeable, who are expert, and whose only mission is to
promulgate comprehensible accounting standards is the most
efficient and effective way to have better financial
statements. If we cannot rely on this process, then there will
be no alternative. The SEC will have to take it on. I think
that is decidedly less desirable.
Senator Shelby. Thank you, Mr. Chairman.
Chairman Sarbanes. Senator Bennett.
Senator Bennett. Thank you, Mr. Chairman.
Chairman Greenspan, I am impressed by the example you gave
of education for your own employees. I think every corporation
ought to think in those terms. That is, protecting your
employees from the personal devastation of debt is a legitimate
productivity issue because an employee who is constantly being
badgered by collection calls, worried about losing mortgages,
et cetera, is not as productive on the job.
Now, you are a regulator. You regulate banks. One of the
most contentious issues within this Committee--I know the
Chairman and the Ranking Member have very strong differing
views about it--is the question of CRA and what banks do to
meet their CRA requirements.
Senator Gramm and Senator Shelby have both been targets of
groups that have come to their homes, demonstrated, trampled
down the flowers, what have you, because they were afraid that
the position that Senator Gramm and Senator Shelby would take
might interfere with the flow of CRA funds to their groups.
Many of them are in the education business.
Is it a legitimate activity for the Fed to think about the
regulatory oversight, to say that groups or banks could fulfill
their CRA requirements by doing educational outreach efforts in
the field we have been talking about this morning? Or is that a
total disconnect that I ought to forget, with some polite
language from you because you are always polite? Is that
something that might have some value to it?
Chairman Greenspan. First, I better ask our General Counsel
whether it is in our statutory authority under CRA?
[Pause.]
This is Dolores Smith, one of our excellent staff,
knowledgeable about everything.
Ms. Smith. There are some educational initiatives that are
being sponsored by banking organizations. And to my knowledge,
they probably are receiving credit and probably rightly so.
Senator Bennett. So somebody smarter than I has already
thought of it. The next question is, does it make any sense to
think about expanding it?
Chairman Greenspan. Well, my judgment about the whole
question of CRA financial education and all of the relevant
issues that surround it, is that we underestimate the
importance of financial education in reaching the goals which
CRA and the whole array of consumer regulatory structures
endeavors to achieve.
Ideally, if everybody were fully rational and looked after
their own self-interest, the banks would not be leaving money
on the table, so to speak, in not granting loans to a number of
neighborhoods from which significant profits could be achieved.
And what we have found, as a number of people have begun to
understand, is that lending throughout the area of a bank's
community will maximize earnings.
Similarly, we find that a number of people have absolutely
no insights into numbers per se, and you will get effects of
that, for example, in all the areas where the Chairman has been
focusing with respect to predatory lending. Predatory lending
is not something which would happen if everybody knew what they
were signing and knew, indeed, what they were doing.
Senator Bennett. That is correct.
Chairman Greenspan. Here education is critical. So my view
is that if there is one area in the whole consumer affairs
lexicon that has been grossly underserved in this discussion
that we have been having over the years, it is how do we get
people to understand what it is that they are being confronted
with?
The only way to do that is to enhance the educational
capability in areas related to finance. And that is, basically,
simple mathematics, whether it is, as Senator Schumer was
saying, that trigonometry may not be relevant, but compound
interest is, and that presupposes a fairly sophisticated
knowledge of arithmetical relationships.
People may look at a 400 percent interest rate which is in
the document that they are about to sign, and they sign it. And
you have to ask yourself, why are they doing that? Well, the
obvious answer is, they do not know what they are doing. And it
is crucially important, to the extent that we can do it, to
enhance the educational capability of the American people
because, as this financial system becomes ever more complex,
the issues are going to become far more difficult to deal with
and we need education to keep up with the complexity of the
system.
Senator Bennett. Thank you. I just had a memory as you
talk, I learned how to write out a check, which I had never
done before and suddenly had to have a checking account, from
the bank that gave me the checkbook. The bank official sat down
and could tell that I really did not have a clue as to how to
deal with this and he explained to me how to write out a check.
Now that is something that I could have learned in 6th
grade. It is not that difficult. But it was the financial
institution I was dealing with that gave me that information
and how to write it out and how to keep the checkbook balanced
and so on.
So, I agree with you that it is to the bank's self-
interest, that is, the legitimate bank as opposed to some of
the predatory institutions that we have been talking about,
self-interest that their customers be as informed as possible.
And CRA is something that banks are always looking for ways to
qualify in, and I would just encourage you to see what you can
do to expand that activity on the part of the banks you
regulate.
Chairman Greenspan. I think that is a very thoughtful
suggestion, Senator. I thank you.
Chairman Sarbanes. How do we establish this financial
literacy 101 that we would like everyone to go through in terms
of trying to educate them?
Where should that happen? Who should do it? Should someone
amongst the Government agencies put out a pamphlet that states,
what you should know about credit cards that everyone would be
induced to read before they took out a credit card? If you want
to take it to an extreme, I guess you could say, well, you
cannot get a credit card if you do not pass the credit card
test. Like you cannot get a driver's license if you do not pass
the driver's license test. I am just using credit cards as one
example. You could take other examples as well. And you say,
you have to pass this minimum standard of knowledge before you
can assume these obligations.
We have figures that 78 percent of college students have at
least one credit card. Many have four or more. The average
credit card debt among undergraduates in 2000 was $2,748. Nine
percent of students carried a balance exceeding $7,000.
The number of young Americans between the ages of 18 and 25
who declared bankruptcy in the 1990's nearly doubled from
60,000 to 118,000. Two thousand young people accounted for
about 7 percent of the Nation's personal bankruptcies.
Where do we put the finger? I was interested. Senator
Carper said, that he was the State Treasurer and his State has
undertaken this responsibility of conducting, I gather, a full-
scale financial literacy educational program. I would be
interested in your thoughts on this.
Chairman Greenspan. Senator, we try ourselves to do a lot
of it in the sense that we do have booklets on a number of
different issues, including credit cards, trying to enhance the
financial
education.
Chairman Sarbanes. If I am a parent, can I write to the Fed
and get a package of those booklets and give them to my son or
my daughter? I was going to say as a Christmas present, but a
lot of people would not think it is much of a Christmas
present.
[Laughter.]
Give it to them under some rubric.
Senator Dodd. Eighteenth birthday.
Chairman Sarbanes. Yes, or something, as required reading.
[Laughter.]
You cannot get your driver's license until you work through
these booklets and take the test in the back, for which I have
the answers, before I am going to allow you to move ahead and
get your driver's license. It sounds funny, but it is really
serious. We have people out there taking on these obligations
and they have no idea what they are doing.
Chairman Greenspan. I agree with that. You do not need to
get a package for Christmas. One of the great advantages of
technological advance in recent years is it is all online. And
people are going to our websites--I guess the regional bank's,
as well as the Fed's website, have a very large quantity of
such material.
But let me be more responsive, Mr. Chairman, to the
substance of your question.
Financial information and financial understanding is
derived from simple arithmetic and primarily one must start at
the base. If you do not understand arithmetic, if you do not
understand how to multiply, divide, you are not going to
understand finance, period.
So it is crucially important that at a very early age, that
people understand numbers. I find that a very significant part
of the problems that very well-educated people have, when they
look at the type of literature we are just discussing, is that
they do not understand it.
More importantly, they are embarrassed to suggest to you
that they do not understand it. And the reason they do not is
they are not used to dealing with numbers, per se. I learned
fractions very young because I had to calculate baseball
averages.
[Laughter.]
You have to have an incentive to do it, and by the time I
got to fractions in school, I was a whiz, provided it had
something to do with ratios, usually under point four, because
I did not know anybody with batting averages over point four.
[Laughter.]
But the point is that you have to have a numerical base.
And I would suggest that it is crucially important--and this prob-
ably goes back to grade school and high school--to make
financial education even in the simplest form sort of the class
right above arithmetic.
In other words, have people actually engage in doing
interest, compound interest, know what it is. Indeed, my
recollection is that they do that. And I think it develops at
the high school level and is really where it has to be because
by the time you get to college, if you cannot handle a credit
card, it implies a state of knowledge which is really quite
inferior to what one should have by that point.
Chairman Sarbanes. I do not recall. Is it you or the SEC
who has those kits that you send to the middle school math
teachers?
Ms. Bair. Treasury does.
Chairman Sarbanes. Is it Treasury that does that?
Ms. Bair. The Bureau of Public Debt, yes.
Chairman Sarbanes. What?
Ms. Bair. The Bureau of Public Debt.
Chairman Sarbanes. What is it called?
Ms. Bair. Money Math.
Chairman Sarbanes. That is it. So it is Treasury that does
that.
Ms. Bair. It is Treasury, yes.
Chairman Sarbanes. And you send them out?
Ms. Bair. Yes, sir, I think over 100,000.
Chairman Sarbanes. Why don't you describe that for us, just
briefly.
Ms. Bair. It is a math program for grades 7 to 9 that
focuses on money skills. It has been very successful. We have
sent out kits to over 110,000 middle schools at this point. It
is very much in demand and pretty pervasively used.
Chairman Sarbanes. Can we get that? Why don't we get copies
of it?
Ms. Bair. Sure. Absolutely.
Chairman Sarbanes. Just so we see what you are doing with
the middle school students, so we do not get embarrassed, as
Chairman Greenspan says, by admitting that we do not know.
[Laughter.]
But it may be very helpful to us. So we would like to see
what you are doing in that regard.
Ms. Bair. If I could build on what Chairman Greenspan said.
I think there is a prime opportunity pursuant to
implementation of the President's education program, which
requires that standards be developed at the State and local
level in both reading and math, and that there be measures for
assessing progress in the standards.
School districts throughout the country right now are
dealing with developing those standards. And what we would like
to do is encourage them as part of developing the standards and
building the curriculum to support the standards, to interweave
financial education into that process.
It is good for separate personal finance courses to be
offered. But we think, as Chairman Greenspan said, these are
fairly complex skills that need to be built upon and offered
year after year. And if they can be integrated into courses
that are already required in reading and math, we think that
that would be an immediate way that school districts can
respond to this need for greater financial literacy in a
process that they are required to do right now pursuant to the
President's education bill.
Chairman Sarbanes. Senator Dodd.
Senator Dodd. Thank you, Mr. Chairman. Just a few
questions.
Just picking up on that, there are some very creative ideas
out there. In Lyme, Connecticut, a little town neighboring my
town, they have a bank at the grade school where people
actually take on responsibilities. It is a very creative, fun
thing to do, a lot like what the Chairman was talking about in
keeping baseball data.
I know John Henry, the new owner of the Red Sox, describes
in detail, I have read stories about it, where as a kid growing
up on a farm in Illinois, he would try and figure out the
baseball percentages, the percentages of the players, before
the papers came out in the morning. It is exactly the same
thing he did that developed his interest.
So there are wonderful ways in which people become more
knowledgeable about it. I think weaving it into the curriculum
as well. Math is an obvious one and reading. But there are
other disciplines as well in which understanding financial
institutions and history and so forth, the role they played in
our history as a Nation can be very, very important as well.
Just the paucity of it I think contributes to what we have had.
I just wanted to make a couple of points and a question, if
I could, Mr. Chairman.
One is, FASB is located in my State, in Norwalk, and I hear
my friend from Alabama and I hear the Chairman. I think Ed
Jenkins, for instance, has done a terrific job at FASB. I do
not disagree with my colleague from Alabama, either, about the
idea of possibly making it a Federal agency.
I want to point out that in a lot of circumstances, and I
recall some of them here, when I watched Ed Jenkins sitting at
the very table you are, getting blistered by people over
pooling and purchasing practices in the accounting area. And he
stood his ground, despite the fact that, as my colleague
properly points out, these are paid for on a SRO status.
These are very, very good people and they work very hard
and have a lot of integrity. There clearly is a need here to
improve the accounting standards for how it works and operates.
But I did not want this hearing to end on a note where there
was the impression that these people were in the tank when it
came to the accounting profession because I do not think that
is the case at all. Nor do I think, Chairman Pitt, that is the
impression you wanted to leave.
Chairman Pitt. No, I appreciate your making that point.
That is not the impression I want to leave. I actually would
place the fault with our agency. I think we have a
responsibility to oversee the process and I think we have not
done that. That is one of the reasons that it is a high
priority on my list when I came into the job.
Senator Dodd. I thank you. I want to point out, the
Chairman made the point on some of the education efforts that
are going on. The State of Wisconsin, I am told, has a very
good program and it includes personal finance instruction in
the school curriculum, according to the Wisconsin Director of
the Office of Financial Education for the State Department of
Financial Institutions.
States that include such finance classes in their schools
tend to have lower rates of bankruptcy throughout the State. So
maybe there are other States that are taking the lead on an
individual basis, Mr. Chairman, but I think it is worth noting.
I wanted to ask you, Chairman Greenspan, if I could, I know
we are going to have hearings that the Chairman has laid out, a
very thorough set of hearings on the Enron issue.
But I wanted to raise an issue for you, Chairman Greenspan,
about the pension issue. There has been a lot of discussion
about how this ought to be handled. There have been some
suggestions. Two of our colleagues, Senators Bingaman and
Collins would require employers to make available independent
qualified investment advisors to provide financial advice to
employees interested in investing in 401(k) plans and the like.
Would you mind just sharing with us some of your thoughts
on this issue? This is a very complex issue and one that really
has to be handled very carefully, in my view.
Some of the ideas are very tempting because of what you
heard happened to these folks at Enron. But I want to be sure
that in addressing that issue, we are not going to in some way
do real damage to people's ability to invest in their own
companies and their pension plans. And I would be interested
just as a generic comment what your thoughts might be on the
issue.
Chairman Greenspan. Well, first of all, Senator, the
pension industry in the most general sense is really a
relatively recent phenomenon. Aggregate amounts of pension
funds invested 30, 40, 50 years ago, were quite small.
It has become an extraordinarily important part of the
American economy in the sense that you have people making
judgments as to the value of existing assets in the economy,
and that is what governs what generates real new plant and
equipment, and it creates the overall economic system that we
have. So that financial intermediation, which is what it is,
has become one of the crucial aspects of the overall American
economy, which moves savings into investment.
It is crucially important that that be done efficiently and
be done in a way in which not only do individuals put aside
monies for their retirement and understand what they need, and
this clearly is a crucial issue, but also that it is invested
in a manner which optimizes the structure of the real
investments which we create in this country.
And I think the issue you raise is very important. That is,
to be sure, there are changes which clearly have to be made and
I think the President is moving in the right direction on that.
But as you make them, it is very crucial to continuously ask
the question, what are the secondary unintended consequences of
the actions you are taking? Because the system in general has
certain obvious flaws, and I guess Chairman Pitt and I could go
through a number of them that we perceive that need to be
corrected, and I trust that they will be, but even granted
those flaws, it is really quite an
impressive system and it has carried this country to a very
high standard of living. We ought to be very careful about how
we approach changes.
Senator Dodd. I thank you for that and it is very
worthwhile. And I presume that we are going to have a chance to
maybe come back and ask you to participate in this discussion
with us. Obviously, Chairman Pitt will be here, but it will be
very worthwhile to have your thoughts as well.
Mr. Chairman, I just have a couple other questions. Do you
mind if I ask them?
Chairman Sarbanes. Senator Shelby was next.
Senator Dodd. I am sorry. I apologize.
Senator Shelby. I will yield to him if he wants to finish.
Senator Dodd. Well, there were two very interesting
articles, going back now to the subject of literacy, that I
thought was important, that relate to it, anyway.
One was in The Wall Street Journal on January 2. It noted
that consumer debt is at record levels. We have all talked
about that already. And it raised what I thought was a rather
critical question. I just want to read to you very briefly from
the article. It says, and I am quoting here:

In the short- term, consumer spending stimulates the economy. But
the usual growth in consumer borrowing during the current recession
also poses a danger that at some point consumers will have to divert
more and more of their income away from spending on goods and services
and toward repaying their debts. Such a shift would slow the economy,
reducing the chances of a speedy recovery. That is of course unless
consumers defaulted under the weight of all their debt, packing the
bankruptcy courts and spreading financial distress among their
creditors. Either way, many economists argue that the current mountain
of consumer debt is likely to mean trouble.

So, I would like to ask both Chairman Greenspan and Ms.
Bair how we might better educate obviously about the issue of
consumer debt. And then relate that, if you could, to the
second article which appeared in The New York Times on January
13. It says here:

When it comes to saving for retirement, Americans are not rational.
They know that they do not put enough away, surveys show. Over a
lifetime, people rationally save an optimal amount, mainstream
economics holds. Confronted with the reality that people do not save
enough, the mainstream has no solutions except to reiterate that people
are rational. So whatever they save must be enough. I wonder if you
think that people are currently not saving enough for retirement and
that this behavior defies economic interpretations under the rubric of
rational behavior.

I wonder if you might comment on both of those and what we
might do, and what ideas that we have discussed here to try and
convince people that savings--why can't they see that as an
attractive alternative to them right now?
Chairman Sarbanes. I understand that one out of every seven
dollars of disposable income now has to be committed to paying
debt, and that is at a very high level historically, that that
is
a spike up in the debt burden that people have to service and
in
the amount of their current income that they have to commit, of

their current disposable income that they have to commit for
that purpose.
Chairman Greenspan. Mr. Chairman, I am planning to devote
some time to that issue, hopefully, at the Committee hearing
that you are going to have on monetary policy oversight because
it is a very important question as a global economic issue.
But getting to the microquestion which Senator Dodd raises,
economists may argue that if people act rationally, they will
do such and such. But there is a premise that is missing in
that re-
lationship, that they have to know what to do. The issue of
try-
ing to make a judgment given your current level of income, what

you expect it to be, what you expect your family obligations to
be,
and what you would like your post-retirement standard of living

to be, are very complex issues to determine no matter how
rational
you are.
Then you begin to put into that mix, the question of what
interest rates you expect, what do you expect in equity price
values, and it is an extraordinarily complex calculation.
People who are in the business to do it well, if they come
off even remotely forecasting what happens in the future at
all, are pleased.
So it is a very complex and difficult issue and it is at
the root of the notion of financial literacy. Indeed, all of
the tools that we talk about with respect to financial literacy
converge on the question of how one saves for retirement, in
what form and in what manner.
And I should think that the general thrust of where we
ought to go, if we did nothing but say how should people
effectively save for retirement, what they would learn in the
process of making those judgments would serve them well in
virtually every other activity relative to finance that they
are apt to confront in their lifetimes.
Senator Dodd. I just wondered, too, in the first statement
about the danger where people, instead of investing in goods
and services, the debt becomes such that they are just paying
off debt and economists arguing that this is, of course, the
opposite effect.
Chairman Greenspan. Well, first of all, let me just say
that you could be perfectly knowledgeable, you could be
perfectly rational, and decide to build up a very large credit
card debt at the age of 20, in the expectation that you are
going to be earning some extraordinary amount of money and be
able to pay it off within 2 years.
Now, you may be right. You may be wrong. But you can do
that rationally. The issue is, people do not understand the
risks that they confront. And I think part of financial
education is a very healthy examination of history. History
suggests that caution is often a very useful activity.
Ms. Bair. If I could just add, I think that a lot of
people, in Senator Bennett's example earlier, in the course he
taught, a lot of people do not understand that it costs money
to borrow money, and the longer you take to pay it back, the
more it is going to cost you. Again, it goes back to
fundamental lack of understanding of compound interest, how it
works for you if you are saving, how it works against you if
you are borrowing.
Again, the problem comes back to financial literacy. We
think in the long-term, the best way--it is a problem of
epidemic proportions, as those numbers indicate. In the long-
term, getting more financial education in the schools we think
is going to be cheated a solution because it is the best thing
we can think of to reach a very broad segment of society.
In the short-term, for the adult population that currently
lacks adequate financial skills, we think workplace education
programs hold a lot of promise. DOL has done a lot of good work
in that area.
There is a tremendous amount of resources currently
available. Chairman Greenspan and the Fed have a fabulous
website, but people are not using it. Or if they are trying to
use it, they do not understand. They do not even have the basic
skills to absorb the resources that can be provided.
I would also like to add, I think that this has been
overlooked in the press accounts of the President's retirement
security proposals that he unveiled last week. The financial
education is a key component of that. One of the proposals is
to require that all plans provide quarterly earnings statements
so that there is better and more timely information about your
assets values in your individual accounts. We are also going to
be requiring specific disclosures about the value of
diversification, the dangers if you do not have a diversified
portfolio. And again, providing that kind of information
through the workplace where your employee is kind of a captive
audience to be able to disseminate the information, we think is
going to be effective.
Senator Dodd. That is a good idea. Senator Sarbanes, I
recall, and Senator Shelby as well, back years now, but when we
had some of the truth-in-lending proposals and the credit card
legislation. Just even getting on the solicitations to let
people know what annual fees would be, what interest rates
would be and so forth, in clear, bold lettering, even putting
examples of what would happen if you borrowed a certain amount
and you only paid the minimum each month, what you are
ultimately going to be paying. Just letting people know in
those simple examples, I have to tell you, it wasn't easy.
There were huge battles over this.
So there is a long history here, unfortunately, of
financial institutions resisting things as simple as just
putting people on notice as to what their obligations were in
the solicitation, period. So, I just mention that as
background. But, anyway, thank you very much.
Chairman Sarbanes. Senator Shelby.
Senator Shelby. I am not here to assault the accounting
profession, per se, but I am here to call into question a lot
of practices that have brought about the payment of billions of
dollars because of accounting failures and flawed accounting
and so forth. I think that is part of our obligation. I also
believe that is part of the SEC's obligation, and I know he
will do the job because he is well prepared for the job that he
holds now.
Who is in the tank here? Obviously, it is the investors
that are in the tank if they do not have accurate information,
notwithstanding how educated they are on financial dealings. If
they do not have accurate information, something is wrong. Who
else is in the tank? Pension holders. We can go on and on. But
who is really at risk? The capital markets are at risk because
people will shun them because the average person will not have
confidence in them.
And I think there is a lot of people in America and the
world looking at our markets today. We have always been told by
your predecessors and others that the SEC was on top of things.
They root out the evil in it, the fraud in it. But I think we
cannot have business as usual in the accounting profession that
we know and have relied on for a long time. I believe that
there has to be a resolution to it, a strong resolution, not
just move on to the next story. I believe either the SEC will
have to step in here with higher standards or something, or we
will have to step in in some way. Sometimes it calls for that.
The SEC, as I understand it, is the watchdog, to use a
term, over the capital markets. And you have a lot of power
ultimately over the accounting profession, as we know.
I think the facts, Mr. Chairman, call for a resolution. I
know you will have hearings on this and other hearings. But I
think the bottom line, you will ask, is can the accounting
profession police themselves? That is going to be one argument
and say, gosh, these are great people and a lot of them are.
But can they police themselves, or will they have to be
policed? I do not think today it has shown that they can police
themselves. I will have to be shown.
So, we know something is wrong. I also believe you cannot
mandate honesty. You cannot legislate honesty. But you can set
the standard so high at the SEC and the accounting, legal
profession, medical profession, that when people really try to
game the system, beat the system, or bordering on fraud, if not
perpetrating fraud, that if they are made examples of, it sends
a notice to everybody else. I believe, to say the least, the
accounting profession is on trial in a big way right now.
Thank you, Mr. Chairman.
Chairman Sarbanes. Thank you very much, Senator Shelby.
In drawing to a close, let me note that the Committee will
continue examining this subject tomorrow with a panel of
witnesses, including representatives from the Americans for
Consumer Education and Competition, from the Consumer
Federation of America, from the American Savings Education
Council, from the American Association of Retired Persons, and
from the National Council of La Raza and additional witnesses.
On Thursday, we will look at the Superior Bank failure. We
asked at the time for the Treasury Inspector General, the FDIC
Inspector General, and the GAO to examine that situation. They
have prepared a report. So, we will receive their reports on
Thursday of this week.
Beginning next Tuesday, the Committee will start a series
of hearings on the various issues that have arisen out of Enron
and similar situations that have occurred, which will continue
on through the rest of the month and into the month of March.
And we hope or intend through those hearings to lay a
comprehensive basis to examine the situation with an eye toward
what systemic or structural changes are necessary in order to
either prevent or at least substantially minimize the chances
of similar reoccurrences in the future.
Now lots of people are running around pointing fingers at
lots of other people. It is interesting to watch. But we hope
through this set of hearings, a really very thorough and
careful set of hearings, to develop the substantive basis for
making these judgments in terms of what ought to be done about
the future to give the public some confidence and assurance
about the workings of our financial markets.
It is an important strength of the American economy and if
that confidence erodes, it has not only the consequences, the
very tragic, human consequences that we are seeing every day,
but in my opinion, it also has severe implications for the
overall workings of the economic system. So, we need to
obviously move on this matter and move in a way that really
puts in place important remedies.
I want to thank the panel very much for coming. It has been
very helpful.
The hearing stands adjourned.
[Whereupon, at 12:00 noon, the hearing was adjourned.]
[Prepared statements, response to written questions, and
additional material supplied for the record follow:]

PREPARED STATEMENT OF SENATOR PAUL S. SARBANES

Today, we hold the first of two hearings on the state of financial
literacy and education in the United States. We are especially pleased
to have as our distinguished witnesses Secretary of the Treasury
O'Neill, Chairman of the Federal Reserve Greenspan and Securities and
Exchange Commission Chairman Pitt, all with significant expertise on
this subject.
This is the first time that our three witnesses have joined in
testifying before the Committee since September 20. As many of you may
remember, the Committee had scheduled a first hearing on financial
literacy for that day, but in the wake of the terrible assaults of
September 11 we asked our witnesses instead to discuss with us the
state of our financial markets and the measures taken to assure the
timely reopening and normal functioning of the markets. That market
operations resumed after only the briefest interruption, and that on
the day trading resumed the New York Stock Exchange handled the largest
volume of transactions in its history reflect the highest levels of
commitment and expert coordination on the part of dedicated public
servants, and we are all grateful for their efforts.
I do not want to suggest that financial literacy is a magic
solution that will solve all the problems consumers face in making
financial decisions. It will mean little without a framework that also
includes strong legal protections, vigorous enforcement, and best
industry practices with responsible credit availability. Here I agree
with the three-pronged approach outlined to the Committee last year by
Roger
Ferguson, the Vice Chairman of the Federal Reserve Board:
``Legislation, careful regulation, and education are all components of
the response to these emerging consumer concerns.''
Indeed, there is substantial evidence that Americans do not have an
adequate basis for making sound decisions about their personal and
household finances, especially given the myriad choices they face. A
number of organizations have sought to assess the level of Americans'
grasp of financial matters, and their survey evidence consistently
shows gaps.
We know what some of the costly consequences of financial
illiteracy are:

Increasing reliance on the high-cost fringe-banking sector by
men, women, and families.
Accumulation of dangerous amounts of credit-card and household
debt.
Inability to save, to build a nest egg.
Inability to plan for a secure retirement.

I am particularly concerned about the consequences for American
consumers of inadequate financial education. These include:

Millions of people in this country without bank accounts.
These people are, in
effect, ``unbanked,'' a status which carries with it a heavy
financial penalty. To conduct even the most essential transactions,
like paying bills or cashing paychecks, unbanked Americans must
rely on financial operations which have large and often hidden
fees. Furthermore, without access to banking facilities they face
serious obstacles to saving and accumulating assets, and to
building credit.

The growth of various predatory lending practices such as
yield spread premiums, single premium credit insurance, and payday
lending. Financial under-education contributes to an environment in
which consumers are vulnerable to unscrupulous lenders who
overcharge and hide the costs.

The exploitation of remittances. Millions of Hispanic and
other workers support families in their home countries by sending a
portion of their earnings home in the form of remittances. This has
long been a common practice among newly-
arrived Americans. Today's workers must pay high fees for the
service, as much
as 20 percent in some cases, and they are given an exchange rate
which is both
highly disadvantageous and often not disclosed.

If financial literacy is important in the short-term, as we go
about the business of our daily lives, it is critical to our future. It
is constantly asserted that Americans are too often spending for
consumption now, with little thought to the years ahead. America's
personal savings rate has averaged an anemic 1.6 percent for the last
year, while consumer debt has grown at a much faster rate.
While some may note that asset growth, particularly in the stock
market, has made up the difference, recent events demonstrate that
constant growth is by no means certain. Increasingly Americans are
highly leveraged, borrowing to spend
beyond their incomes, without a cushion to fall back upon. In uncertain
economic times or a downturn, like the present, the problem becomes
especially acute.
We also know that the largest generation in this Nation's history
is approaching retirement. One example of the challenges facing us with
respect to retirement is the status of women who face particular
financial challenges as they grow older. Millions of women through
widowhood or divorce find themselves in charge of their household's
finances at or near retirement age, without having received any
financial education. These women are then expected to make complex
financial choices which will affect them throughout their retirement.
These hearings, which have long been in the planning stage, take on
a special
urgency in the context of our present circumstances. The economy is in
recession,
and its future course remains unclear. Recent events in the markets
threaten to
undermine the confidence on which the functioning of the markets
depends.
Higher levels of financial literacy will help Americans approach
the decisions they must make in a responsible and productive manner;
they will also reinforce the efficiency of the economy. The time has
come to bring the public and private sectors together in a national
strategy to raise the level of financial education in the Nation. Our
hearing is a first step in that direction.
We are fortunate that a number of organizations have been working
toward this end, and we will hear from many of them tomorrow. We begin,
however, with our three public-sector witnesses who are uniquely
qualified to assist us in examining the question of financial literacy.
We will hear from Secretary O'Neill, whose testimony reflects his
strong commitment to improving the level of financial education in
America. Next, we will turn to Chairman Greenspan, who has highlighted
the importance of this issue on many occasions. For example, in an
address to the Fed's Consumer Affairs Research Conference last year he
stated that:

Efforts to increase awareness of, and access to, information
that pro-
motes financial literacy are increasingly seen as necessary to
ensure that
consumers can meet their immediate obligations, as well as
achieve their
broader goals of buying a home, funding higher education for
themselves or their children, and preparing for retirement.

Finally, we will hear from Chairman Pitt, whose agency oversees
transactions in our capital markets. The SEC bears a unique
responsibility now, when, for the first time in our history, more than
half of our population qualify as investors, either
directly or indirectly. Many of these Americans have had little
preparation for the weighty responsibilities that have been placed
before them.
I thank them for their willingness to appear this morning, and I
look forward to their testimony.
----------

PREPARED STATEMENT OF SENATOR JON S. CORZINE

Mr. Chairman, I want to thank you for holding this important
hearing on the issue of financial literacy. It is an issue that was a
concern of mine long before I became a Member of the Senate, and I
applaud you for making this issue a priority.
I would be remiss if I did not take this opportunity to thank my
colleagues, Senators Akaka and Enzi--who cosponsored a financial
literacy amendment I authored that was included in ESEA (``The
Elementary and Secondary Education Act''), the education reform bill
that the President recently signed into law.
Providing financial education to our Nation's young people must be
a priority. Indeed, it is time for our schools to make a more concerted
effort to prepare our children for success in new ways--including their
future financial decisionmaking.
Today, it is as important for young people to learn about staying
out of debt, maintaining good credit and building up their savings as
it is for them to learn about geography, science, and history. I might
add that I personally was never too good at the latter.
While we have taken an important step in getting financial literacy
included in ESEA, we still have a long way to go. Despite our best
efforts, the divide between those who lack basic financial literacy
skills and the ``financially savvy'' continues to grow. We can, and
must, do more.
A recent nationwide survey by the Jump$tart Coalition for Personal
Financial Literacy found that a mere 36 percent of surveyed high school
students could correctly answer basic personal finance questions--and
only 33 percent of these students viewed financial issues as strongly
affecting their lives. These responses demonstrate the need for us to
continue to encourage financial education in both the elementary and
secondary schools.
The amendment we included in the ESEA bill will help toward that
end by allowing elementary and secondary schools to apply for Federal
funds to promote financial education as part of the basic educational
curriculum. But Mr. Chairman, as you seek to make clear through these
hearings, financial literacy is not just an issue for our youth.
Financial literacy should be a lifelong goal.
It is essential for families, and it is crucial to the success of
families moving off of welfare and into work. If we truly expect to
move these families to financial independence, we must give them the
tools they will need to make that transition. We must address financial
education on a national level, but help to make it a priority locally.
While our Federal welfare Temporary Aid to Needy Families (TANF)
focuses on moving families off cash assistance and into work, it fails
to provide recipients with the tools they need to maximize their
earnings and manage their expenses in order to achieve financial
stability.
I plan to introduce legislation that would do just that, by
requiring States to provide financial education as part of their
welfare programs. In fact, I would echo remarks recently made by
Chairman Greenspan, who said:

Educational and training programs may be the most critical
service
offered by community-based organizations to enhance the ability
of lower-
income households to accumulate assets.

In addition to the needs I have previously outlined, we must also
seek to expand on programs like the First Accounts Initiative, a
program established by Former President Clinton that is geared toward
reducing the number of unbanked families in America. Today,
approximately 12 million households remain outside the financial
mainstream.
We need to emphasize financial education, and more specifically
consumer education, for our seniors, who are often targeted by scam
artists and others who seek to profiteer from their life's work. It is
unconscionable that financial exploitation is the largest single
category of abuse against older Americans. Education can help reverse
this alarming trend.
And I hope that my colleagues will join me in support of
legislation I am developing that will focus on consumer and retirement
education for our seniors. This will particularly help senior women,
who have substantially lower Social Security and pension benefits than
men do because of the work years they lose serving as primary
caregivers, according to the Older Women's League (OWL). And there is
more to do.
We must seek to provide financial education for those who are the
targets of unscrupulous predatory lenders. These individuals seek to
strip the equity from the unsuspecting homeowner and also seek to take
advantage of many first-time homebuyers.
Finally, Mr. Chairman, one of the things that the Enron debacle has
crystallized is the need for better investment education for our
workers. The freefall of the company's stock hurt thousands of the
company's employees by financially devastating their 401(k) accounts.
Many of these individuals lost their entire life savings. If Congress
is to address the issue of pension reform, we must ensure that these
accounts are properly diversified, and provide investment education for
workers where the adviser does is independent and free of conflict.
As I said earlier Mr. Chairman, we have done a great deal. But a
great deal more needs to be done. I want to thank you again for holding
these hearings and for your commitment to ensuring that financial
literacy becomes a national priority.

----------
PREPARED STATEMENT OF SENATOR MICHAEL B. ENZI

Thank you, Mr. Chairman, for holding this hearing. I would also
like to thank our very distinguished panel. I know you all have very
busy schedules, and I appreciate your taking the time to offer your
insights on this subject. I think the fact that you have taken the time
to come here today highlights the importance of this issue.
It is imperative that we focus on financial literacy. While we
continue to provide incentives for additional education, I believe
financial education is an area where we lack focus.
However, we have seen improvements. I am encouraged to see the
increase in public-private partnerships. For instance in my home State
the Wyoming Community Development Authority and Fannie Mae have joined
to educate on first-time homebuying. In fact, they are about to service
their 1,000th customer in Wyoming. In addition, UNIWYO, a credit union
in Laramie, Wyoming, has begun a program through the National Endowment
for Financial Education to educate their membership. These types of
programs have proven very effective in educating the public
in the areas of finance. I applaud all of the financial institutions
who have taken
it upon themselves to reach out in their communities to provide
financial literacy
programs.
I am proud that Wyoming acknowledges the need for financial
literacy. Wyoming has requirements that students must demonstrate
proficiency in financial management skills before graduating from high
school. This is compared to a national survey in which 82 percent of
high school seniors failed a personal finance quiz.
The Enron situation has raised the profile of financial literacy.
With so many employees losing their retirements through their 401(k)
plans, we need to remind employees and emphasize to them not to put all
of their eggs in one basket. Those employees needed to diversify their retirements, but unfortunately they trusted the same executives who were
over-inflating the company's profits while paying themselves millions of dollars in compensation. These employees would be in much
better financial condition had they moved some of their stock into
safer, long-term investments.
I do believe that the Federal, State, and local governments can and
should do more to assist in this endeavor. Last year, during the
Elementary and Secondary Education Authorization legislation, Senator
Corzine and I offered legislation that allowed financial literacy
programs an allowable expense under the Local Innovative Education
Programs. I am happy to say that this amendment was accepted and was
signed into law last year by President Bush.
Financial literacy is something that is needed over a broad range
of income levels. No matter how much one earns, money management is a
necessity. It is something we need to begin emphasizing in grade school
and continue all of the way through high school. It should not stop
there. Financial education should be something we continue to
concentrate on for our entire lives.
Again, Mr. Chairman, I want to thank you for holding a hearing on
this most
important topic. I look forward to hearing from our distinguished
panel, and I look
forward to working with you on this in the future.

----------

PREPARED STATEMENT OF SENATOR DEBBIE STABENOW

Thank you, Mr. Chairman. I am glad that you have called this
hearing. As you have pointed out, financial literacy is so critical. It
is as necessary in today's world as basic reading and math skills.
Unfortunately, it often does not get the attention it deserves.
Last December, back in my home State of Michigan, I attended an
event at Eastern High School in Lansing where the Michigan Jump$tart
Coalition for Personal Financial Literacy released the findings of a
statewide survey in conjunction with the National Institute for
Consumer Education.
What we learned was disturbing. Michigan's high school seniors
generally did not have a strong grasp on basic personal finance
concepts related to saving and investing, money management, and credit.
I doubt our students are much different from students around the
country.
One interesting finding in the study was that students who
participated in the Stock Market Game, a national investment game, did
better in the survey than students who completed an entire course in
money management or even an entire course in economics. This seems to
indicate that reality-based, interactive learning
curriculum is critical to instilling basic financial literacy concepts
in our students. This finding is a lesson that I hope that educators
and other policymakers will explore more thoroughly.
Mr. Chairman, if we are to improve financial literacy, then we must
make it a priority in our schools. The education bill that we passed
not too long ago establishes a national financial literacy
clearinghouse and I hope that will help us to streamline our education
efforts.
In addition, I am happy to note that, in my State, the legislature
is moving forward, in a bipartisan way, to make financial literacy a
priority. The State House of Representatives, last month,
overwhelmingly passed a bill to ensure that the State Department of
Education establishes model programs in financial education. The bill
also makes it clear that Michigan schools should set aside Federal
education funds specifically for financial education programs. I hope
the State Senate will act quickly on this proposal.
Consistent with this emphasis on financial literacy, in Michigan,
we test our students on economic concepts in the 5th, 8th, and 11th
grade as part of the Michigan Educational Assessment Program. It is so
important that we continue to do this throughout elementary and
secondary school. Economics should be an integral part of the
curriculum at every age level in every part of our country.
Mr. Chairman, while the kindergarten through 12th grade period is
an important time to educate the public, we in Michigan and around the
country need to look at improving financial literacy among adults as
well. The financial illiteracy of adults in this country is both
startling and troubling. And it makes too many in our society
vulnerable to predatory lending practices. That is why I was so pleased
to join with Freddie Mac last year in launching the antipredatory
lending campaign ``Don't Borrow Trouble'' in Southeast Michigan.
Freddie Mac is a real leader in educating our public about their rights
and responsibilities when buying a home.
I hope that Freddie Mac, and its counterpart, Fannie Mae, will
continue to be leaders in tackling abusive lending--especially as the
two companies move increasingly into the subprime market.
Mr. Chairman, I look forward to hearing from our witnesses today. I
hope that this set of hearings is just the beginning. I want to work
with my colleagues, community groups, financial services companies, and
consumer groups to make financial education an on-going effort.
We need more campaigns like ``Don't Borrow Trouble.''
Campaigns for managing credit card debt and for keeping a good
credit rating. And it must be done in a sustained and coordinated way.
That is the way we did it in Detroit. We brought everyone to the table,
assessed the community's needs, and implemented a program.
Furthermore, we need the financial services community to step up
and reach out to the ``unbanked'' and ``underbanked'' even when it is
not their most profitable
demographic group.
We need to improve financial literacy to help my generation, as
well as our children and their children better understand saving and
investment needs and to help plan appropriately so that retirement
years are comfortable times--not a time when people have to choose
between necessities like food and prescription drugs.
All of this is possible and I hope today will be an important step
forward.
Thank you, Mr. Chairman.

----------

PREPARED STATEMENT OF SENATOR DANIEL K. AKAKA

Thank you, Mr. Chairman, for convening this first hearing on the
state of financial literacy and education. I welcome Secretary O'Neill,
Chairman Greenspan, and Chairman Pitt to this morning's hearing. I look
forward to your views on this important subject. I also eagerly
anticipate tomorrow's hearing where we will hear from seven witnesses
from organizations working in the field of financial literacy and
education.
Mr. Chairman, I became actively involved in this issue in 1999,
after reading an article in Parade Magazine featuring the study on
financial literacy conducted by the National Council on Economic
Education. The disturbing results of that study caught my attention. In
a basic economics test, half of the adults and two-thirds of the high
school students received failing scores. More than half of the students
and adults did not have a basic understanding of economic concepts such
as money, interest rates, and inflation. Also, a majority of the adults
and students did not know that a budget deficit occurs when the Federal
Government's expenditures exceed its revenue for the year. After
reviewing these test results, I investigated further the lack of
financial literacy in our society.
Americans of all ages and backgrounds face increasingly complex
financial decisions as members of the Nation's workforce, managers of
their families' resources, and voting citizens. Many find these
decisions confusing and frustrating because they lack the tools
necessary that would enable them to make wise, personal choices about
their finances.
Increased education about basic economic concepts will help people
to make better financial decisions and increase opportunities for
participation in today's global economy. All citizens need to be
prepared, starting from youth, to make informed decisions regarding
fundamental undertakings such as purchasing a first home,
financing a college education, and saving for a comfortable retirement.
Arming
citizens with basic economic knowledge and the ability to find the
specialized information they need has the potential to increase the
chance that citizens can realize their financial goals. According to
Mr. Lewis Mandell, Dean of the State University of New York at Buffalo,
if we fail to provide children with a sound understanding of personal
finance, we can expect them as adults to make financial missteps,
misjudgments, and errors which can lead to poor retirement planning,
clumsy investing, debilitating debt, and even bankruptcy.
Increasing the financial literacy of citizens can provide numerous
benefits. For example, a greater understanding and familiarity with
financial markets and institutions will lead to increased economic
activity and growth. A greater citizen awareness of economic issues
will lead to expanded participation in our political system. Most
importantly, financial literacy empowers individuals to make wise
financial decisions and reduce the confusion of an increasingly complex
economic society.
The reauthorization of the Elementary and Secondary Education Act
included the Excellence in Economic Education Act as an amendment,
which I introduced along with my colleagues Senator Corzine and Senator
Enzi. This legislation will significantly improve the knowledge of
fundamental, yet critical, economic principles among our country's
young people. The measure aims to increase student knowledge of, and
achievement in economics by providing our Nation's teachers with the
tools to enhance teaching methods of economics. The legislation
authorizes funding for teacher training programs and increased
resources to States for the purpose of incorporating economics into the
K-12 curricula. This legislation encourages economics-related research
and development, dissemination of instructional materials, and
replication of best practices and programs. It also increases private
and public support for economic education partnerships between schools
and local businesses and private industry.
I was also pleased to support another financial literacy amendment
sponsored by Senator Corzine that was also included in the legislation.
Today's hearing is the
beginning of a national dialogue on financial literacy and education. I
applaud the
efforts of Secretary O'Neill, Chairman Greenspan, and Chairman Pitt to
bring
attention to this issue, and I look forward to your recommendations on
how to increase financial literacy.
Thank you, Mr. Chairman, for convening these hearings on financial
literacy.

----------

PREPARED STATEMENT OF SENATOR THOMAS R. CARPER

I would like to thank Chairman Sarbanes for scheduling this hearing
on this important topic. I believe that financial literacy is essential
for consumers in the new economy.
I would like to commend Delaware's State Treasurer Jack Markell for
the remarkable job he has done in our State to promote financial
literacy. He has created the Delaware Money School, which provides
community-based financial education.
Financial professionals volunteer to teach classes on subjects that
include money management and debt reduction, investing, retirement
planning, and managing life changes. This winter alone the Delaware
Money School will offer over 80 classes throughout the State, most of
which are free. The Money School also has a website,
www.delawaremoneyschool.com, which offers online registration for the
Money School, and useful financial literacy links to governmental,
educational, and private organizations.
Last November, State Treasurer Markell hosted a free money
conference for kids and their parents at the University of Delaware. On
a Saturday morning, approximately 500 people, including children in
grades 4-7 and their parents, attended the conference. Treasurer
Markell is committed to teaching the children of Delaware the three S's
(saving, spending, and sharing or giving to charity).
Also in Delaware, local banks have partnered with 21 elementary
schools to promote and teach the importance of saving. The program,
called Bank at School, is sponsored by the University of Delaware's
Center for Economic Education and Entrepreneurship and the Delaware
Chamber of Commerce. It allows students to open and manage savings
accounts while at school, and includes a teaching program developed by
the University of Delaware. The program is very successful with over
2,500 children participating.
It is clear that financial literacy is important. However, recent
events have shown that literacy is not enough. Even the most
sophisticated investor cannot be expected to divine the truth from
false financial statements and disclosures, nor can the ordinary
investor be expected to know that some analysts recommendations are
based not on objective analysis, but on a willingness to bend the truth
to attract investment banking business. These issues are not new, and
recent events merely bring them front and center. I know that the
Committee will be holding hearings on the issues raised by the collapse
of Enron, and I look forward to exploring these issues at those
hearings.
Thank you, again, Mr. Chairman, for holding today's hearing.

PREPARED STATEMENT OF SENATOR TIM JOHNSON

Mr. Chairman, thank you for holding this hearing into the
importance of financial literacy. It is clear from the distinguished
panel before us today, including Secretary O'Neill, Chairman Greenspan,
and Chairman Pitt, that you have identified an issue that merits the
attention of our Nation's top policymakers. Thank you all for joining
us today.
Mr. Chairman, America is a great country. And part of what makes
our Nation great is the opportunity that we all have to make something
of ourselves. Americans love rags-to-riches stories, because they
represent the best of what this country has to offer--opportunity for
all.
But opportunities are limited for those who have not had access to
education. Just as basic illiteracy limits the professional and
personal opportunities for far too many Americans, financial illiteracy
has limited the economic success of an even larger group. In fact,
financial illiteracy of a surprisingly large segment of our population
has in all likelihood impaired the success of our marketplace, and not
just of those individuals. That is why we should all be concerned, and
so many players in the industry have stepped forward with valuable
educational programs. Yet clearly, more needs to be done.
As the terrorists responsible for September 11 recognized,
America's free markets are a central driver of this Nation's economic
prosperity. Yet as a student in a first year economics classroom will
tell you, markets function smoothly if, and only if, full information
is both freely available and able processed correctly.
On the consumer side, if a person lacks basic financial literacy,
no amount of information will help him or her make a good financial
decision, whether it be the choice between a fixed-rate or adjustable-
rate mortgage, or whether to buy or lease a new car, if that person
lacks the basic skills to analyze the information. Of course, we need
to be ever-vigilant to make sure that information is conveyed in plain
English. But we face a great challenge to make sure that all Americans,
starting with our children, are taught how to make sound financial
decisions.
Of course, for information to be useful even to the most
sophisticated consumer, it must be accurate. And as we are all very
much aware, recent events have called into question the accuracy of
publicly-available information. Without moving too far afield from
today's subject, I would urge that we in Government put our heads
together to figure out a way to ensure that our public companies and
accounting firms, most of which are upstanding corporate citizens,
comply with our laws.
As Chairman Pitt knows better than any of us, the SEC plays a
critical role in overseeing the information that keeps our markets
functioning smoothly. And I am sure he shares my disappointment that,
despite the Senate's action in passing H.R. 1088 in late December,
President Bush chose not to set aside money in this year's budget to
bring SEC salaries to parity with the other Federal banking agencies.
We passed that bill in large measure because we were concerned that
in the past 3 years, more than one third of all SEC employees have left
the agency. There is simply no question that without qualified
employees, who have experience and institutional knowledge, the SEC
will falter. In fact, it is not an overstatement to say that a strong
SEC is an integral part of our Homeland Security. And money should be
made available to ensure that the guardians of our markets are not paid
less than those minding our banks.
Mr. Chairman, we are here today because we recognize that America's
economic well-being is a topic that should command the attention of our
top policymakers.
I thank you for calling attention to the role that financial literacy
plays in our
economic and social success. I look forward to hearing from our very
distinguished witnesses.

----------

PREPARED STATEMENT OF PAUL H. O'NEILL

Secretary, U.S. Department of the Treasury
February 5, 2002

Introduction
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, independ-
ence, 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 finan-
cial 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 CD's 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 50 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 percent, 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 a
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 cochairing the Pennsylvania
Advisory Commission on Academic Standards. This was a 17 member panel
of noneducators, 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 noneducators 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 invest-
ment 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 50 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.

* * * * *

WHAT THE FEDERAL GOVERNMENT IS DOING TO
IMPROVE FINANCIAL EDUCATION
U.S. Treasury Efforts
Bureau of Public Debt (BPD)
MoneyMath: BPD launched the MoneyMath program to teach the
importance
of savings and financial literacy. MoneyMath is an education kit
for grades
7 through 9, which includes lesson plans and supplemental learning
activities
focused on savings and investing, money management, and spending
and credit. The kits were provided, free of charge, to over 110,000
middle school math teachers in 16,000 school districts nationwide.
MoneyMath was kicked off at the Nasdaq Market Site in New York City
on May 7, 2001. The Securities Industry Foundation for Economic
Education, sponsor of the Stock Market Game, agreed to incorporate
the MoneyMath kit into their distribution system. Partners for the
MoneyMath program include the Jump$tart Coalition, the Center for
Economic Education, Merrill Lynch, the Fannie Mae Foundation, the
MetLife Foundation, the Nasdaq Stock Market, and many others.
Office of the Comptroller of the Currency
In its Advisory Letter on Financial Literacy (AL 2001-1)
published in January 2001, the OCC encourages national banks to
develop and refine their financial education activities. The
advisory described characteristics of successful financial literacy
programs and noted that involvement in these programs has helped
national banks develop new customers while enhancing their
visibility in the communities they serve.

In conjunction with the Advisory Letter, the OCC published an
online Financial Literacy Resource Directory. This Directory
provides an online listing of financial literacy resources,
including national and local organizations that offer financial
literacy programs. The OCC updates this directory on a regular
basis.

OCC staff participate in the National Forum to promote Low-
Income Savings, an effort directed by the Consumer Federation of
America to increase the savings rate in local communities. An OCC
staff member chairs the forum's Hispanic Advisory Committee, an
advisory group that helps the larger forum incorporate strategies
for reaching the Hispanic community.

Through Community Developments, a quarterly newsletter
produced by the Community Affairs Division, the OCC provides
ongoing education about financial literacy programs, through
articles that highlight financial literacy programs in which banks
are involved. The newsletter is widely distributed to banks and
community and consumer organizations, and is available on the OCC
website.

OCC has been a national partner of the National Academy
Foundation since 1997. The National Academy Foundation sponsors the
Academy of Finance, a school-to-career curriculum operating in 40
States and 300 high schools. The OCC is now partnering with schools
or school districts in 28 locations across the country to support
academies of finance and provides summer internships for Academy of

Finance students.

Under regulations promulgated by the OCC and the other Federal
banking regulators, bank participation in financial literacy
programs targeted to low- and moderate-income individuals may be
eligible for consideration under the Community Reinvestment Act.
Office of Thrift Supervision
Since 1998, Office of Thrift Supervision (OTS) employees have
participated as tutors in financial education programs in local
schools and in the community as part of the agency's Community
Service Program. Examples of financial education programs that the
agency has participated in over the past 3 years include Operation
Hope's Banking on the Future Day in Los Angeles and New York, the
NHS of New York Financial Life Skills Course, Junior Achievement,
American Bankers Association's National Teach Children to Save Day,
Seahawks Academy Financial Literacy Training and the Central City
Lutheran Mission Financial Literacy Training.

OTS has produced several articles dealing with financial
literacy issues. Primarily through the Community Liaison, a
quarterly newsletter edited and produced by the Community Affairs
staff, OTS works to inform and educate the thrift industry and
others about financial literacy issues and to highlight best
practices and
financial education programs that the thrift industry is involved
in.

The OTS plays a role in financial literacy initiatives through
a number of regional activities. For example, OTS is a partner in a
campaign targeted to the primarily Latino neighborhood called Back
of the Yards in West Chicago to get more people who qualify for the
``Earned Income Tax Credit'' (EITC) to file and deposit these
refunds in a bank account. Local financial institutions open these
new bank accounts and provide basic financial education to these
individuals as well. The staff in each regional office participates
in a number of antipredatory lending activities designed to educate
consumers about predatory lending and avoid abusive lending
practices.

OTS is currently working on the development of an industry
bulletin on the issue of financial abuse of the elderly. They are
also working with the Federal Reserve Bank of San Francisco to
produce an educational video addressing the financial
abuse of the elderly and dependent adults and will take part in a
public service
campaign.

Bureau of the Mint

The mission of the Mint includes providing marketing,
education, and advertising for U.S. coinage. The Mint, while not
directly engaged in financial literacy efforts, supports a
Treasury-led financial literacy initiative, and will use its
resources to promote a national financial literacy initiative. The
Mint has worked with the National Education Association (NEA) to
educate young people about U.S. currency. The Mint also uses its
website, www.usmint.gov and other media to educate the public on
coinage and to promote its 50 State Quarters and H.I.P. Pocket
Change programs--both of which leverage our youth's interest in
American coinage to promote their knowledge of money's role in
financial transactions. Additionally, the Mint is working with
Congress to obtain final approvals necessary to move forward on its
plans to open a Mint Museum at its Washington, DC, Headquarters,
which will serve as an interactive forum to better educate the
public on the heritage of our Nation's coinage.

Office of the Treasurer

The Treasurer serves as an effective venue to communicate the
importance of
financial literacy.

Other Federal Efforts

Social Security Administration: The Social Security
Administration (SSA) is engaged in a number of initiatives to
educate people about the importance of planning for their financial
future. SSA produces nationally broadcast public service
announcements that explain the importance of saving for retirement.
In addition, by law, SSA mails all workers copies of their Social
Security Statement that includes customized benefit estimates. SSA
mails statements to half a million Americans each day. The purpose
is to allow workers to ensure that their earnings are credited for
benefit purposes and to convey to the public the need for financial
resources in addition to Social Security for retirement.

Housing and Urban Development: In conjunction with the
Treasury Department, the Department of Housing and Urban
Development (HUD) published a 2000 report on predatory lending,
which listed the need for greater financial literacy as a tool to
curb predatory lending practices. Financial education is an
eligible activity in a number of HUD programs, including
Youthbuild; Resident Opportunity and Self-Sufficiency and Housing
Counseling. The President's 2003 Budget proposes to increase
funding for the housing counseling program by 75 percent. The HUD
website provides the names of local financial education and housing
counselors throughout the country.

Department of Labor: For over 6 years, the Department of
Labor's Pension and Welfare Benefits Administration has maintained
a retirement savings education and outreach program through its
Savings Matters Campaign. The Campaign is designed to promote
retirement savings and security for the 21st century workforce.
DOL's efforts are mandated under the Savings Are Vital to
Everyone's
Retirement Act (SAVER) of 1997. DOL has developed a variety of free
informa-
tional tools, which are distributed through a toll-free telephone
line and on the
Internet and highlighted through radio, television, and print
public services
announcements. These tools include a publication, ``Savings
Fitness: A Guide to
Your Financial Future,'' developed jointly with the Certified
Financial Planner
Board of Standards and an interactive website for small employers,
selectaretirementplan.org, developed in partnership with the U.S.
Chamber of Commerce and the Small Business Administration. In
addition, the Department, in conjunction with the Federal Deposit
Insurance Corporation, credited Money Smart, a financial literacy
curriculum that is available through more than 600 One-Stop Career
Centers across the country.\1\ The second National Summit on
Retirement Savings, cohosted by President Bush and the
Congressional leadership and planned by Secretary of Labor Elaine
L. Chao, is scheduled for February 27-March 1, 2002.
---------------------------------------------------------------------------
\1\ The Workforce Investment Act established a State and local
administered system of ``One-Stop Career Centers,'' throughout the
country that provide access to labor market information, job training
courses, financial education, child care, and other services.

Department of Agriculture: The U.S. Department of Agriculture
(USDA), through its Cooperative State Research, Education, and
Extension Service makes financial literacy materials available
throughout rural and agricultural areas. USDA is also launching a
significant financial literacy initiative entitled ``Financial
Security in Later Life.'' The initiative's goal is to provide
senior Americans with financial literacy information most relevant
for them. In addition, the USDA is able to draw on the resources of
academic professionals found throughout the United States in the
Land Grant University System. Financial literacy courses are taught
at many land grant universities, which pool together teaching plans
---------------------------------------------------------------------------
and other educational materials intended for adults.

General Services Administration: The General Services
Administration places financial literacy information from various
governmental sources on its website. For example, the DOL's
``Savings Fitness: A Guide to Your Money and Your Financial
Future'' can be found there.

Federal Trade Commission: In 1998, the Federal Trade
Commission (FTC) joined with the Securities and Exchange
Commission, the North American Securities
Administrators Association, and a number of public and private
organizations including Government, industry associations, and
consumer organizations to launch a campaign to educate consumers
about investing and saving. The FTC has an entire webpage dedicated
to consumer credit issues, investments, and abusive lending. In
addition, the FTC continues to publish reports on personal finance
issues such as ``Avoiding Home Equity Scams,'' ``Cancellation of
Private Mortgage Insurance: Federal Law May Save You Hundreds of
Dollars Each Year,'' and ``Credit Repair, Help Yourself First.''

Federal Reserve Board: The Federal Reserve Board (FRB)
provides consumer and financial information through such means as
the Federal Reserve website, and a number of publications. The
website features informational pages such as ``Building Wealth, A
Beginner's Guide to Securing Your Financial Future.'' Many of the
FRB's publications are provided in Spanish, as well as English.
Publications include ``Understanding the Process and Your Right to
Fair Lending,'' ``Looking for the Best Mortgage: Shop, Compare,
Negotiate,'' and ``Keys to Vehicle Leasing: A Consumer Guide.''
Chairman Greenspan has publicly expressed his support for financial
education. In January 2002, he gave an address that focused on the
need for increased personal financial education at the Ninth Annual
Economic Development Summit held by the Greenlining Institute.

Federal Deposit Insurance Corporation: In September 2000, the
Federal Deposit Insurance Corporation (FDIC) initiated a national
financial education campaign by developing Money Smart, a
comprehensive financial education curriculum designed to help
adults outside the financial mainstream develop financial skills
and positive banking relationships. The curriculum, which is built
on the foundation of delivering quality education at the local
level, is available free to banks and others interested in
sponsoring financial education workshops. Money Smart contains
everything necessary to begin teaching the program right away and
includes take-home booklets and other resources for participants.
FDIC has worked with the Department of Labor (DOL) to connect
financial institutions with locally-based employment service
centers (One Stop Centers) around the country and encourage joint
efforts establishing financial education as a service regularly
available to the public. FDIC began providing the Money Smart
curriculum to banks, One Stop Centers and other interested parties
in July 2001. By the end of 2001, the FDIC had received nearly
5,000 orders for Money Smart, including nearly 2,000 from banks and
over 400 from credit unions.
The FDIC Consumer News, which is published quarterly, features a
range of articles on personal finance topics, such as credit card
use and identity theft. This publication is disseminated widely to
approximately 60,000 subscribers. In addition, the FDIC has
arranged to make copies of articles of interest that may have broad
national appeal available through the Consumer Information Center
in Pueblo, Colorado.
As part of the Financial Services Education Coalition, the FDIC
helped write and publish ``A Comprehensive Guide for Community
Educators.'' The guide, which was issued in 1999, is used by
community educators with a variety of audiences who do not have
accounts with financial institutions or who need basic
information about how to use accounts.

The Securities and Exchange Commission: The Securities and
Exchange Commission (SEC) provides public information on the
fundamentals of investing and
investment products. The SEC provides information that is balanced
and neutral
regarding securities markets and the types of investment products
available to
average investors. In addition, the SEC works to ensure that its
documents
and the documents of the companies that it regulates are easily
readable by typical investors.

Department of Defense: Many military credit unions work with
local commanders to provide personal financial education for
military personnel.

Neighborhood Reinvestment Corporation: Neighborhood
Reinvestment has developed a financial education program that is
implemented around the country by a network of local nonprofit
organizations as part of their community education efforts. The
program consists of 10 hours of workshops followed by individual
counseling to help participants learn and practice money management
skills; the program also includes a component for training
trainers. Six private sector partners have been recruited to
support the program. In the 12 months ending on
December 31, 2001, more than 1,600 participants graduated from the
program. Neighborhood Reinvestment and the FDIC are negotiating a
partnership to use their Money Smart curriculum.

PREPARED STATEMENT OF ALAN GREENSPAN

Chairman, Board of Governors of the Federal Reserve
February 5, 2002

I am pleased to be here this morning to discuss the importance of
improving
financial literacy and learning for consumers.
Given the importance of accurate and timely information in the
financial services industry, it is not surprising that this sector has
benefited enormously from the innovative application of new
technologies that have facilitated the development of a wide range of
new financial providers and products. For consumers of household and
business credit, computer and telecommunications technologies have
lowered the cost and broadened the scope of financial services. As a
consequence, we have seen a proliferation of specialized lenders and
new financial products that are tailored to meet very specific market
needs. At the same time, the development of credit-scoring tools and
the securitization of loan pools holds the potential for opening doors
to national credit markets for both consumers and businesses. In
addition to technological advancement, deregulation has created
important structural changes in the financial services industry and
contributed significantly to creating a marketplace that is
increasingly competitive and highly innovative as a result of the entry
or expansion of new players.
Throughout our banking history, we have seen significant
adjustments made to existing policies to enable markets to respond to
the demand for services. These structural changes have heightened
competition, resulting in market efficiencies that continue to help
drive down costs and foster the emergence of increasingly
diverse and highly specialized organizations. Through these entities,
which range from banks and brokerage firms that offer their services
exclusively through electronically-based delivery mechanisms to
locally-based public-private partnerships that provide counseling and
financing arrangements to facilitate access to mortgage credit for low-
and moderate-income families, consumers have increased access to a
variety of credit and savings instruments. Corporations, for example,
often allow employees to self-direct their investments in pension and
other benefit plans, whereas employers dictated such decisions 20 years
ago, and the advent of online brokerage firms has enabled individual
investors to directly conduct stock transactions.
For an increasingly complex financial system to function
effectively, widespread dissemination of timely financial and other
relevant information among educated market participants is essential if
they are to make the type of informed judgments that promote their own
well-being and foster the most efficient allocation of capital.
However beneficial, constant change, of course, can be unsettling,
and one challenge we face is overcoming such anxieties. But just as the
rapid adoption of new information technologies has expanded the scope
and utility of our financial products, so has it increased our means
for addressing some of the challenges these changes pose. For example,
just as universities provide remote learning options to allow students
to pursue continuing education via the Internet, consumers can utilize
software to create customized budgets to develop long-term savings
strategies for retirement or their children's college education. In
both scenarios, technological advances represent the opportunity for
achieving efficiencies and exercising preferences, but only when the
end users possess the knowledge of how to access pertinent information
and how to capitalize on those choices.
As in the workplace, fostering education that will enable
individuals to overcome their reluctance or inability to take full
advantage of technological advances and product innovation in the
financial sector can be a means of increasing economic opportunity. As
market forces continue to expand the range of providers of financial
services, consumers will have more choice and flexibility in how they
manage their financial matters. They will also need to accumulate the
appropriate knowledge about how to use new technologies and how to make
financial decisions in an informed manner.
Indeed, surveys repeatedly demonstrate a strong link between
education and the use of new financial technologies. For example, data
from the Federal Reserve's
Survey of Consumer Finances (SCF) suggest that a higher level of
education significantly increases the chances that a household will use
an electronic banking product. In particular, in 1998, the typical user
of an electronic source of information for savings or borrowing
decisions had a college degree--a level of education currently achieved
by only about one-third of U.S. households.
These most recent data from the SCF exhibit a mixed picture of the
financial status of households, providing evidence that we need to
reach out to those who have not been able to participate fully. For
example, while the median real net worth for all families increased
17\1/2\ percent between 1995 and 1998, this trend did not hold where
the head of the household had a high school level of education or less,
family earnings were less than $25,000 annually, or the ethnicity of
the respondent was nonwhite or Hispanic. That families with low-to-
moderate incomes and minorities did not appear to fully benefit from
the highly favorable economic developments of the mid-1990's is, of
course, troubling, and the data from the 2001 survey that will be
available later this year will warrant a detailed look. Through 1998 we
found that families with incomes below $25,000 did increase their
direct or indirect holdings of stock, and more reported that they had a
transactions account. However, they were less likely to hold
nonfinancial assets--particularly homes, which constitute the bulk of
the value of assets for those below the top quintile according to
income. At the same time, one encouraging finding from the survey is
that the homeownership rate among minorities rose from 44 percent to 47
percent between 1995 and 1998, and according to the Census surveys, the
rate edged above 48 percent as of the fourth quarter of 2001. This
trend may be a sign of improved access to credit for minorities.
Other findings of the SCF through 1998 include the rise in
families' median level of debt burden, financial stress (defined as
debt payments that represent more than 40 percent of income), and
incidence of late debt repayment. The findings showed increases in each
of these categories across all income and age groups, with the highest
levels of financial stress among households headed by people 65 and
older and earning less than $25,000 annually. The recent evident rise
in subprime loan delinquencies is of some concern in this regard.
In considering means to improve the financial status of families,
education can play a critical role by equipping consumers with the
knowledge required to make wise decisions when choosing among the
myriad of financial products and providers. This is especially the case
for populations that have traditionally been underserved by our
financial system. In particular, financial literacy education may help
to
prevent vulnerable consumers from becoming entangled in financially
devastating
credit arrangements. In the quest to stem the occurrence of abusive,
and at times illegal, lending practices, regulators, consumer
advocates, and policymakers all agree that consumer education is
essential to combating predatory lending. An informed borrower is
simply less vulnerable to fraud and abuse. Financial literacy can
empower consumers to be better shoppers, allowing them to obtain goods
and services at lower cost. This effectively increases their household
budgets, providing more opportunity to consume and save or invest. In
addition, comprehensive education can help provide individuals with the
financial knowledge necessary to create household budgets, initiate
savings plans, manage debt, and make strategic investment decisions for
their retirement or their children's education. Having these basic
financial planning skills can help families to meet their near-term
obligations and to maximize their longer-term financial well-being.
While data to measure the efficacy of financial education are not
plentiful, the limited research is encouraging. For example, a recent
study by Freddie Mac, one of the Nation's largest purchasers of home
mortgages, finds that homebuyers who obtain structured homeownership
education have reduced rates of loan delinquency. Similarly, an
evaluation conducted by the National Endowment for Financial Education
on its high school-based programs found that participation in financial
planning programs improved students' knowledge, behavior, and
confidence with respect to personal finance, with nearly half of
participants beginning to save more as a result of the program. Another
Freddie Mac study of the relationship between financial behavior and
financial outcomes revealed that comprehension of the general
principles of sound financial behavior, such as budgeting and saving,
is actually more beneficial in producing successful financial results
over time than specific and detailed information on financial
transactions.
These findings underscore the importance of beginning the learning
process as early as possible. Indeed, in many respects, improving basic
financial education at the elementary and secondary school level is
essential to providing a foundation for financial literacy that can
help prevent younger people from making poor financial decisions that
can take years to overcome. In particular, it has been my experience
that competency in mathematics--both in numerical manipulation and in
understanding its conceptual foundations--enhances a person's ability
to handle the more ambiguous and qualitative relationships that
dominate our day-to-day financial decisionmaking. For example, through
an understanding of compounding interest, one can appreciate the
cumulative benefit of routine saving. Similarly, learning how to
conduct research in a library or on the Internet helps one find
information to evaluate decisions. Focusing on improving fundamental
mathematics and problem-solving skills can develop knowledgeable
consumers who can take full advantage of the
sophisticated financial services offered in an ever-changing
marketplace.
As I noted earlier, we have seen the marketplace respond to an
increased demand for conceptual job skills by increasing the range of
educational options available to individuals. We are also beginning to
see similar efforts to provide consumers with information and training
that will improve their knowledge about financial matters throughout
their lives. For example, the U.S. military, in response to surveys
that revealed that nearly one-third of enlisted service members
reported moderate-to-
severe difficulty in paying bills, has mandated that all incoming
enlisted personnel
receive financial education.
Some school systems have introduced financial management classes as
part of their high school curricula and many employers are taking up
the challenge as well. At the Federal Reserve Board, for example,
interest in financial education prompted an employee committee to host
a seminar on financial planning strategies, and our Consumer and
Community Affairs staff recently hosted several well-attended
educational programs for Federal Reserve employees, providing
information on qualifying for a mortgage and managing debt. In fact, in
conjunction with National Consumers' Week, today an additional employee
seminar on budgeting is underway.
Despite the existence and proliferation of numerous training
programs offered by a wide variety of public, private, and nonprofit
organizations, evaluation of the efficacy of such programs has just
recently begun. A study commissioned and published by the Fannie Mae
Foundation recommended that financial education programs equip
consumers of all ages and across all socioeconomic groups with the
ability to know when they need information, where they can find it, and
how to apply it.
The Federal Reserve also has a keen interest in measuring the
effectiveness of financial literacy programs. For example, we hosted a
forum highlighting best practices in credit education focusing on
effective tools and techniques and identifying programmatic challenges
and issues. More recently, we have included studies that evaluate the
impact of such training initiatives in our call for papers for the
Community Affairs Research Conference scheduled for the spring of 2003.
Additionally, our Community Affairs and Public Information Offices have
embarked on a national initiative to highlight the importance of
financial literacy and heighten the visibility of economic education
programs. Quantitative study of the quality and long-term success of
education and training will be of particular interest to the Federal
Reserve System, as we develop and distribute a wide variety of
financial and economic literacy products.
Both individually and through longstanding partnerships with a
variety of local, regional, and national organizations, each of the 12
Federal Reserve Banks and the Board provide extensive information on
these topics to a wide range of audiences, including school-age
children, low- and moderate-income families, and minority and immigrant
populations. The scope of these activities ranges from the sponsorship
of competitions on economic principles for high school students and
workshops on homeownership and wealth-building strategies to the
development of computer-based tools for understanding mortgage
borrowing and creating household budgets and savings plans. The
economic educators of the Federal Reserve System launched an
interactive website offering students, educators, and the general
public an introduction to the workings of the Fed and the Nation's
banking system. The goal is to offer consumers a clearer picture of,
for example, how the Federal Reserve's decisions influence the economy
and consequently affect their monetary choices.
In closing, let me simply reiterate that the pace of technological
change and competitive pressures can only increase. These changes are
affecting both financial and nonfinancial institutions around the
world. We cannot know the precise directions in which technological
change will take us, but as in recent years, the role of banks and
other providers of financial services will surely be significantly
affected by the same basic forces that guide the real economy. Building
bridges between community organizations, our educational institutions,
and private business will be an essential aspect of our efforts to
increase familiarity with new technological and financial tools that
are fundamental to improving individual economic well-being. And the
success of such efforts will have a significant bearing on how well
prepared we are to meet the challenges of an increasingly knowledge-
based economy.

----------

PREPARED STATEMENT OF HARVEY L. PITT

Chairman, U.S. Securities and Exchange Commission
February 5, 2002

Chairman Sarbanes, Senator Gramm, and Members of the Committee, I
am pleased to be here this morning to offer the Securities and Exchange
Commission's perspective on financial literacy and education in today's
securities markets. I am especially gratified, Chairman Sarbanes, that
you and the Committee have taken the initiative to raise the visibility
of this important issue that has only become more significant in light
of recent events.
Achieving financial literacy for all Americans has always been an
important goal. With so many individuals and employees invested in our
securities markets today, financial literacy is now not only important
but also an essential goal. In my testimony today, I would like to
offer some observations on the landscape of financial literacy and
education from the SEC's perspective.
As the events of last September demonstrated, our capital markets
are the world's strongest and most resilient. Our markets are not
located in any one building or city or place. Rather, they are networks
of people and ideas and freedom. Thus, they are emblematic of our great
Nation. Precisely for these reasons, all Americans should have the
opportunity to participate in our markets. Financial literacy is a
crucial foundation for participation. People need to be able to ``read,
write, and speak'' basic financial concepts in order to make informed
investment decisions.
Beyond basic fairness issues, there are significant economic and
social benefits of financial education. People of even modest means can
realize financial security and all that it promises--such as buying a
home and pursuing educational opportunities. As a society, we should
want all Americans to have the opportunity and the ability to invest in
our markets. Historically, investing in the market has resulted in
returns superior to other savings strategies. Investment dollars help
our Nation's businesses and economy grow stronger, and ensure that new
and creative technologies have a chance to develop and flourish. Saving
and investing enrich and bring stability to individuals and families.
With the decline in defined benefit retirement plans and the concurrent
rise in defined contribution plans, workers increasingly need to be
able to evaluate investment options thoughtfully, in order to provide
for their retirement security.
We learned, in the wake of the Great Depression, when world
economic forces caused precipitous and calamitous declines in equity
market values, that investors are willing to commit their capital to
our markets only if they have confidence that those markets are fairly
and honestly run, are fully transparent, and affirmatively minimize the
risk of loss from selective disclosure, fraud, and manipulation. The
trust and faith investors place in our capital markets have fueled
incredible economic growth, improved our collective standard of living,
and made it possible for innovators to see their ideas come to
fruition. The success of our markets has been due not just to their
depth and breadth, but also to their quality and integrity.
Our markets must be transparent and hospitable to all investors.
Ours is a disclosure-based system. And it is our job to promote clear, accurate, and timely disclosures--proactively. Once investors are fully informed, we leave it to them to evaluate the merits of an investment. Of course, when investors are not fully informed--when they are misled--it
is our job to prosecute the wrongdoers. The Federal securities laws police fraudulent, deceptive, and manipulative conduct. Vigorous and timely enforcement of these provisions plays a critical role in ensuring market transparency. Where investor interests are being disserved or abused, we
seek to take immediate action to halt violative conduct and then undo its effects. Aggressive enforcement helps prevent continued fleecing of the
investing public. It publicly identifies wrongdoing, which helps
educate investors about that particular fraud, as well as raise public
awareness of the kinds of schemes and pitfalls out there. Vigorous
enforcement punishes wrongdoers, stamps out recidivism, and deters
future misconduct. It also prevents the dissipation of investor assets.
Our goal is to protect investors and we will pursue securities law
violations and financial fraud aggressively. But an educated investor
is the first defense against fraud.
Educating people about how to manage their money effectively and
achieve retirement security demands participation on all levels: local,
State, and national. Public-private partnership is essential. This is
the same approach that our country has taken to promote literacy,
itself the first step toward achieving financial literacy. The Federal
Government can play an important role in achieving financial literacy.
First, it can stimulate localities and the private sector to initiate
financial education. People learn locally--through schools, workplaces,
newspapers and other media, and religious organizations.
The Commission works with numerous public and private organizations
to foster educational programs. For example, we have provided
curriculum material for the Department of Agriculture's Cooperative
Extensive Service to include in their financial education course--which
is widely distributed. We are an active member of the ``Jump$tart
Coalition,'' a public-private partnership that seeks to foster youth
financial literacy education. We also partner with the American Savings
Education Council (ASEC), a public-private partnership devoted to
increasing investor education. Our staff has given presentations to
countless schools, religious organizations, and investor clubs,
explaining basic investing concepts and answering questions. Our staff
also hosts ``Investor Town Meetings'' across the United States,
bringing together industry, Federal and local government officials to
educate investors on basic financial concepts.
Government can play a second critical role in the national
initiative of financial literacy by providing investors and potential
investors with neutral, unbiased information on saving and investing.
We have worked with industry trade groups and other Federal and State
regulators to produce an extensive array of educational material
directed at helping people make wise investment choices and avoid
fraud. We hand out and mail brochures on how to interact with financial
professionals, on Internet investing, and many other topics. We do not
copyright our materials. In fact, we encourage the private sector and
other Federal and State regulators to copy and use them. Private
entities frequently ask us for bulk shipments to hand out to customers.
Many foreign regulators have, with our active encouragement, taken our
material and adapted it for their investing audiences.
One example of the many informational brochures we compile to
educate investors is called ``Analyzing Analyst Recommendations.'' Our
alert discusses the potential conflicts of interest analysts face and
provides tips for researching investments.
Analysts often use a variety of terms--buy, strong buy, near-term or
long-term accumulate, near-term or long-term over-perform or under-
perform, neutral, hold--to describe their recommendations. But they
rarely urge investors directly to sell the stocks they cover. Working
with the Congress and the securities industry, we are on the threshold
of new rules that will create more transparency for analyst
recommendations. As a general matter, investors should not rely solely
on an analyst's recommendation when deciding whether to buy, hold, or
sell a stock. Instead, they should also do their own research--such as
reading the prospectus for new companies or for public companies, the
quarterly and annual reports filed with the SEC--to confirm whether a
particular investment is appropriate for them in light of their
individual financial circumstances.
We post all of our educational material on our website, and we have
taken advantage of the Internet to create interactive tools to help
inform people's investment decisions. For example, we created a mutual
fund cost calculator, which allows investors to compare the costs of
holding different mutual funds over a period of time that they specify.
We also have an extensive tutorial on the use of margin, which includes
a calculator for assessing the true costs associated with a margin
account. We have an interactive quiz to ``test your money smarts,'' and
an interactive question-and-answer database, through which investors e-
mail us questions. We generally reply to these e-mails within two
business days.
The Internet has emerged as a major source of investment leads for
many Americans, rivaling the old ``water cooler'' chats of a different
era. We have all witnessed the willingness of otherwise thoughtful
people to believe what they read on unverified websites, in unregulated
chat rooms, and through claims of sure things by individuals who
probably were (or could have been) snake oil salesmen in prior lives.
Investors become easy prey for cyberspace sharpshooters who spread
disinformation, or use their virtual pulpits to promote their ability
to sell their own holdings at a profit. Unfortunately, there always
will be people who allow dreams of untold wealth to distort their
better judgment. So, we have redoubled our efforts to arm investors
with the information they need to invest wisely.
Recently, we began a major new initiative to post fake scams on the
Internet similar to those that fraudsters successfully use to separate
investors from their hard-earned money. We took this step in order to
bring our educational information to the screens of Internet users who
have not tapped the wealth of educational material located on our
website. The fake scams are all modeled on ``real'' scams from cases we
have brought. In this initiative we are working with State securities
regulators, foreign regulators, other U.S. Government agencies such as
the Treasury and the Federal Trade Commission, the National Association
of Securities Dealers and trade associations to bring educational
messages to those investors who click on our sites in search of
unrealistically high returns.
Last week, we announced that we had created the fake scam site,
www.mcwhortle.com. The McWhortle site graphically illustrates what we
have been telling investors for years:

If it sounds too good to be true, it is.

``Guaranteed returns'' aren't. Most fraudsters spend a lot of
time trying to convince investors that extremely high returns are
``guaranteed'' or ``cannot miss.''

Check out the company before you invest. Look at financial
statements. Find out if the company has ever made any money. And by
the way--if a supposedly upright firm only lists a P.O. box, as
McWhortle did, you will want to do a lot of work before sending
your money!

If it is that good, it will wait. Scam artists usually try to
create a sense of
urgency--implying that if you do not act now, you will miss out on
a fabulous opportunity. But if you are being pressured to invest,
especially if it is a once-in-a-lifetime, too-good-to-be-true
opportunity that ``just cannot miss,'' just say ``no.''

Understand your investments. Fraudsters frequently use a lot
of big words and technical-sounding phrases to impress you. But
have faith in yourself ! If you do not understand an investment, do
not buy it.

Beauty is not everything. Do not be fooled by a pretty
website--they are remarkably easy to create.

The sole out-of-pocket cost of this educational project was $50 we
spent to register the McWhortle domain name. We have had more than a
million hits on the site thus far. We think this is a low-cost, high-
impact way to reach potential investors. Crooks figured out a long time
ago how to best separate people from their money. Our website
graphically illustrates fraud to investors, so that the next time they
encounter a ``real'' scam, they will know what it is they are dealing
with. We have always thought that an educated investor is our best
defense against fraud. This initiative is helping educate investors.
The response from the public has been overwhelming. These are
representative responses that we have received about the site:

----------------------------------------
Fantastic!!! This is an excellent idea for reaching exactly the
audience that needs this warning. Congratulations are in order
for the individuals responsible for this imaginative
communications concept.
----------------------------------------
WELL DONE!
VERY NECESSARY AND VERY WELL DONE!
Thank you for your efforts, I have forwarded the initial link
to all of my e-mail friends.
NICE TO SEE TAX DOLLARS WELL SPENT!!!
YOU SHOULD CONTINUE WITH OTHER TYPES/VERSIONS OF THE SAME UNTIL
YOUR MESSAGE IS RECEIVED BY ALL
----------------------------------------
This is an excellent idea. Kudos for creative thinking.
----------------------------------------
Dear SEC,

Thank you for this clever exercise in public education. I was
alerted to your site from an author on Realmoney.com . . . just
wanted to see how effective it might be in attracting gullible
investors.

Good luck with all that confronts you; I appreciate your
efforts in attempting to protect the public from unscrupulous
scoundrels.
----------------------------------------
Very clever and helpful--I know there are a ton of people whose
eyes will be opened by this.
----------------------------------------
Great site, great lesson--I saw the story on Reuters about how
the site was created to educate investors. I hope you keep the
site up as I would like to point to it in a business class I
talk at each quarter.
----------------------------------------

The McWhortle site was launched with the assistance and support of
the Federal Trade Commission, the National Association of Securities
Dealers, and the North American Securities Administrators Association.
We have other fake scams out there as well. The Treasury Department has
partnered with us on one of them, a ``Prime Bank'' fraud. Scotland Yard
has also joined forces with us.
Beyond educating investors, we are also looking to improve the
quality of information they receive. Confidence in our markets begins
with the quality of the financial information investors use to decide
where to invest their hard-earned dollars. Comprehensible information
is the lifeblood of strong, vibrant markets. Our current disclosure
system is the best in the world. However, as more and more Americans
are entering our markets and making increasingly difficult investment
decisions that
affect their lives, savings goals, and retirement security, we need to
ask whether we have done the best job possible in making financial
statements and other disclosures timely and understandable to all
investors. Are we meeting investors' needs?
In his State of the Union Address, the President appropriately
demanded ``stricter accounting standards and tougher disclosure
requirements.'' He wants corporate America to ``be made more
accountable to employees and shareholders and held to the highest
standard of conduct.'' The SEC shares and embraces these principles,
and we are firmly committed to making them a reality. As part of the
President's Working Group on Financial Markets, we are working with
Secretary O'Neill and Chairman Greenspan, as well as Chairman Newsome
of the Commodity Futures Trading Commission, to conduct a full review
of corporate disclosure rules. The SEC is ready to develop and
implement reforms. We are firmly committed to improving corporate
disclosure and assuring that the accounting profession functions
properly, fairly, and in the public interest.
In all of our investor education materials, we advise people to
``do their homework,'' by which we mean primarily looking at the SEC
filings of a company in order to evaluate whether it is a good
investment. It is tremendously important for investors to be able to
understand and evaluate the information that the SEC requires issuers
to make available. A critical step toward enhancing national financial
literacy is to make more intelligible and more timely the financial
data we require issuers to file. We need to rethink our financial
disclosure model, with an eye toward simplifying it so that everyone can understand the fundamentals of every company and find absolute
comparability from firm to firm. This task has become increasingly
critical as more and more individuals become direct participants in our markets and face increasingly difficult investment decisions that affect
their lives, savings goals, and retirement security.
Our existing disclosure system must be strengthened, and
supplemented, in order to put information into investors' hands more
promptly, and help investors. Several attributes are clearly required
if we are to enable all of our citizens to identify the opportunities
that abound in our marketplace, and to avoid the pitfalls that lurk
behind every opportunity.

Supplementing periodic disclosure with ``current disclosure.''
In the system we envision, public companies will be required
affirmatively to disclose unquestionably significant information
when it arises and becomes available, even if the information is
learned between scheduled periodic reports.

Making use of technology to simplify disclosure documents
without sacrificing the wealth of information companies are
accustomed to supplying, and without unduly disadvantaging those
investors who lack Internet access.

Encouraging the use of so-called ``trend'' information, to
give investors the same kind of view of the companies in which they
invest as is available to the managers of those companies.

Making financial information comprehensible to the average
investor.

We are committed to making disclosures more meaningful, and
intelligible, to average investors. We are soliciting broad input. This
May, the Commission will hold its first ever ``Investor Summit'' to
solicit investor input on the policy issues that confront us as we
begin reforming our disclosure and financial reporting process.
The SEC in essence has a two-fold task ahead of us: first,
improving corporate disclosure and strengthening financial accounting
and reporting standards; and, second, raising our national
consciousness so that investors fully understand the importance of
researching investments before buying. Firefighters drill into school
children the mantra of ``stop, drop, and roll.'' We need to convince
people to ``stop, read, and think.'' To the extent that we can improve
the clarity of what investors read, we will succeed in improving
financial literacy in America.
There is no magic ``bullet'' that will accomplish our financial
literacy goals. No one program will reach all groups. No one
organization can do it all. Financial literacy for all can be
accomplished only with enthusiastic cooperation by all. We look forward
to continuing to work closely with this Committee and others to advance
financial literacy in America.
I am happy to try to respond to any questions the Committee may
have.

RESPONSE TO WRITTEN QUESTIONS OF SENATOR AKAKA
FROM ALAN GREENSPAN

Q.1. Chairman Greenspan, in your statement, you mentioned the
need for building bridges between our educational institutions,
private businesses, and community organizations to increase
familiarity with new technological and financial tools that are
fundamental to improving individual economic well-being. What
are your recommendations to facilitate the building of such
bridges?

A.1. Dialogue among educational institutions, private
businesses, and community organizations to identify shared
objectives is an important first step. It can facilitate the
building of bridges among parties interested in promoting
financial literacy and in increasing consumers' familiarity
with new technological and financial tools. Successful
partnerships and cross-sector collaborations can in turn offer
an effective means for addressing what often are complex
issues, by helping the parties to leverage resources, bring
different perspectives together, and expand the reach of the
initiative's participants.
The Federal Reserve System both participates in and
convenes such partnerships and collaborations through the
System's Community Affairs Offices, which regularly sponsor
meetings for and conduct outreach to a broad base of groups.
These activities foster information sharing and have resulted
in the formation of important linkages that have led to the
development and implementation of effective strategies.
The Federal Reserve System has played a role, for example,
in a number of partnerships that address financial literacy. In
Cleveland, the Federal Reserve Bank was a key player in
developing and implementing ``Cleveland Saves,'' a pilot
program for the Consumer Federation of America's ``America
Saves'' campaign. This initiative, which is being replicated in
Kansas City, Charlotte, and Philadelphia, enlisted the help of
local business, sports, government, religious, and community
leaders to increase financial literacy and savings on a city-
wide basis.

Q.2. I have had several constituents contact me inquiring how
changes in the Federal funds rate relates to the interest rates
that they pay on their credit cards and mortgages. Although I
have been pleased that they have contacted me for information
and I have provided them with an explanation, this reveals to
me a need for a greater understanding of the real life
implications of the activities of the Federal Reserve. How can
we better educate the general public about the activities and
significance of the Federal Reserve?

A.2. The Federal Reserve System has actively promoted economic
education and better public understanding of the roles of the
Federal Reserve System for many years, utilizing a variety of
vehicles. Most recently, the economic educators of the Federal
Reserve System developed and launched (in September 2001) an
interactive website, www.FederalReserveEducation.org, that
offers students, educators, and the general public an
introduction to the workings of the Federal Reserve System. The
site's tutorial, FED101, covers a wide array of topics
including the Federal Reserve's history, its structure, and its
functions in the areas of monetary policy, banking supervision,
and financial services. Interactive graphics and a series of
quizzes and self-tests make it easy for visitors to the site to
understand the Federal Reserve's role in the U.S. economy and
how it carries out its many duties. The website links to a
multitude of other resources on the Federal Reserve and to
general economic education materials offered by the System (as
well as linking to other relevant external organizations). One
such linkage is to In Plain English, an easy-to-read guide to
the structure and functions of the Federal Reserve System
developed by the Federal Reserve Bank of St. Louis. This
brochure can be accessed on the Bank's website,
www.stls.frb.org, and is also available in print form.
Other resources include the Board's publication, Purposes
and Functions of the Federal Reserve System. It provides an
overview of the Federal Reserve System, including a discussion
on the goals and implementation of monetary policy and on the
international and domestic roles of the Federal Reserve. The
publication is accessible at www.federalreserve.gov. That
website also features a Publications and Education Resources
section that links to other informational tools on the Federal
Reserve and on general economic concepts.
In addition, many of the Reserve Banks provide
instructional material and support to classroom teachers in
their Districts through conferences and workshops, special
newsletters, and tours of Reserve Bank facilities. One example
is ``Fed Challenge,'' a multilevel national competition for
high school students designed to increase understanding of the
Federal Reserve's role in setting U.S. monetary policy; to
develop research, cooperation, presentation, and critical-
thinking skills of students; and to promote economic literacy
and interest in economics.
More generally, the Consumer Affairs Offices also provide
insight into the Federal Reserve's role in fostering community
economic development through their outreach, technical
assistance, and other informational activities.

Q.3. As you indicated in your statement, the Federal Reserve is
interested in measuring the effectiveness of financial literacy
programs. I look forward to reading the papers that will be
presented at the Community Affairs Research Conference
scheduled for the spring of 2003. What has the Federal Reserve
learned thus far about the effectiveness of financial
education?

A.3. Available data for measuring the efficacy of financial
literacy are, regrettably, not plentiful. Some research has
been conducted by organizations that have been directly engaged
in offering or funding training for the public. Generally, the
resulting data show a positive relationship between formal
financial education and improved financial conditions. For
example, research by the National Endowment for Financial
Education among high school students identified a positive
correlation between participation in basic personal finance
training and the students' knowledge, behavior, and confidence
relating to managing finances. Data reported by the Cooperative
Extension System on its ``Money 2000'' initiative indicate that
80 percent of respondents affirmed that the program improved
their financial situation through increased savings or
decreased debt. A study conducted by Freddie Mac showed that
prepurchase homeownership counseling contributed to reduction
of delinquency rates by over a third.
The Federal Reserve has not conducted research on the
effectiveness of financial literacy. But the Board does take
great interest in understanding consumer finances, and conducts
the Survey of Consumer Finances (a triennial survey) to gain
insight into the financial and demographic characteristics of
U.S. families. These data provide an important research tool
for identifying trends relating to consumers' use of financial
services. Other survey work that is currently in progress will
collect data on consumers' learning preferences and information
sources which may be helpful in designing and marketing
financial literacy materials.

STATEMENT OF THE NATIONAL ASSOCIATION OF
FEDERAL CREDIT UNIONS

Financial Literacy and Personal Savings are Intertwined
NAFCU and our member credit unions know that financial illiteracy
is an issue that touches all Americans--at every age and income level.
Intertwined with financial literacy is personal savings. The Nation's
personal savings rate is slumping and personal savings rates are at
their lowest level in nearly 40 years. Large numbers of Americans
habitually spend instead of save. Credit unions know that saving is a
matter of choice and that the most important factor in long-term wealth
accumulation is the act of saving itself. NAFCU is proud to be
proactively involved in promoting financial literacy and personal
savings in America. NAFCU President/CEO Fred Becker's first major
speech before the credit union community in September 2000 addressed
the need to increase the personal savings levels of all Americans.
Many credit unions have special programs to educate their members
and assist them in achieving their savings goals. These programs not
only teach their members about saving, but also assist them in becoming
more financially literate. We want to tell you about just two such
success stories.

McCoy FCU: Teaching Youth about Money and Savings
NAFCU member McCoy Federal Credit Union, located in Orlando,
Florida, is the only community credit union in Central Florida. It has
assets of $235 million and serves the borrowing and saving needs of
about 55,000 members. In September 1993, McCoy FCU began a ``Youth
Savings Program'' to teach young people about saving and to give them
incentives to encourage them to save. This program reaches future
generations by establishing at an early age a meaningful relationship
or ``link'' between them and their financial institution--a credit
union.
The Youth Savings Program is set up in two age groups 5-10 years
and 11-17 years, with appropriate incentives targeting these two very
distinct age groups. A Youth Savings Brochure, available to credit
union members and potential members, explains eligibility based on
McCoy FCU's field of membership. The brochure is often the first
exposure many young people have to financial terms, providing
definitions of such terms as saving, deposits, interest, withdrawals,
and balance, as well as a savings register and I.D. card. It also
explains savings goals and includes ideas of how students might obtain
the money to put into their savings accounts, that is piggy bank,
birthday, allowance, chores, good grades, or jobs.
When a young person joins McCoy FCU's Youth Savings Program and
opens an account for $5-$99, they receive several items appropriate to
their age designed to encourage savings and to help them measure their
progress in meeting their savings goals. McCoy FCU waives the $5 credit
union membership fee for the young people who join, and there are no
fees associated with Youth Savings Program accounts. To encourage their
active participation and savings, young people earn various gifts when
they attain savings goals of $100, $250, $500, $750, and $1,000.
The program continues educating young people as they mature from
their teenage years to young adulthood. Upon reaching 18 years of age,
the participants receive a letter telling them that while they are no
longer eligible for McCoy's Youth Savings Program, as fiscally
responsible ``graduates'' of the Youth Savings Program they can now
take full advantage of the many other services that McCoy FCU has to
offer. The letter then proceeds to introduce them to other services
that McCoy FCU offers its members, such as Share Draft Accounts.
In order to effectively reach out to all segments of the community
and educate its young people about, and get them involved with, the
Youth Savings Program, McCoy FCU spreads the word in a number of ways:

1. Various youth organizations (i.e., YMCA).
2. Partners in Education (Orange County School System).
3. Presentations at local schools and church youth groups.
4. Sponsorship of youth programs.
5. Word of mouth.
6. McCoy Financial Planner Newsletter.
7. Brochures in the credit union's lobbies and new accounts
areas.

McCoy FCU's program has successfully prepared thousands of young
people to successfully manager their financial affairs. As of May 31,
2001, McCoy FCU's Youth Savings Program had 4,589 members representing
8.3 percent of the credit union's total membership with savings
totaling $3,176,587.

Promoting Financial Literacy in San Antonio
San Antonio City Employees Federal Credit Union (SACEFCU), which
serves government employees in San Antonio, has about 32,000 members
and $175 million in assets. SACEFCU was asked to prepare and teach
basic financial courses for the San Antonio's Adult Basic Education and
GED Preparation Program. The credit union was a logical choice for
implementing this program because of the depth of financial knowledge
and experience of its dedicated staff. The credit union, in turn,
availed itself of information and assistance offered by a resource
knowledgeable about financial education: the National Endowment for
Financial Education (NEFE), a nonprofit foundation committed to helping
Americans gain the skills and knowledge needed to control their
personal finances.
SACEFCU adopted an educational curriculum initially developed and
made available by NEFE. The curriculum includes courses on financial
planning, cash now, spending and savings, credit and debt management,
insurance needs, savings and investments, homeownership, and small
business opportunities. The credit union also made use of instructional
materials provided by the NEFE without charge. SACEFCU's financial
literacy program is free, and the knowledge imparted via the curriculum
is supplemented by guest appearances by area professionals and experts.
The first class taught by SACEFCU was a pilot program comprised
primarily of people training to become literacy teachers themselves.
Twelve trainers and eight students have graduated from the pilot
course, taught entirely by SACEFCU.
SACEFCU realized that by committing itself to educating more people
to become financial literacy trainers and teachers, they could more
effectively promote financial literacy among its members and the San
Antonio community at large--spreading the word of financial literacy.
As a result, SACEFCU hosted a one-day ``train the trainer'' course for
24 city of San Antonio county agencies and private industry trainers.
Eventually, with the financial literacy program well developed and
solidly underway in San Antonio, SACEFCU stepped back with the city
taking over the
financial literacy classes.
Having been well established under the auspices of SACEFCU, the
financial literacy course is now offered in a number of literacy
centers in San Antonio throughout the year. Meanwhile, SACEFCU has
maintained an active role in the advancement of the financial literacy
program it conceived by periodically monitoring and auditing the
classes. The city of San Antonio is very willing to share the
curriculum for this program with others who share their interest so
that other cities can benefit from San Antonio's experience as they
develop their own financial literacy courses.
Realizing that true financial literacy and healthy saving habits
are best fostered among the young, San Antonio has now enlisted SACEFCU
to do for the city's children what it has already done for the city's
adults: develop an age-appropriate financial education course. The
credit union is now working on creating such a financial information
program to teach local elementary school children about financial
literacy and help foster an appropriate awareness of the value of
money.

Conclusion
These examples of what credit unions are doing to promote financial
literacy and savings are just two of many. Credit unions in every State
regularly work with their members to educate them on financial matters,
to increase their financial literacy, and to promote their personal
savings. Credit unions by their nature have a special relationship with
their members--one that has put credit unions on the front line in
fighting financial illiteracy for years. Credit unions are in NAFCU's
view critical partners in implementing any national strategy promoting
financial literacy and education. NAFCU and the Federal credit union
community stand ready to work with you as we move forward together.

THE STATE OF FINANCIAL LITERACY AND
EDUCATION IN AMERICA

----------

WEDNESDAY, FEBRUARY 6, 2002

U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.

The Committee met at 10:05 a.m. in room SD-538 of the
Dirksen Senate Office Building, Senator Paul S. Sarbanes
(Chairman of the Committee) presiding.

OPENING STATEMENT OF CHAIRMAN PAUL S. SARBANES

Chairman Sarbanes. Let me call this hearing to order.
Today, we hold our second hearing on the state of financial
literacy and education in the United States. We are very
pleased to have such a distinguished panel of witnesses, all of
whom bring significant expertise on this subject.
I think, as most people know, we began our exploration of
this issue yesterday, when we heard from Treasury Secretary
O'Neill, Federal Reserve Board Chairman Greenspan, and SEC
Chairman Pitt. Their testimony underscored the urgent need for
improved
financial education in the United States. In fact, one witness
observed in response to the Committee's questions, the problem
of financial illiteracy in this country is one of ``epidemic
proportions.''
Each of the agencies who testified yesterday are actively
engaged in efforts to improve Americans' financial
understanding, and I commend them for their commitment to this
issue, and they are all developing additional initiatives.
Of course, as I noted yesterday, financial illiteracy is
not a magical solution that will solve all the problems
consumers face in making financial decisions. We obviously need
a framework within which these activities take place that
provide strong legal protections, vigorous enforcement, and
best practices on the part of industry.
Nonetheless, financial education can go a long way toward
preparing consumers to make decisions that will be in their
long-term financial interest. As was noted yesterday, the
costly consequences that inadequate financial education can
have, includes such difficulties as: increased reliance on the
high-cost fringe financial sector by those who find themselves
closed out of mainstream banking institutions; predatory
lending, when people are persuaded to borrow on terms they do
not fully understand and cannot afford; the accumulation of
dangerous amounts of credit card and household debt; the
inability for people to save, to build a nest egg; and the
inability to plan for a secure retirement.
I indicated yesterday that I think we need a national
strategy to bring the public and private sectors together to
address this problem of financial illiteracy. The commitment of
yesterday's witnesses to improve financial education gives me
some confidence that we can undertake increased coordination
and cooperation on this issue at the highest levels of the
Federal Government.
Today, we will hear from representatives of the private and
nonprofit sectors, as well as a from State government. We had
far more requests to testify than we could accommodate. And
frankly, I am gratified that there are so many organizations
and groups working on this issue. It is a testament to the
growing awareness of the importance that financial literacy
plays in helping people make the financial choices necessary to
give them the opportunity to succeed in our society.
The panel before us today covers a broad spectrum of issues
related to financial literacy and education, from school-aged
children to young people who are handling credit for the first
time, first-time mortgage borrowers, right up to those who are
trying to save enough for retirement. I believe the testimony
we will receive this morning will help to inform the
development of a national strategy to address this issue and we
look forward to working with each of you in the weeks ahead as
we try to make progress on this issue.
Before I turn to our panel of witnesses, I will yield to my
colleague, Senator Gramm.

STATEMENT OF SENATOR PHIL GRAMM

Senator Gramm. Mr. Chairman, let me thank you for these
hearings. I dedicated 12 years of my life as a college
professor in trying to deal with economic and financial
illiteracy. I was blessed to have very good students, but it is
still an uphill battle. And they were in a position where they
knew that I was going to ask the material on the test and they
were going to have to explain to momma if they did not know the
answer.
I think this is a very important undertaking. Obviously,
today, we are talking about the budget in the Budget Committee,
of which we are both Members. We are talking about tax
provisions in the budget in the Finance Committee. Both of
these things are more
immediate.
But in terms of the long-term, the functioning of a system
that is primarily based on individual decisionmaking and the
freedom of people to do things right or make mistakes needs to
be conditioned by people who have a certain level of
understanding about finance.
I think it is fair to say that, from my mother on back
probably to Adam and Eve, no one in my family ever owned any
financial instrument, other than a Government savings bond or a
savings
account.
Today, it is common for young people to have 401(k)'s,
retirement programs, IRA's, Roth IRA's. There is intense
competition in the letting of mortgages, a high reward for
competitive shopping in many areas of financial services. I
think the better job we can do in getting knowledge and
developing a knowledge base in society, the better off we will
be.
I just want to say that I am very pleased that Denise
Crawford, who is our Securities Commissioner, is here today
from Texas. Also, I am very happy today that we have two of my
favorite colleagues from my service in the House, Susan
Molinari and David Dreier, with us.
Mr. Chairman, Senator Miller and I are going to have to go
over, we are introducing an amendment at 10:30 a.m. So, we are
going to stay until then and then we will run over. If we can,
we will come back. But, again, thank you very much for coming.
Chairman Sarbanes. Thank you.
Senator Miller.

COMMENT OF SENATOR ZELL MILLER

Senator Miller. I have no statement.
Chairman Sarbanes. Senator Akaka.

COMMENTS OF SENATOR DANIEL K. AKAKA

Senator Akaka. Mr. Chairman, I want to thank you, too, for
holding this hearing on financial literacy. And I want to thank
the witnesses for appearing today, and look forward to their
testimony.
In the wealthiest country in the world, we must increase
the ability of citizens of all ages and backgrounds to manage
their resources, participate in the workforce, make wise
investments, and become better informed about public policy.
All Americans need to have the necessary skills and information
to prepare for a secure financial future.
The current economic recession highlights the importance of
financial literacy. American families are now facing an
enormous amount of financial stress. The Department of Labor
reports that 7.9 million Americans were unemployed in January.
These unemployment statistics do not include those whose hours
and pay have been reduced. In Hawaii, bankruptcy filings for
the third quarter of 2001 were 20 percent higher than in 2000.
It is obvious that financial stress is not solely caused by
lack of financial literacy. There are many factors that can
cause financial difficulty, including the bankruptcy of an
employer or a reduction in tourism due to the September 11
terrorist attacks. However, having or knowing how to acquire
financial knowledge can prevent or reduce the consequences of a
difficult financial situation. Increased education about basic
economic concepts will help people to make better financial
decisions and increase opportunities for participation in
today's global economy.
Today's hearing will feature organizations on the front
line of financial education. Mr. Chairman, I am looking forward to
your recommendations, their recommendations, and the Committee's
recommendations on how we can increase financial literacy.
Thank you very much, Mr. Chairman.
Chairman Sarbanes. Thank you, Senator Akaka. We very much
appreciate your efforts in this area.
I am first going to recognize Congressman David Dreier, who
has come over from the House to introduce his former colleague,
Susan Molinari. We are very pleased to have Congressman Dreier
with us. He actually has taken the lead on this very issue in
the House of Representatives. He is the author of H.R. 61, the
Youth Financial Education Act, which was a comparable piece of
legislation to the proposal put forward by Senators Corzine,
Akaka, and Enzi, who have played an important role in this
area, and others.
That legislation authorizes grants to support financial
literacy programs for students in grades K through 12, as well
as developing a national clearinghouse for model programs and
best practices. And actually, important aspects of that
legislation were
included in the recently-passed education legislation.
So, we are making some progress step by step here. And
David, we very much appreciate your being with us. We would be
happy to hear from you.

STATEMENT OF DAVID DREIER

A U.S. REPRESENTATIVE IN CONGRESS

FROM THE STATE OF CALIFORNIA

Representative Dreier. Thank you very much, Mr. Chairman,
and Senators Gramm, Miller, and Akaka. Let me say that you are
right on target, Mr. Chairman, when you said that you have so
many requests for witnesses. The panel is even spilling over on
the dais here.
[Laughter.]
So this is an issue which I believe is very important and
you have really covered my testimony in talking about the
legislation that I, Senators Akaka, Corzine, and Enzi have
worked on. And also the fact that we were able to include this
very important language in H.R. 61.
I think that when Senator Gramm mentioned the fact that
issues like the budget that we are dealing with are
extraordinarily timely, I think this is a very timely issue as
well because with the mention of 401(k)'s, we know that there
are a couple of hearings taking place on both sides of the
Rotunda dealing with 401(k)'s. And when you think about the
fact that we want to ensure that young people are in a position
that they can make the best decision possible when it comes to
their retirement and all kinds of other things, looking at
education in this area is something that is critically
important.
I do not know if there were U.S. Savings Bonds when Adam
and Eve were investing, Phil, but the fact is, if you look at
the fact that today----
Senator Gramm. That is big enough, you would think there
were.
[Laughter.]
Representative Dreier. Exactly right. There may have been.
[Laughter.]
The fact of the matter is, if you look at the number of
choices and options that are out there today versus the time
that your mother was simply investing in those savings bonds,
it seems to me that the need for this kind of education is even
more important.
And that is why I am very pleased that we have seen so many
organizations step forward and, from my perspective, there is
no one more important in this effort than Susan Molinari. As
you said, Phil, she served with us in the House of
Representatives. But she has also taken a lead role as the
National Chairperson for the Americans for Consumer Education
and Competition. And as the mother of two young daughters, she
wants to ensure that they make all kinds of plans to take care
of her in retirement, I am sure. So, she wants to make sure----
Ms. Molinari. As well as that guy I am married to, too.

[Laughter.]

Representative Dreier. Yes, exactly, because he has very
expensive taste, we know, as well.

[Laughter.]

So making sure that the kind of education that is out there
is very important. Susan has done a wonderful job in stepping
forward and offering the kind of public presentation that is
needed for this issue. I am very pleased that she has done
that. I am going to have to go back to the other side of the
Capitol, but I have taken a look at the testimony and will look
forward to seeing the testimony of all of you. And I suspect
that you have other panels as well here that you are offering,
Paul.
I really applaud the fact that you have focused on these
many, many different organizations that are committed to this
goal, and I thank you for including me.
Chairman Sarbanes. Thank you very much, Congressman Dreier,
for coming over, and we look forward to continuing to work
closely with you on these issues.
We will hear first from Susan Molinari. I will move across
the panel. And I think what I will do is introduce each person
as the time comes for your testimony. That way, we can link the
introduction with the person, instead of doing it all up front
in the beginning. As Congressman Dreier said, Susan Molinari is
the National Chairperson of Americans for Consumer Education
Competition, which was established 2 years ago to promote
financial literacy in education among young people, directly
the subject that we are concerned about, as well as to raise
awareness among educators and legislators on the importance of
financial education. The ACEC does a national survey of high
school seniors, as I understand it, and I guess we will hear a
bit about what that survey shows, but it is not very
encouraging news.
Susan, we are delighted to hear from you. Thank you very
much for coming today.

STATEMENT OF SUSAN MOLINARI

NATIONAL CHAIRPERSON

AMERICANS FOR CONSUMER EDUCATION AND COMPETITION

Ms. Molinari. Thank you so much, Chairman Sarbanes.
In his absence, let me begin by thanking Congressman Dreier
for his kind introduction. I must emphasize that Congressman
Dreier's efforts to improve financial literacy among our young
people have gone back many years, including a piece of
legislation he cosponsored with Congressman Earl Pomeroy, where
they really got out in front in talking about this problem
beginning in the 105th Congress, where he introduced a House
Resolution Expressing Support for Personal Financial Literacy
Programs and culminating with this year's passage, as you all know,
with the No Child Left Behind Act.
Congressman Dreier, as well as everyone sitting with the
Senators around this distinguished dais were very instrumental
in ensuring that the No Child Left Behind Act included full
funding of the financial literacy programs. This legislation
earmarks $5 million specifically for financial education. And I
commend all of you for that particular accomplishment.
Chairman Sarbanes, Ranking Member Gramm, Senators Miller,
Akaka, as you know, I am Susan Molinari, Chairperson of the
Americans for Consumer Education and Competition. I want to
thank you for this opportunity to testify and participate in
this very important dialogue to improve our Nation's financial
literacy.
I would also like to recognize in particular Chairman
Sarbanes for his leadership in initiating these hearings and
helping to elevate the dialogue on financial literacy.
At a time when we do focus on the economic problems of our
Nation, individually or collectively, I was very excited to
come forth today and spend some time, not only in examining the
problems, but also putting forth solutions. Obviously,
educating the public, as you said, Senator Gramm, to make the
right decisions or providing them with the best information to
make their own decisions, is one way that we can make sure that
some of these mistakes are not made in the future.
Teaching our young people to manage their finances should
be as much a part of their curriculum as teaching them math or
grammar. It is a subject that will affect them throughout their
lives and will impact their ability to purchase a home, raise a
family, and prepare for retirement.
Let me digress just for a minute to say that I am honored
to be part of this board presentation here today where so many
people sitting here and sitting in the audience have spent a
significant portion of their lives working and promoting
financial literacy.
And while I am honored to appear always before the U.S.
Senate, I must admit that I am a little bit nervous because I
am sitting two seats next to a former president of the college
that I attended. When I was at the State University of Albany,
Patrick Swygert was President. And so, one can imagine when you
are a freshman or sophomore in college, if you ever thought you
were this close to the president of your university, you were
about to get kicked out of school.
[Laughter.]
So, I am delighted to now be sitting very close to Patrick
Swygert and to work closely with him and to hear about his
partnership with Freddie Mac that is also going a long way
toward improving financial literacy in this country.
As we said, financial literacy forms the foundation that
supports such American Dreams as homeownership and secure
retirement. Sound financial skills are crucial to avoiding the
pitfalls that result in many of our citizens, but particularly
young people, getting into financial hot water or becoming
victims of charlatans who prey
oftentimes, as you correctly stated, on the financially
illiterate. Quite simply, being financially literate is
essential to controlling rather than being controlled by one's
financial circumstances in life. And as Federal Reserve Board
officials have pointed out, mastery of these financial ABC's by
consumers is essential to the smooth and efficient functioning
of our free market economy.
These hearings bear witness to the fact that you and your
colleagues, Mr. Chairman, share the view of many of us in the
financial community, that the sweeping education bill which
President Bush recently signed into law is the beginning and an
important first step, a downpayment, if you will, toward the
financial education accounts of our Nation's young people.
Let me at this time also thank and recognize Senator
Corzine for the leadership that he has taken in making sure
that this provision was championed in the Senate and passed,
along with Senators Enzi, Akaka, Jeffords, Harkin, Kennedy,
and, of course, Senator Sarbanes. Chairman Boehner of the House
Education Committee, along with Congressmen Dreier and Pomeroy
led the House.
Now let me just begin my official testimony by asking the
five most frequently-asked questions when we talk about
financial literacy programs for younger people.
First, how bad is the problem? Well, let's look quickly at
the bottom line. Here's a study that caught my eye 2 years ago
when we were first forming ACEC. It was a 1999 study done by
the National Council of Economics test of basic economic
principles.
Adults received a 57 average grade. High school students
scored 48 percent. Half of the adults and two-thirds of the
students did not know at that time that the stock market
provides a venue for people to buy and sell stocks. Now, I bet
that number has gone up a little bit, but that is kind of an
amazing statistic to know that occurred in 1999. Less
surprising is the statistic that says that only 54 percent of
adults and 23 percent of students knew that when Government
spending exceeds its revenue, a deficit is created, a test I
think many on Capitol Hill would not do so well on these days.
ACEC should add to this data, as you said, and we reported
last year with a survey in which we surveyed over 800 high
school seniors and juniors basic economic principles. Eighty-
two percent failed that survey. We tested them on real life
questions such as interest rates, loans, et cetera. Now that
plays out in real life because it is not just surveys.
According to Norton Bankruptcy Law Advisor, over a 10 year
period, from 1991 to 2001, individuals between the ages of 25
to 34 declaring bankruptcy rose from 417,000 to 464,000.
Second, now that we have established that there is a
problem, why are we suggesting that these problems be solved at
the blackboard rather than at home by their parents? While we
may be great parents, ladies and gentlemen, we are not great
investors and we are not great savers.
Fifty-six percent of U.S. households have failed to save
enough for retirement. Fifty-three percent of Americans report
that they oftentimes live paycheck to paycheck. And remember that
first Lou Harris poll that I cited--parents, as well as their
teenagers flunked that test. Moreover, a VISA USA survey
revealed that 81 percent of parents want their children to get
solid finances taught in schools because they want their
children better prepared to manage their finances than they
were and they are.
Third, should we ask our teachers to assume one more
responsibility in preparing our children for the future?
I would answer that as we raise the next generation to be
successful don't we have an obligation to train them to deal
responsibly with that success? For when they are not adequately
taught, retirement plans are not funded, medical plans are not
paid, bankruptcies are absorbed by consumers one way or the
other and our economy is overall negatively impacted.
Fourth, do financial literacy courses work?
Students, like those at Woodrow Wilson High School's
Academy of Finance here in the District of Columbia, offer
insights into the value of personal financial classroom
instruction. Whereas just 146 of the 801 seniors taking ACEC's
2001 personal financial quiz were able to achieve a passing
grade, all of Woodrow Wilson's 12th graders passed. They did so
after just one semester of personal finance instruction that
included everything from borrowing money all the way to estate
planning.
Similarly, the National Endowment for Financial Education's
High School Financial Planning Program made a significant
difference in the financial skills of students taking that
course work. A survey of teens who completed this program found
that nearly half knew more about credit cards and nearly two-
fifths knew more about investments. The knowledge gained also
brought important behavioral changes in the teens. Nearly two-
fifths improved their skills for tracking spending, and nearly
half began to save or began saving more. More importantly,
teens taking the Financial Planning Program retained what was
taught to them and used their practices in their daily lives.
Let me also just say on this subject, when we went into
these classrooms, it not only took the valedictorian and made
them good financial planners. What it did was it took kids that
I talked to who said, you know what? They were about to fail
junior year and senior year math. Then, all of a sudden, their
teacher said, let's look at that loan you want to take for the
car of your dreams. Let's start to take the college
applications that you are going to have to fill out. All those
people who want to join a gym. Let's look at the financial
programs that they have for them. The math all of a sudden had
tremendous relevance to the children that were learning it and
they picked it up and they ran with it.
You know what it did? It gave them power. It was no longer
just a class about math or applied science. It gave them power,
oftentimes, for children in very powerless situations.
Teachers can incorporate financial literacy curriculum into
their applied math or economic courses right now by accessing
the Internet. The ACEC website contains a course prepared by
Professor Howard Black who was formerly of Howard University
and now at the University of Tennessee that can be downloaded
for use in the classroom.
I know that Project Jump$tart always has their websites
filled with curriculum. And the truth is, Senator, when I
travel, the people that I talk to referring to the public-
private partnerships that you referred to in your opening
statement, no matter where I go to speak on behalf of financial
literacy, people who are investment counselors, retired
bankers, raise their hand and say--I would love to be a part of
training my community because I have seen what happens to this
community when the wrong decisions are made. So, you are right.
There is a wealth of people out there who know the mistakes
that have been made and are anxious to get into the classrooms
to help the teachers.
Fifth, can we afford to teach financial literacy courses?
Of course the answer is, we cannot afford not to. The poet e.e.
cummings once said: ``I am living so far beyond my income that
we may also be said to be living apart.'' That might be funny
were it not for the fact that too many Americans have the same
relationships with their financial life, myself included.
Working together to improve the financial literacy of our young
people we can reunite consumers and their income so that they
may live comfortably and productively under the same roof.
Chairman Sarbanes, thank you for the great honor of giving
me the opportunity to testify before you all this morning.
Chairman Sarbanes. Thank you very much, Susan. It is very
helpful testimony.
We have been joined by Senator Corzine, who has, of course,
played a very important role in moving these efforts forward.
Jon, do you have a statement?

COMMENTS OF SENATOR JON S. CORZINE

Senator Corzine. I have one, but I would rather listen to
the witnesses.
Chairman Sarbanes. I want the witnesses to know what a
great deference that is to the witnesses.
[Laughter.]
Senator Corzine. I believe that they can make the case that
we have a lot of work to do here to bring financial literacy to
our children, to adults in full life experience. And I think it
is terrific that you all are here and I thank you very much and
look forward to hearing your testimony.
Chairman Sarbanes. Very good.
We will now hear from Steven Brobeck, who is the Executive
Director of the Consumer Federation of America. CFA has been
actively involved in educating consumers about financial
matters. It has been an invaluable resource for anyone with an
interest in the many ways in which Americans, particularly low-
income Americans, become entangled in unfavorable or abusive
financial transactions.
We very much appreciate Mr. Brobeck being with us.
Actually, Steve, I understand you were on ABC's nightly news
last night on this issue with reference to yesterday's hearing.
So, we are trying to raise, obviously, the profile of this
issue and see if we cannot get a national commitment to it. We
would be happy to hear from you.

STATEMENT OF STEVEN BROBECK

EXECUTIVE DIRECTOR

CONSUMER FEDERATION OF AMERICA

Mr. Brobeck. Thank you very much, Mr. Chairman, Members of
the Committee.
CFA greatly appreciates the opportunity to discuss the
financial education needs of lower-income adult Americans,
effective ways to meet these needs, and the role of the Federal
Government in this education. These needs are so pressing
because the poor and near-poor have few financial resources to
waste, but relatively poor skills in managing these resources.
Most of some 35 million households with incomes under $25,000
have net financial assets excluding home equity of less than
$1,000.
Yet, they tend to be charged high prices because of their
economic condition, where they live, and their low literacy
levels. Because these households often lack basic reading and
math skills, they frequently have difficulty conducting
effective product searches and they also tend to be vulnerable
to seller abuses.
Individuals who do not understand percentages, for example,
may have difficulty learning the costs of mortgage and consumer
loans. Those who read poorly may not be able to check whether
the oral promises of sales persons are written into contracts.
And those who do not write fluently are limited in their
ability to resolve problems by writing to sellers or to
complaint agencies. And then consumers for whom English is a
second language face special challenges obtaining good value in
their purchases.
Over the past decade, the financial vulnerability of lower-
income Americans has increased simply because of the greater
availability of credit. During the 1990's, credit card debt
rose from about $200 billion to more than $600 billion, and
unused bank card credit lines to more than $2 trillion.
Just the fact that most recent Chapter 7 bankrupts have
incomes well under $30,000, and that credit card debts that
approach these incomes, indicates that the growing availability
of credit cards to lower-income households confers financial
risks as well as benefits.
In the same period, the expansion of subprime mortgage
lending and high-cost small loans marketed largely to lower-
income households, also increased their financial
vulnerability. This vulnerability cannot be reduced without
effective financial education. In our view, there are five
important characteristics of this education.
First, it must seek to change behavior, not just improve
knowledge. Effective financial education must help ensure that
consumers adequately apply the knowledge that they learn.
Second, effective financial education must include
attractive, useful knowledge that is relatively easy to apply.
The knowledge that can be communicated most easily and
effectively to large numbers of adults who are unlikely to
return to the classroom after they leave school takes the form
of relatively short, simple messages containing built-in
motivators about how to meet financial needs and attain
financial wants.
Third, effective education must address values, as well as
knowledge. Most importantly, it should raise basic questions
about the role and value of consumption in people's lives.
Fourth, this education must provide chances to learn by
doing, as well as by studying. It should include opportunities
to participate in the marketplace through actual and simulated
experiences.
Fifth, effective financial education should be part of a
comprehensive national plan for increasing the financial literacy
of all Americans. Unfortunately, at present, many worthwhile
financial education programs do not reflect any broad,
compelling vision and reach only a small minority of the
population.
We need a comprehensive plan, in our opinion, with the
following elements. A rigorous assessment of financial
education needs. Identification of those populations with
especially pressing needs. Evaluations of existing programs to
develop the most promising strategies for meeting these needs.
A campaign to organize broad social and political support for
these strategies. And finally, continuous evaluation of the
successes and failures of these strategies.
In our view, only the Federal Government has the concern,
the objectivity, and the resources to effectively lead the
development and implementation of such a plan. We recommend as
a first step that it initiate a major study of the Nation's
financial education needs and the most effective strategies for
meeting these needs. We also suggest that the study considers
the feasibility of a separate U.S. Office of Financial
Education that could undertake new research and test new
programs.
In closing, we would echo what you said yesterday, Mr.
Chairman, that while financial education is needed to reduce
the financial vulnerability of lower-income Americans, this
education by itself is not sufficient. It must be coupled with
effective consumer and investor protections. Only a sensible
combination of financial education and regulation can help
ensure that consumers manage, spend, borrow, and save their
money adequately.
Thank you.
Chairman Sarbanes. Thank you very much. We appreciate that
statement.
Next, we will hear from Patrick Swygert, President of
Howard University, who is speaking on behalf of the
Historically Black Colleges and Universities.
Yesterday, it was mentioned in our hearing that 78 percent
of U.S. college students have at least one credit card, and
many of them graduate with thousands of dollars of credit card
debt.
The number of bankruptcies amongst those 18 to 24 years has
gone up--it has doubled in less than a decade. Recognizing
students' need for guidance on managing the responsibility that
comes with having a line of credit, Dr. Swygert and other
leaders of the Historically Black Colleges and Universities
have been in the forefront in improving financial literacy
among college students. So, we are very pleased to hear from
you, sir.

STATEMENT OF H. PATRICK SWYGERT

PRESIDENT, HOWARD UNIVERSITY

APPEARING ON BEHALF OF

HISTORICALLY BLACK COLLEGES AND UNIVERSITIES

Mr. Swygert. Chairman Sarbanes, thank you very much for
this opportunity, and Members of the Committee, Senators Dodd,
Corzine, and Akaka, thank you so much as well.
My name is Patrick Swygert and as Chairman Sarbanes has
indicated, I have the privilege of being President of Howard
University, and also the privilege of being a former President
who had the opportunity to share some time at the State
University of New York at Albany with one of our most
distinguished graduates, Congresswoman Susan Molinari.
Chairman Sarbanes. You were certainly a privileged college
president to have her in your student body.
Mr. Swygert. Yes, indeed.
[Laughter.]
Mr. Chairman, I would like to submit for the record my
written statement and highlight one or two items that are found
therein.
Chairman Sarbanes. Your full statement will be included in
the record.
Mr. Swygert. Thank you. Mr. Chairman, as you indicated,
Howard University and the Consortium of Historically Black
Schools and Colleges have worked very, very hard and, indeed, I
believe, are in the forefront of dealing with one of the great
challenges confronting American college-age students. Namely,
their use and, far too often, misuse, of credit cards.
Let me say at the outset, however, Mr. Chairman, that if
used responsibly, credit cards allow students to build up
credit histories that facilitate increased access to credit in
the future.
However, if college students have not learned financial
management skills in their secondary education, or from their
parents, and if they misuse their credit cards or mismanage
their credit card debt, the disadvantages far outweigh any
supposed advantages.
In order to protect students from unnecessary debt
accumulation, all learning institutions, Mr. Chairman, have an
obligation to promptly educate such students on credit card
consumer debt and the dangers of credit card debt.
Howard University is already addressing the national
financial literacy problem as it relates to African-Americans
and to other
minorities.
In partnership with Freddie Mac, Howard and four other his-
torically black colleges and universities--Benedict College,
Clark Atlanta University, Florida A&M University, and St. Augustine's
College--are participating in the CreditSmart program, which
seeks to develop a comprehensive, classroom-based consumer
education curriculum for college students.
Students are provided with an overview of credit and credit
management; insight as to how lenders access credit histories;
and the key steps to achieving financial goals. The
curriculum's mission is designed to increase financial literacy
by enhancing successful life-long money management skills.
This morning, Mr. Chairman, I am accompanied by the
Director of that program, the CreditSmart Project, Manager and
Professor of Finance at Howard University, Dr. Debby Lindsey.
Also, I am accompanied by our Senior Vice President for
Government Relations, Dr. Hassan Minor, who has been
instrumental as well, and his staff assistant, Mrs. Andrea
McIntosh.
Now, Mr. Chairman, we have found, in cooperation with
Freddie Mac and our other partners, that what we characterize
education for financial literacy as indeed, very hard work. No
one should believe that simply attending a seminar or two, or a
program or two, or an awareness session or two, will imbue
students, whether they be middle school students, high school
students or college students, with the necessary intellectual
wherewithal to manage their way through the welter of financial
instruments and opportunities available to them. It is hard and
intensive work.
I think these hearings are terribly important inasmuch as
they underscore both the intensity of the issue and also the
need for a national strategy to address it.
We have a number of other strategic partners, Mr. Chairman,
that I would just like to mention, if I may, before concluding
my remarks at this phase of the hearing. Namely, we have a
relationship with our strategic partner, the Fannie Mae
Foundation, which has developed a personal finance initiative
that Howard is participating in as well.
In addition, we are well aware of, and we certainly support
the National Urban League, the Coalition of Black Investors'
Investment Education Fund, and the Investment Institute
Education Foundation, for the role that they are playing in
seeking to raise awareness of these issues within the African-
American community in particular.
We also take this opportunity to acknowledge a program
entitled, ``Are You Credit-Wise?,'' a program funded and
sponsored by MasterCard which provides a financial education
program on a peer-to-peer basis. At Howard University, indeed,
we have two student interns, Ms. Marsha Ann Brown and Ms.
Stella Stiles, who are involved in this peer-to-peer counseling
which is also so terribly important.
Mr. Chairman, again, thank you so very much for this
opportunity to share these brief remarks with you and I look
forward to any questions you may have.
Thank you, sir.
Chairman Sarbanes. Thank you very much. And your full
statement will be included in the record.
We have been joined by Senator Dodd and I will yield to him
if he has any statement.

COMMENTS OF SENATOR CHRISTOPHER J. DODD

Senator Dodd. First of all, Mr. Chairman, just to apologize
for being a bit late, but we had a hearing on long-term care
for the elderly, a joint hearing this morning, and I apologize
for getting up here late.
Susan, welcome back to familiar territory to you. And to
all of the witnesses here.
Thank you all very, very much.
Chairman Sarbanes. Thank you very much.
Senator Dodd. Thank you, Mr. Chairman. This is a very
important set of hearings. As we mentioned yesterday, Senators
Corzine and Akaka, I know that a lot more attention is being
paid to a very specific case, the Enron case. But in a sense,
what we are doing here may have more to do in the long-term--
with addressing some of the underlying problems here than many
other things we may suggest. So, I am very grateful to the
Senator from Maryland and Senator Corzine and others who have
really made education in this area such an important point.
Chairman Sarbanes. The Committee will turn its attention to
Enron beginning next week with a series of hearings.
We had originally scheduled this hearing on financial
literacy for September 20. We had Chairman Greenspan, Chairman
Pitt, and Secretary O'Neill as our witnesses. Of course, we had
the events of September 11. So the focus of that hearing
shifted off to whether we could get our markets up and
functioning again and get back into action. We then scheduled
the hearings for yesterday and today. I was determined we were
going to carry through with them.
There is always something, the hot topic of the moment,
that can divert you off. And we will go to that issue, as I
said, next week. But we very much wanted to move ahead on this
schedule. And those on this panel have been very gracious in
arranging their schedules so that we could bring you all in at
the same time. This is a long-term issue, but we intend to stay
with it and see if we can't make a difference.
Next, we will hear from Don Blandin, who is the President
of the American Savings Education Council. ASEC is a leader on
the issue of retirement saving. It has focused on public
awareness about saving through ads, public events, national
surveys, such as the 2001 Retirement Confidence Survey. Their
work actually becomes even more essential when we consider that
the largest generation in history is set to start retiring at
the end of this decade.
Mr. Blandin, thank you for coming. We would be pleased to
hear from you.

STATEMENT OF DON M. BLANDIN, PRESIDENT

AMERICAN SAVINGS EDUCATION COUNCIL (ASEC)

Mr. Blandin. Thank you, Mr. Chairman. I am pleased to join
you for your second day of hearings.
I was in this same building yesterday for your other
hearings and found it was very interesting and even had an
opportunity to give a several minute summary on CNN this
morning, since they seem to be interested in this topic as
well.
I am Don Blandin, President of the American Savings
Education Council, a coalition of public- and private-sector
organizations that promotes financial education to adults and
to children. We believe that coalition-building, the public-
private-sector partnerships, are the key to increasing
financial literacy in the United States.
Within ASEC, we are bringing together a large and diverse
group of institutional representatives from various sectors who
may not always sit at the same table, but have discovered that
they share a common goal and can help educate more Americans by
leveraging each other's networks and resources.
I will not address the need for financial literacy and
financial education, since that is well-documented and was
highlighted during yesterday's hearing with prominent Government
leaders. Rather, I would like to highlight several examples of best
practices and encourage others to benefit from and, in some
cases, replicate these efforts.
As background, here are some key findings from a national
field study recently done by the Institute for Socio-Financial
Studies and commissioned and supported by the Fannie Mae
Foundation.
Financial education is most often provided by communities,
by employers, by faith-based organizations, and within the
military, the study found. The most recently taught topics are:
Budget and money management, saving and investing, credit and
debt, 401(k) investing, and how to pay for school and health
care, health care being a very important growing issue.
The biggest challenges that program leaders and managers
face in these programs are having enough resources to run the
program, inexperience in reaching out to different cultural
groups, and being able to attract or expand the program to
reach even more participants than they currently do, a comment
that I think echoes the concern of Steven Brobeck. What helps a
program to be successful?
The study found that a clear mission statement, targeted
outreach, adequate resources, successful evaluation and follow-
up, measurable results, essentially, easy access to the
program, a relevant curriculum, and what they called dynamic
partnering.
The issue of retirement savings and financial education has
long been a policy concern in Congress and some Members of this
Committee helped to enact the 1997 Savings Are Vital To
Everyone's Retirement Act, also known as the SAVER Act. As
mandated by the SAVER legislation, the first White House and
Congressional summit on retirement savings was held in 1998,
and the second summit is scheduled later this month on February
27, here in Washington.
In my written testimony, you will see the results of a
Delphi survey conducted to evaluate ideas generated by the 1998
summit delegates on ways to help Americans better save for
retirement and become more financially secure.
The top five financial education ideas that came out of
that process include:
Educate people about the benefits of starting to save
early.
Educate people about the cost of retirement, including the
increasing costs of health care.
Encourage the use of payroll deductions.
Develop financial curriculum for high schools and colleges.
Provide simple, easy-to-use information on retirement
savings.
These were some of the top recommendations coming out of
the Delphi study of the first White House and Congressional
summit.
The Emmy award-winning Choose To Save^' financial
education campaign was cited in 1998 by summit delegates as the
type of campaign that should be conducted throughout the
Nation. Today's national Choose To Save^' program,
underwritten by Fidelity Investments in the Washington, DC
market, includes ongoing news coverage and special programming
through our DC media partners, WJLA-TV Channel 7, WGMS radio,
and WTOP radio.
In April, 2000, the Choose To Save^' program
hosted a forum on retirement security that brought together key
representatives in the public, private, and nonprofit sectors
to share expertise and best practices. The top six initiatives
ranked by participants included:
Creating a national media campaign to raise public
awareness.
Promote negative election as a default design feature.
Promote consumer financial literacy in K-12.
Promote financial planning tools and websites through the
Social Security Administration's benefit statement mailings.
Promote preservation/rollover through the use of waivers
recognizing foregone future accumulations.
Require automatic rollover of lump sums as a default design
feature in retirement plans.
In my written testimony, I go into detail about the 2001
Parents, Youth & Money Survey, cosponsored by the Employee
Benefit Research Institute, ASEC, Matthew Greenwald &
Associates, and underwritten by the TIAA-CREF Institute.
The findings of this and other studies support the
important work of such organizations as the Jump$tart Coalition
for Personal Financial Literacy, whose objective is to
encourage curriculum in schools to ensure that every student
graduates from high school with basic personal financial
management skills.
According to recent research by the National Conference of
State Legislatures, only seven States currently include
personal finance instruction in a required course. But there
are some exciting new efforts, one of which was mentioned
yesterday. There is a new learning tool called Money Math:
Lessons for Life.
The Treasury Department, the Jump$tart Coalition, and other
partners have developed four free lesson plans that can be
included in middle school math curriculum that teaches
important personal finance skills to students in grades seven
through nine, essentially those middle school students where I
think it is very important to start, again, as early as you can
on basic money management.
America is the land of opportunities, but many Americans
are opting out of their opportunity to build personal wealth by
overspending, carrying excessive credit card debt, and not
participating in their company's employment-based retirement
plans.
I urge employers that have not yet done so to join us in
our mission to help educate their employees and other Americans
about personal finance. And I leave you with five lessons I
have learned over the years about public- and private-sector
partnerships and coalition-building, as we are beginning down
this road through these hearings.
You should emphasize personal relationships.
You should make sure that any alliance you form is a two-
way street.
You should have patience.
You should be flexible.
And most of all, think big, since the purpose of a
coalition is to accomplish something that no one entity could
accomplish alone.
Mr. Chairman, Members of the Committee, I thank you for the
opportunity to speak with you today. I request that my full
testimony be placed in the record and at the appropriate time,
I would be glad to take questions or answer any written
questions following the hearing.
Thank you.
Chairman Sarbanes. Thank you very much, sir.
Next, we will hear from Tess Canja, President of the Board
of Directors of AARP and who has visited with us before. We are
pleased to have you back before the Committee.
Many older Americans, particularly older women, are finding
themselves ill-prepared to make the type of complicated
financial decisions required of them in their later years. And
as our hearings last summer demonstrated, the hearings on
predatory lending, seniors are often targeted as victims for
abusive loan terms and other devastating financial
arrangements. We know that this is an issue in which AARP has
interested itself for quite a period of time, and we would be
happy to hear from you.
Ms. Canja.

STATEMENT OF ESTHER ``TESS'' CANJA

PRESIDENT, AARP

Ms. Canja. It is so very good to be back. Thank you and
good
morning, Chairman Sarbanes, and distinguished Members of the
Committee. I am, as you know, Tess Canja, President of AARP.
And if I may, I would like to ask that my longer written
statement be submitted for the record.
AARP considers the work being undertaken by this Committee
regarding financial literacy to be critical in its focus and in
its timing. If there is a positive aspect of the Enron debacle,
it is that we need to clearly understand the investment process
and to protect fair play in it.
The policy debate over the issue of Social Security and its
benefits has provided additional focus regarding the risks of
private investment.
To be certain, developing effective financial literacy and
services and programs should not be viewed by anyone as a
substitute for clear and strong oversight and enforcement of
investor protection laws and regulations. However, we see a
need for a national strategy for making available well-
esearched and well-evaluated programs for financial literacy.
AARP has long been active in conducting research and
providing financial education and counseling services to our
members. On the one hand, we have learned from an independent
analysis of 1994 Health and Retirement Study data, prepared for
AARP that low levels of savings and high levels of personal and
real estate debt are serious problems for many households
nearing retirement. On the other hand, there has been a
sustained trend of great popular participation in the stock
markets and an increasing reliance on these investments for
retirement income.
According to the Census Bureau, more than 28 million
Americans over the age of 65 rely to some extent on investment
income to meet their living expenses. Three quarters of older
persons depend on investment income to meet 25 percent or more
of their total income. This trend is likely to accelerate as
the Baby Boomer generation ages and defined contribution
pension plans replace
defined benefit pension plans. These findings raise important
policy questions about how to improve the financial literacy of
all Americans.
In 1998, AARP commissioned a national telephone survey of
1,500 adults aged 18 and older. Four questions were asked to
provide a general indication of the level of investment
knowledge possessed by this sample of consumers. The specific
questions asked are cited in my written statement. Among
consumers under the age of 65, 12 percent answered all four
questions correctly, while only 6 percent of the age 65 and
over could do it.
The growth in the proportion of Americans investing in the
stock market appears not to be well supported by a
corresponding knowledge about fundamental product features,
charges and risks.
In April 2001, AARP contracted for a study of persons age
50 through 59 to gain more information about their interests in
financial planning and management. Among the key findings of
this unpublished survey, when asked about their level of
confidence in a financially secure retirement, only 2 in 10
respondents say they are either extremely or very confident
that they will have enough money to live comfortably throughout
their retirement years.
When respondents were also asked to rate how important it
was for them to learn about each of 22 different financial
topics, more than 6 in 10 say Social Security, that the
benefits are important to learn about. However, less than half
as many consider knowing how much money they will need in
retirement or about sources of retirement income as important
topics to learn about. And less than 1 in 4 picked any of the
other topics such as investment, savings, tax strategies, and
interest in inheritance issues as being among the top five.
In conclusion, the need and the demand for financial
literacy programs and services will continue to grow. We look
forward to working with you, Chairman Sarbanes, and Members of
the Senate Banking Committee, on both fronts--strengthening
investor protections and strengthening the investor.
Thanks for this opportunity to testify today and I would be
happy to answer any questions that you may have.
Chairman Sarbanes. Thank you very much. Your full statement
will be included in the record.
We have been joined by Senator Stabenow, who has taken a
keen interest in this issue. Debbie, did you have any comments
that you wanted to make?

COMMENTS OF SENATOR DEBBIE STABENOW

Senator Stabenow. Well, thank you, Mr. Chairman. I would
just welcome all of our guests that are with us today. And in
particular, I would welcome Tess Canja, who has been with us
before, who is a friend from Michigan. We go back some 25
years, Mr. Chairman. I won't say how old we were then.
[Laughter.]
But it is a pleasure to have all of you here. I will have
an opportunity and do have some questions that I would like to
ask at the appropriate time.
Chairman Sarbanes. Well, you both started out at an
extremely young age in these public policy matters.
Senator Stabenow. That is correct.
[Laughter.]
Chairman Sarbanes. That is my understanding.
Next, we will hear from Raul Yzaguirre, President and CEO
of the National Council of La Raza. As part of its campaign to
improve economic opportunity for Hispanic Americans, La Raza is

actively engaged in financial education efforts. And through
its ex-
tensive work with community-based groups, La Raza is raising
awareness of this critical issue.
Raul, we are very pleased to have you with us. We would be
happy to hear from you.

STATEMENT OF RAUL YZAGUIRRE

PRESIDENT AND CHIEF EXECUTIVE OFFICER

NATIONAL COUNCIL OF LA RAZA

Mr. Yzaguirre. Thank you, Mr. Chairman, for that very kind
introduction and for this opportunity to speak here today on
behalf of the National Council of La Raza.

Before I begin, I want to thank you, Chairman Sarbanes, for
helping make Raoul Campos a prospective nominee to the U.S.
Securities and Exchange Commission.

As you know, the National Council of La Raza is the largest
Hispanic constituency-based organization. We have been working
for many years in an effort to address the economic issues
faced by Latino working families. An important element of this
work is to explore the financial security of Latino families,
which includes focusing on issues such as savings and
investment, retirement security, pension coverage,
homeownership, tax policy, and financial literacy.

In light of this, I appreciate this opportunity to address
you about how important financial literacy and education is to
improving the economic status of Latino families in the United
States.

In recent years, it has become clear that the economic
well-being and financial security of families is not simply
predicated on one's income from work. Financial security today
is defined by net worth or wealth of a family or a household.
Thanks, in large part, to a vibrant financial services market,
American families have become wealthier and more financially
secure, even though their incomes have grown at a more modest
rate.

Unfortunately, as most Americans benefited from the
economic boom of the 1990's, Latinos have been left behind. As
Chairman Alan Greenspan mentioned yesterday, while the median
family net worth of most families increased, the median Latino
family net worth decreased in the 1990's. By 1998, the ratio of
family net worth between Anglo-white families and Latino
families was 27:1--that is, 27 times larger than the Latino net
worth. Just as appalling, when home equity it taken out of the
equation, we find that Hispanic families have a median
financial wealth of zero. Just remember that this is despite
increases in income and decreases in poverty for Latino
families.

This wealth gap exists due to many factors, including lack
of knowledge and adequate information about the financial
services industry and insufficient kinds of financial products
to meet the distinct needs of Latino families.

These barriers keep Latino families from becoming active
participants in the financial market and in turn inhibit them from
accumulating assets and reaching financial security. They can
be addressed through financial education, which leads to a
finally literate community. Improvements in financial literacy and
financial education opportunities for Hispanic families are critical
to financial security.

It is eminently clear that our Nation's current and future
economic security is increasingly dependent on the Latino
community. Today, there are more than 35 million Hispanics in
the United States mainland, and an additional 4 million
American citizens on the island of Puerto Rico. One in eight
Americans is Latino. We are more than one in ten workers and
one in five students.
The number of Hispanic-owned businesses has continued to
rise dramatically and Latinos have a purchasing power that
exceeds $450 billion annually. Latino financial well-being has
benefits and the lack thereof has consequences for all
Americans.
Due to the lack of Latino participation in the financial
services arena, the enormous potential that Latinos have to
contribute to this country's economy is untapped.
According to the Survey of Consumer Finances, in 1995,
nearly one-third of Latinos did not have a basic checking or
savings account, compared to just 13 percent of Anglo whites.
The drawbacks to not owning a transaction account are manyfold.
Your money is less secure and it does not accrue interest and
you are subjected to check cashers and predatory lenders that,
at the very least, charge exorbitant fees for their services.
In addition, you do not have access to other services or
products that are necessary for asset accumulation. How do we
provide information about saving in beneficial ways for Latinos
to access financial services?
First, successful financial education programs have to be
responsive to cultural nuances within the Latino community.
This means that simply translating all materials into Spanish
mostly fails to elicit the hoped-for response. Many Hispanics
that need financial education were born in this country or
speak fluent English.
As you cited yesterday, Mr. Chairman, another issue that
affects various Hispanic communities is remittances. Remitted
money serves not only as an alternate form of savings, but also
as a critical source of investment capital for countries that
are often suffering economically.
In 1999 alone, over $13 billion was wired from the United
States to Latin America. However, one of our concerns is that
those who remit money are paying too much for these services.
Fortunately, there are increasingly more services available
from credit unions and even some banks that will wire money
abroad at a much more reasonable cost than traditional money-
senders. In addition, these services are more frequently being
linked to savings or checking accounts in the United States,
further encouraging participation in financial services.
Second, effective financial education programs for Latinos
link education to accessing a product or service, which
provides strong incentives for Latinos to take time to attend
classes and to ask
questions.
Third, successful education programs are delivered by
groups that the community knows and trusts. Evidence suggests
that for Latinos, the best vehicles for financial education are
community-based organizations, or CBO's, that already have
strong relationships with the community.
I would like to highlight two noteworthy Federal programs
that combine these elements: The Individual Development Account
program, or IDA's, and homeownership counseling programs. The
IDA program is a Federally-sponsored program that provides
incentives for savings and asset accumulation among low- and
moderate-income people by matching participants' savings. As
part of this program, IDA accountholders must attend mandatory
financial education classes, often provided by CBO's
administering the IDA program. Preliminary data has been very
promising. Latinos are not only getting educated, they are also
saving more.
Also, the Federally-sponsored homeownership counseling
programs offer another model for effective financial education.
A number of local NCLR affiliates provide prepurchase
counseling, both to people who are ready to buy a home and to
those who are just starting the process of saving for their
first home. The education and assistance provided are effective
for both groups because they are directly linked to achieving
the goal of homeownership.
All that being said, more information is needed about best
practices and approaches to improving financial literacy.
However, we do know that such measures are only useful insofar
as they result in mature improvements in the asset level and
financial security of Latino families nationwide. That is why
we must have a national partnership among the Government,
community-based groups, and advocates in the financial services
industry. The Federal Government can tap into Latino economic
potential by taking public policy measures to foster financial
education efforts.
The National Council of La Raza recommends expanding the
existing IDA grant program to $500 million and including a
clear
intent to target such programs to serve more Latinos.
As President Bush proposed in his fiscal year 2003 budget,
NCLR also recommends expanding the homeownership counseling
program to at least $35 million this year. Furthermore,
creating initiatives that entice the financial sector to play a
bigger role in providing services, education, and opportunities
for underserved communities would do a great deal to reach
millions of people and increase the Nation's financial
literacy.
Mr. Chairman, we will do our part. We are committed to
serving the community by providing the financial education that
under-
scores the importance of financial literacy and the
opportunities
it presents.
Finally, the financial services industry has an important
role as well. It should become more involved in financial
education efforts by partnering with community-based groups.
They should also create new products to meet the needs of
Latino families. This will benefit Latinos, as well as the
institutions themselves by building trust in the community and
shaping future customers to be informed consumers.
We all have a role to play in increasing financial
literacy. It is important for the country that all Americans
understand the financial market and that all Americans
participate in it fully.
I thank you for allowing me to speak here today and I look
forward to working with you in the future to help make all
American families financially secure.
Thank you, Mr. Chairman.
Chairman Sarbanes. Thank you very much.
Our concluding panelist this morning will be Denise Voigt
Crawford. Ms. Crawford is a Securities Commissioner for the
State of Texas. Surveys have consistently shown that most
Americans do not understand the basics of investing. Ms.
Crawford has been actively involved in financial literacy
programs and investor education programs in Texas.

We are very pleased that she is here with us this morning.
We would be happy to hear from you.

STATEMENT OF DENISE VOIGT CRAWFORD

TEXAS SECURITIES COMMISSIONER

TEXAS STATE SECURITIES BOARD

Ms. Crawford. Thank you, Mr. Chairman. I am delighted to be
here among such good company. As I hear the speakers today talk
about their programs and their goals, I am very impressed with
what has been done so far.

Chairman Sarbanes and Members of the Committee,
unfortunately, despite these incredible efforts that have been
made, these surveys that Ms. Molinari was discussing earlier
show that we do continue to have financial and security and
investment crisis in this country in terms of the level of
financial literacy. And what does that mean to us?

What it demonstrates to me is that what we are doing is
great as far as it goes. But we have to do a better job of
pinpointing those components of our society that can be reached
most efficiently and work together to do that and motivate
people to learn and collaborate and coordinate our efforts
better.

And so I commend you, Mr. Chairman, in having these
hearings because I am hopeful that as we go forward, that is
exactly what will happen.

As you are probably aware from the testimony that you heard
yesterday and your own experiences, everyone is decidedly
concerned about the absence of financial literacy in the United
States.

One of the things that has been very interesting to us in
Texas is the fact that not only have the securities markets
grown, but also they have grown at such a tremendous pace. And
now, the dollar volume in the Texas securities market outstrips
the combined deposits in all banks, savings and loans, credit
unions, and thrifts, all of those financial entities. And it
far outstrips them.

The Texas experience, to some degree, mirrors what is
happening all over the United States. We just no longer live in
the passbook savings community of our childhood. And you have
heard repeatedly about the complex issues that come before U.S.
citizens and other persons who are in our country.

Without a basic financial education, investors are
obviously less savvy. The securities industry has been very
concerned about that. We have worked closely with the
securities industry on joint projects, primarily through the
North American Securities Administrators Association, of which
all State securities regulators are members.

The SIA has done an excellent job in trying to collaborate
and reach out and it is really in the industry's best interest
to do so because a savvy investor is much less likely to be
disappointed in his or her investment. A savvy investor is much
more appreciative of the inherent risk of the markets and is
not so quick to assume that there is something about the
markets that is somehow rigged or not right.

With regard to other entities with which we have worked,
the AARP, ASEC, other members of this panel, we have reached
out to those people and done a great deal of good on a
collaborative basis.
I have to say that ASEC, the group that Don Blandin
represents here today, has elevated public-private partnerships
to an art. And that is something that I would highly recommend
that this Committee keep in mind. Government cannot do it all.
The taxpayers cannot do it all. It is very important for us to
work with the private sector to make these educational outreach
efforts work. I wanted to give you just a couple of examples
from my experience as a securities regulator.
One of the things that we have found in our cases is that
when people lose their money, and sometimes they are completely
wiped out, we are more often than not successful in putting the
perpetrators in jail, and that is extremely important. However,
very seldom, if ever, are we able to get restitution for the
investors. Very seldom. It is a huge problem.
So what we have analyzed in our office has been a series of
situations where we brought enforcement cases and we have found
that some fundamental concept, a financial literacy concept was
missing. And had this concept been fully appreciated by the
investors, perhaps they would not have been victims of fraud.
Let me give you a couple of real-life examples.
You may have heard of these prime bank debenture schemes.
They are incredibly huge across the country right now. In fact,
State securities regulators have brought cases on behalf of
more than 41,000 people nationwide who have invested in these
deals. And at the very least, about $470 million has been lost.
Well, that is just one example. And you know what is really
interesting about that case, Mr. Chairman, is that there is no
such thing as a prime bank. There is no such thing. And if
investors just understood that concept, they would not be
ripped off, to put it in the vernacular.
Another situation. We have seen foreign currency frauds
that are ongoing. We had one in Texas fairly recently, where we
had about $50 million invested. The financial literacy concept
that we found in our office as we investigated that case that
was missing was the fact that the investors did not bother to
read their account statements. And many times, if they did read
them, they simply did not understand them.
Had they read them, or had they understood them, they would
have seen that the account statements were completely unrelated
to what was going on in the marketplace. Had they understood
the basics of investing, it is fair to say that many, if not
most, of these investors would not have been victims of fraud.
I am going to give you one more example from real life. And it
has to do with elderly investors or seniors.
These days, the senior population in the United States is
actively seeking out higher returns from safe investments. And
oftentimes, they turn to CD's. CD's historically have been a
great investment for seniors. And legitimate CD's continue to
be a good investment. However, the world of CD's is very
complex today. You have things like callable CD's. You have
variations on a theme. Unless an investor understand these
differences, it is a real problem, particularly if an elderly
investor does not understand. Let me give you one example.
One retiree was persuaded to invest more than $100,000 of
her 97 year old mother's money in three callable CD's with 20
year maturities. For a 97 year old to have a 20 year maturity
in a CD is just completely unacceptable. The financial literacy
concept missing here is that the age and risk tolerance of the
investor is very key in getting a callable CD or any other type
of CD.
So as securities regulators who are always strapped for
resources, we have seen day-to-day how critically important it
is to have people who are savvy and understand the basics. I
want to give you one example, the best example I can think of,
of an outreach effort, a collaborative effort that was
undertaken in this area.
Some of you here may have heard of a program called
Financial Literacy 2010. It originated in the State of Texas,
the Texas State Securities Board, without taxpayer monies, I
might add, set up this program and we have since then, through
NASAA, the Nonprofit Investor Protection Trust, and the NASDR,
as well as the consumer education group at the Eastern Michigan
University (National Institute for Consumer Education), have
taken this program nationwide and we have reached out to
thousands upon thousands of teachers.
In the State of Texas, we have delivered the program with
free teaching guides to over a thousand teachers. We provide
the information for free, and it is now in the schools and it
is adaptable to economics classroom settings, to other
settings, math settings and whatnot. And our goal is to make
sure that every senior in the United States is given the
opportunity to learn the basics of finance before he or she
graduates. That is critically important, Senators, because so
many of our seniors do not go on to college. So this is the
only opportunity that they will ever have to get a personal
financial literacy class.
This has just been a tremendous success. The components of
the program are set forth in our written testimony and I
commend it to you. And again, not necessarily to sell the
program itself to you, but to use it as an illustration of one
of these partnerships that we think is so important going
forward.
With that, I am going to conclude my testimony and I would
like to make myself available for questions. Anything that I
can do to assist the Committee or anything that NASAA or the
IPT can do as well, we are happy to.
Thank you again, Mr. Chairman. I am delighted to be here.
Chairman Sarbanes. Well, thank you very much, Ms. Crawford.
It is obvious that great care and effort has gone into the
prepared statements and not only will we include them in the
record, but also they are a very important source of
information to us.
There is a vote scheduled at 11:30 a.m. I do not know
whether it will go off on time. I am going to just do one quick
question and then yield to my colleagues because I know it will
be difficult to reconvene. In fact, there are two votes
scheduled in a row, so I will try to move along quickly.
I have one question that I want to ask and then I am going
to yield. Senator Miller, I think you were here first this
morning.
The Chinese have this expression--let a thousand flowers
bloom. And I have some perception that a certain amount of that
is going on. You have this company that is running a terrific
education program for its workers and the Historically Black
Universities and Colleges have a special program now. La Raza
is working. The AARP. You have these exciting things happening
in Texas. The councils are at work.
A lot of people can fall through the cracks. How do we get
a system in place or a framework that we can say, well,
everyone's going to go through this education process.
The Chinese have another expression. When a group visits
China, the first question they ask is: Who is the responsible
person in this group? If you get fingered as the responsible
person, then you have to handle all the issues from there on.
Who is the responsible person here? Who are we going to put
this on.
Yesterday, Senator Carper said, that the treasurer of the
State of Delaware has taken on the role of handling financial
literacy as his project in Delaware.
I would be interested very quickly in just getting your
thoughts on that and then I am going to yield to my colleagues.
Mr. Swygert. Mr. Chairman, if I may, it was not too long
ago in our Nation's history that a question of public health
was viewed as a very, very local, site-specific issue--whether
it was personal hygiene, or the care and feeding of livestock,
it was viewed as a very personal and local issue.
I think today, we understand that public health is a
national imperative. Now how we address it still has a
significant local, as it must, impact.
I think these hearings over the last 2 days have gone a
long way in making the question of financial literacy a
national question, and that is where we have to start.
I come from the perspective of higher education, and I
guess if left to my own devices, I would say that the Assistant
Secretary for Post-Secondary Education in the U.S. Department
of Education should consider that as part of her new mandate. I
have not consulted, by the way, with the Assistant Secretary.
Chairman Sarbanes. Ms. Crawford makes an important point,
that a lot of people never get beyond high school.
Mr. Swygert. Yes. As I said, Mr. Chairman, if left to my
own devices. But I think it is bigger than that. I think it
really has to start at the primary level.
When we talk about students in middle school and we talk
about students in high school, you are talking about students,
sometimes tragically, who already have incurred debt.
I think it has to start as a function of primary education.
And
if our young people in the second and third grade can be
exposed to a foreign language, and successfully so, then I
think we are
clever enough to come up with ways and means of exposing them
to financial literacy as well, as another language.
Chairman Sarbanes. Does anyone want to add, very quickly?
Ms. Canja. I will add.
Chairman Sarbanes. Go ahead, very quickly.
Ms. Canja. Very quickly. It really does have to be basic
education through our school system. But then you come to
special populations that have very special needs. I am thinking
of women. I am thinking that 43 percent of women after the age
of 65 are widowed and totally responsible for their economic
security. And they need a great deal of guidance, a great deal
of information at that moment or before they are coming into
retirement. They have to realize that the chances of their
being alone in later life is so significant. And so, somehow,
whatever national strategy we have, we have to include these
special populations. We heard about the Hispanic population and
a whole group of special needs have to be addressed.
Mr. Brobeck. The issue is so large and complicated, that it
is difficult to hold any one body responsible, which is why we
suggest that you consider creating an Office of Financial
Education within the Treasury, and within the Department of
Education, to have some accountability.
But what would be really helpful as well is for the Federal
Government to take the lead in helping to develop a
comprehensive plan and evaluation of financial education which
would serve as a roadmap for all of the many institutions that
are seeking to meet needs and address challenges in this area.
Chairman Sarbanes. Senator Miller.
Senator Miller. Thank you, Mr. Chairman. I hurried back to
get this question in. And I apologize for having to leave.
I am the product of a single parent, back before that term
was even invented, and as prevalent as it is now. My question,
and you touched on it, Ms. Canja, is special challenges that
face women.
We know that an average woman spends 11\1/2\ years out of
the workforce caring for children or other family members. And
during that time, she is not investing in a pension or she is
not paying into Social Security. Even during the working years,
we know how much less she is paid than a man, and we will not
get into that
right now.
[Laughter.]
And women, as you have pointed out, live longer than men,
an average of 7 years. So my question is what do you see as the
consequences of these challenges for women in their retirement
years? You touched on that a little. What role do you see for
financial education in particular for these women? And I know
that we could talk about that all morning.
Ms. Canja. Yes, we could. I can tell you that it has been a
huge concern of AARP's and we have had programs that have
addressed it. We had a very wonderful program--Women's
Financial Information Program. It gave basics. Very often, and
especially in more traditional families, the husband has
handled the finances and the woman, and especially if she has
to deal with it then, really does not know where to turn.
So this took care of many, many basic things for women. We
have expanded that now into a program for younger women who are
coming into retirement and talking much more about investments
and financial planning, the kinds of things they need to do.
There is a tremendous need for financial information for
women of all ages as they move forward because they can be left
alone at any age and responsible for their economic well-being.
Senator Miller. Thank you. If you have any information, or
if any of you have anything that you would like for me to read
on the subject, I would appreciate your sending it to me.
Ms. Canja. We will get you something.
Senator Miller. Very good.
Chairman Sarbanes. Thank you very much.
Senator Akaka.
Senator Akaka. Yes, Mr. Chairman, I know that we are short
on time. I was trying to think of a question like yours. I come
back to the question that I think was raised by Mr. Brobeck.
And that is, is there a comprehensive national kind of plan
that can be used nationally in our country to deal with the
problems that we are facing today?
Enron of course now is a spark that will certainly drive
it. But as was mentioned earlier, I did put in a bill for
economic educa-
tion beginning from kindergarten, as was mentioned here by
Dr. Swygert. But whatever we do will have to be comprehensive
and national.
That is my question to all of you. What is the National
Plan? Suggestions were made that we assign that task to the
Federal Government, perhaps by giving it to the Secretary of
Education. But in spite of that, I am looking for an answer to
this. And so, let me just lay that down to you.
Ms. Molinari. Senator, if I can start just by saying,
obviously, we are in a delicate area of debate here on Capitol
Hill with regard to the Federal role in course curriculum in
schools.
One of the concerns that we have heard constantly as we
travel around the United States is not only how do we get that
course curriculum in particularly high schools, but also
particularly now that we are requiring schools to give
standardized tests. How do we make sure that we are
complementing the effort of the course curriculum with regard
to the State tasks with the national impacts that are now being
implemented throughout the United States. So, we have to
somehow make sure that we are, in fact, rewarding the teaching
of this with regard to the eventual testing and the way we deal
with that today.
Obviously, a lot of this I think does have to be left to
the States to determine where they best enforce this
curriculum. I have traveled to Delaware where they do a
terrific job in the very early school grades, where high
schools will run banks. The kindergartners are allowed to have
their day where they go in and make their deposits and they
learn to start at a very young age, get the general sense of
accomplishments by saving and investing and spending and having
their own little plan for how that money is going to last for
the week.
It is never too early to begin the very basic principles.
But, again, once we start to get to the course curriculum in
high schools, we cannot under-emphasize I think the role that
the State education departments have to play. But I would
certainly agree with everyone here that, as we proceed, and if
we all agree, as I think we do, that this needs to be put on a
very ambitious timetable, that the Federal Government can serve
a very positive role by serving as a clearinghouse, if you
will, for best practices, for good curricu-
lum, and make that available to the State education departments
as quickly as possible.
Mr. Yzaguirre. Mr. Chairman.
Chairman Sarbanes. Mr. Yzaguirre.
Mr. Yzaguirre. Mr. Chairman, I listened very carefully to
all the testimony here and I was particularly struck by Steve
Brobeck's comments about the end goal here. And the end goal,
as I understand it, and one that I would support, is not to
increase knowledge, but to change behavior, to move it in the
right direction.
I want to emphasize that because it has been our experience
that tying all of these education programs to a specific event
like buying a home or buying a car, tying it to IDA's,
Individual Development Accounts--and buying a home--home
counseling, has by far the best way of changing actual behavior
compared to simply offering a course. This is not to in any way
demean the importance of education, but it is also important to
understand people's motivation and how we actually change
behavior.
Chairman Sarbanes. Mr. Blandin, you wanted to comment.
Mr. Blandin. Yes.
Chairman Sarbanes. Then, I will go to Senator Stabenow for
her questions.
Mr. Blandin. Thank you, Mr. Chairman. I am trying to answer
both of your questions.
Let me just say that I believe that the Government needs to
create the climate for fostering public- and private-sector
partnerships that can create the environment by using its bully
pulpit of the Congress and the President to make sure that the
people know that this is an issue of national concern.
And if you do that through a Presidential commission, a
Congressional commission, and have private-sector leadership
involved, I think that will go a long way and do a lot better
than creating a Federal entity to oversee it or to run it.
We actually have Federal legislation now that is on the
books that has not been implemented appropriately in a way that
would make a difference.
So, I think that it needs to be a public-private sector
partnership with the Federal Government in the lead in helping
to determine what needs to be done, but creating a separate
office I am not sure is in the best interest.
Chairman Sarbanes. Well, we will have to examine that
carefully. Maybe we need to have a coordinator. Maybe one
objective would be to establish a financial literacy council in
every State and figure ways of encouraging that, so that at
least in every State, you say, well, now, there is the locus of
responsibility here. They are supposed to be addressing this
issue. And that council, of course, could be a public-private
composition.
Ms. Crawford. Mr. Chairman, if I may.
Chairman Sarbanes. Yes.
Ms. Crawford. I would like to respond to your suggestion.
As a State securities regulator, I think what you have just
suggested makes a great deal of sense. One of the things that
we have discovered is that the Governors, for example, have
gotten very involved in investor education. One of the outreach
programs that we have among the State securities regulators
each year is a Facts on Savings and Investing Month.
The Governors almost routinely issue proclamations and get
involved in the activities. And President Bush this year
actually sent a letter from the White House commending all of
the participants. So back when he was Governor of Texas, he did
this, and now as President, he continues to endorse that. That
kind of climate is extremely important going forward.
Chairman Sarbanes. Thank you.
Senator Stabenow.
Senator Stabenow. Thank you, Mr. Chairman. I think it is
critically important that we look broadly at this issue and I
appreciate the comments.
I mentioned yesterday the Jump$tart Coalition in Michigan
and the efforts working nationally and how important I think
those public-private relationships are.
I did want to mention just three more specific issues,
though, and would welcome a comment on any of them. I know we
have very limited time.
First, I know that there is a great challenge, and we are
talking about the language of financial services for many, many
people. It already sounds like a foreign language. But when we
are then coupling that with the attempt to translate what
interest means or APR's or yields fees, capital gains, et
cetera, into Spanish or Russian or Arabic or other languages,
it seems that we have a special challenge as it relates to
addressing the language of financial services and a multitude
of languages and people who are coming as immigrants to our
country and maybe, in fact, translating through their 8 year
old child, and the challenge of then, as an adult, feeling
vulnerable on a child who is attempting to negotiate a car loan
or some other challenge. And so, I would welcome any comments
on that.
Second, I know AARP and many others have been involved in
predatory lending, and this is a major issue that I have been
involved in in Michigan and feel that we have to address these
issues as it relates to financial literacy and information.
And then, finally, I have a real concern as a parent of two
children who have gone through teenage years and who have been
aggressively marketed by credit card companies and if not every
day, every other day, get either an application or a card in
the mail, even before they were working at all. And certainly,
for my 21 year old now, she would have the opportunity to have
10 different credit cards at any moment, she is not working
full time and is, in fact, going to school. I would welcome any
thoughts regarding the role or responsibility of credit card
companies and providing information as it relates to what is
happening to promote credit.
Mr. Swygert. Senator, if I may, I would like to speak to
your first question. Namely, the question of translating
financial documents and instruments into other languages. As an
educator, I would like to begin by saying the first challenge
is translating many of those documents into English. I think
that is where we need to start. If we have learned nothing else
recently, we have learned that a lot of the folk who we thought
understood the language that was being expressed had no greater
knowledge than lay persons, apparently.
So, I think that is where we need to start. I think the
Federal sector has been very helpful in terms of the SEC,
insisting upon plain language in so many documents. And this is
a movement that has been underway for some time.
In terms of language, in terms of simple transactions being
in the language of the consumer, here, I think again the work
of the Committee can underscore both existing statutes and
underscore the will of the Senate, that language that purposely
obfuscates, is simply not in the Nation's best interest.
Whether we need more legislation in this regard, I for one,
would have to think more about. But I do think that it is in
all our best interests, both in terms of the consumer and the
Nation's interest at large, that the language be
understandable, however it is translated, and to whom it is
addressed.
Mr. Brobeck. On the controversial issue of marketing of
credit to young people, we sponsored a study that was released
several years ago that revealed that a significant minority of
college students were carrying unsustainable credit card debt
levels, that those debt levels had carried with them huge costs
that included dropping out of school, or at least cutting back
on the course work.
In a couple of cases, we brought in the mothers of apparent
related suicides.
But it is difficult because even teenagers now, many of
them are working. It is hard to tell them that they cannot
accept a credit card and use a credit card.
You asked the question: What is the responsibility of the
issuers? Most importantly, it is only to extend sustainable,
affordable credit. That is their responsibility.
Now it is very hard to create a law that would require them
to do that. But if everyone in the country understood that that
was their responsibility, I think they would act more
responsibly. Then when it comes down to legislation, Senator
Dodd has taken the lead and we support his efforts.
Senator Dodd. I have tried over many years to get the
industry to be more sensitive to the issue and it seems to get
worse. The numbers are just getting worse every year. I cited
them yesterday. I do not know if you have seen the sheets here.
We made them part of the record yesterday. The average credit
card debt per household has tripled in the past decade, to in
excess of $8,000. Over half of families that earn less than
$10,000 a year have over a $1,000 in credit.
Americans owe more in credit card debt than education debt.
Knowing the cost, I won't get into the cost of higher
education. Seventy-eight percent of college students have at
least one credit card. The average credit card among
undergraduates is almost $3,000. It is up 46 percent in 2
years. I quickly want to add, credit cards are a real asset for
consumers. I do not want to be in the position of suggesting
that credit cards are a liability. They have been a wonderful
vehicle for people.
First, our bill simply said that if you are under 21, you
have to be able to prove that you can pay, something that I
thought you would ask. Second, if you are not going to pay, is
someone going to cosign it with you? And third, if either of
those things are too much for you, then would you require that
there be a course in what credit responsibilities are? Any of
those things so that you can at least raise the level of
literacy because you are just seeing kids coming out of school
at a young age--and I agree, 18, 20, you should be certainly more
responsible than you would be at a younger age. But you are
watching the debt.
We had bankruptcies between 18 and 25 year olds. In the
early 1990's, there were 60,000. In 1999, there were 120,000,
double the number of bankruptcies in this country of kids,
really young people. That is not a good way to begin.
So, I appreciate the Consumer Federation's interest in this
subject matter. And I wish we could convince more people. This
is not a way to try and deny people access to credit cards. But
if you look at the proliferation of this stuff, you are
watching infants getting stuff mailed to them in the mail, and
automatically, they are approved.
You know what happens. It is the parents that they are
counting on. They will go to a college campus and they will
tell kids, pay for your books with credit cards. Save your cash
for Friday and Saturday night when you want to go out. And of
course, these things mount up and it is the parents that are
going to get hit with the darned thing. That is what happens.
So, they know what they are doing. They know these kids are not
going to pay it. Their parents are.
So it is tragic, in my view, that they haven't been more--
the bankruptcy act we are trying to pass, I have been opposed
to it for a number of reasons. Not because I do not believe
that we should not try and restrain the amount of bankruptcies.
But there is not a commensurate sense of responsibility on
those who are extending credit.
Just as the consumer has to be more responsible, those who
are extending the credit have to be more responsible. And
credit card companies dumping this stuff on college kids and
sending them unsolicited, preapproved credit cards to infants and
children is not responsible. It is highly irresponsible. And there
is not a parent in America who does not understand what I am
saying.
And so, when I hear them claiming about the problems of
bankruptcy and simultaneously pouring this junk out to them
asking them to assume responsibilities they cannot even begin
to afford--I am sorry, but I get a little irate about it.
[Laughter.]
It has literacy issues.
Chairman Sarbanes. You should hear him when he is really
upset.
[Laughter.]
Senator Miller. You have a child who is coming on to it.
Senator Dodd. I have a child who is 4 months old. I am
getting nervous.
[Laughter.]
Ms. Canja. How many credit cards does she have already at 4
months?
Senator Dodd. She is 35 years old.
Senator Schumer. She has been mailed a lot of them, I am
sure.
[Laughter.]
Senator Dodd. Actually, Senator Stabenow, I kind of jumped
in on your time.
Senator Stabenow. I very much appreciate your comments. I
would underscore that certainly credit cards are an important
tool. But it is extremely disheartening as a parent to watch
these come in and to see my children at 12, 14, 16, being
offered preapproved credit cards.
Senator Dodd. Mr. Chairman, I apologize. I will just finish
up briefly and you can go to Chuck. And that is, on the
Hispanic households, Raul, my good friend. The absence of bank
accounts, that 42 percent of Hispanic homes do not have bank
accounts. You alluded to it in your testimony a little bit
about what the reasons may be.
I wanted to ask you about the individual development
accounts, the IDA's. What do we need to do to make the IDA
program
and financial institutions do a better job in outreaching to
the
community?
Those two questions I just have quickly, and then Chuck,
whatever you want to ask.
Mr. Yzaguirre. Thank you, Senator. First of all, we need to
increase the amount of appropriations for the IDA program. It
is a Federal program. It has been hugely successful. I think it
comports with our experience that if you have an event, if you
have a goal, that you can tie consumer education, financial
education to, you will change behavior and you will create
middle-class people out of poor people.
So, we support the program very much. I would couple that
also with housing counseling, which is in some ways a similar
kind of situation where you have a specific event and you are
trying to educate people to come to it and tie the two programs
together. An IDA account can be used for a homeownership
downpayment. I am sorry, I forget the rest of your question.
Senator Dodd. On the 42 percent Latino households that have
no bank accounts. You point out that in many countries where
there is a lack of confidence and trust, maybe in their native
countries in financial institutions.
Mr. Yzaguirre. Indeed.
Senator Dodd. And so they bring that insecurity about can
you trust these institutions with their hard-earned money. I
presume that has a lot to do with it. I presume language
barriers as well. But there may be others.
Mr. Yzaguirre. You know our community well, Senator. It is
due in part to that. It is also due to the fact that poor
people of any race or ethnicity have a distrust of institutions
in general. It also has to do with income.
But a lot has to do with the banks' willingness to do the
right thing. We have visited a number of communities. Let me
just give you one example.
I went to a community in Gainesville, Georgia, where the
community had almost forced the bank to set up a branch in the
Latino community. It did so reluctantly and they created all
Latino clerks. They had a day care center. They had everything
in Spanish. They are making money hand over fist. So it is not
just simply to do the right thing for altruistic purposes.
There is money to be made and sometimes banks and financial
institutions are not necessarily looking after their own best
interests.

Senator Dodd. Thank you, Mr. Chairman.

Chairman Sarbanes. Senator Schumer.

COMMENTS OF SENATOR CHARLES E. SCHUMER

Senator Schumer. Thank you, Mr. Chairman.

I want to thank you again for holding this hearing. I also
want to welcome my New York colleague, Susan Molinari, who is a
good friend, was a great Congresswoman, and who is doing a
great job here on these issues.

Welcome, Susan. As well as Mr. Swygert, who used to head
Suny at Albany before he moved south.

[Laughter.]

Chairman Sarbanes. Susan was his student. We found that out
this morning. She was a student there when he was the
President.

Senator Schumer. Oh, really?

Ms. Molinari. His name is on my diploma.

Senator Schumer. That is another plaudit for you because
you did a great job.

Mr. Swygert. Thank you, sir.

[Laughter.]

Senator Schumer. I just have one question. The dilemma we
face in this issue is that many of us, as you can tell by the
questions, feel some urgency here. And at least for me, and I
mentioned this yesterday, having a daughter in high school,
seeing the courses that she is required to take, and I want her
to have a broad-based education, but geometry. That is a good
one. Algebra is really
important. Trigonometry is getting a little bit further afield.
And yet, nothing on the things we are talking about here and
trying to really learn what the world is all about. So the
question I guess I have is, what is the appropriate Federal
role here?

Our local schools are overburdened. They have so much to
do. We are putting new requirements on them. But at the same
time, there is a real need for Washington to lead the way here,
I think, because otherwise, the thousand flowers will bloom,
but there will be a lot of the landscape that is barren.

Chairman Sarbanes. Yes.

Senator Schumer. And my guess is that the poorer districts,
where it is needed the most, will have the most difficult
ability in getting this done. So the question is, what are the
carrots? What are the sticks? What is the appropriate Federal
role other than exhortation? For whoever on the panel who would
like to take a shot at that one.

Mr. Swygert. Well, Senator, as you well know, one stick
that comes to mind very quickly is the stick that has been used
as it relates to mortgage lending generally in order to avoid
red-lining. And the Federal Government has been very aggressive
over time, as have the State governments, in addressing this
issue. Although I am not suggesting some analogous
circumstances exist, or should be utilized, there are examples
that one can turn to.
I would think, to echo my colleague on my left, that a
strong program of public-private partnerships with some form of
incentives, however the private side might be incentivized to
support both grade school, middle school, and high school
programs.
There has to be, just as many local companies and
corporations and financial institutions of all sorts, whether
credit card issuers or not, who have all sorts of activities
related to their communities. We need to come up with some ways
and means to incentivize them to do this as well, not just
clean up the playground, not simply paint the day care center,
not simply to, as important as it is, to assist the elders. But
also to use some of their bright and clever people to design
curricula, although it may be locally-based curricula, which is
not such a bad thing, to assist local grade and middle school
teachers in terms of both handouts and actual classroom
instruction because, as you say, the last thing a local
superintendent wants is more Federally-mandated curriculum content.
They just do not have the resources, or at least, certainly, I think
the reaction or the reception would not be terribly positive.
Ms. Molinari. Let me just say, Senator, that, obviously,
that is the most difficult question I think we face today is
recognizing the relationship between the Federal and the States
with regard to education and the curricula.
However, I do think, obviously, you went a long way in the
education act by providing the carrot, which is some Federal
monies for incentivizing some programs that can be, if you
will, taken on the road to the rest of the States.
I do think that the notion should be further explored of a
potentially national commission that is private and public to
raise the visibility and touch the States.
I see Senator Carper here from Delaware. I would not want
the Federal Government to interfere with the work that Delaware
has done in so many ways in promoting financial literacy. And
one of the things that they have done most recently along with
the State of Wisconsin, under the auspices of the Governor, is
creating a task force of public-private educators, parents,
business people, to come up with suggested curricula to
evaluate the need in those States. And these task forces really
will be those small, little engines that can, in fact, not only
drive the material, but also certainly the public relations
that can continue to create the interest.
Senator Schumer. Thank you.
Chairman Sarbanes. We will just hear from Steve and then we
will yield to Senator Carper.
Senator Schumer. Yes. And I would just ask unanimous
consent after Steve that any other comments in writing, because
I wanted to hurry up and let Tom get in here.
Mr. Brobeck. Senator, I think that a national commission is
an idea that is worth exploring. But it will not be effective
in our opinion unless it is given sufficient resources to
conduct adequate research, a literature review of the research
that has been undertaken to date, perhaps new research looking
at the effectiveness of existing programs or proposed programs,
and a commission or some other kind of body. And we fully
support participation by responsible corporate groups,
educational leaders, nonprofit organizations, as well as the
Government. But it seems to us that the Government has to take
the lead because you, more than anyone else, have concern,
objectivity, and resources.
Chairman Sarbanes. Fine.
Senator Schumer. Thank you, Mr. Chairman.
Chairman Sarbanes. Thank you very much, Senator Schumer.
Senator Carper.

STATEMENT OF SENATOR THOMAS R. CARPER

Senator Carper. Thank you, Mr. Chairman.
Welcome. It is nice to see you all today and especially
nice to see Susan. Thank you for your kind words about
Delaware.
We had a hearing yesterday----
Chairman Sarbanes. Actually, the kind words were said about
Delaware when you were not in the room as well.
[Laughter.]
I just wanted to assure you of that.
Senator Carper. Thank you. I mentioned yesterday our State
Treasurer, Jack Markell, who is doing very, very good work in
these vineyards that you all are working in, too. So, we are
grateful.
As Governor of Delaware for the last 8 years, we focused in
my State and in virtually every other State to put in place
rigorous academic standards of what we expected students to
know and be able to do.
Most States adopted somewhat different standards, but we
focus on standards in math and science and English and social
studies, for the most part--math, science, English, and social
studies.
The schools that are doing the best job in terms of raising
student achievement and making sure that students are learning
the things that they need to do in math and science and English
and social studies, are ones who have found ways to align the
curriculum and their classroom with the standards that have
been adopted. So that the lesson plans, the materials, the
texts are compatible and consistent with the standards that
have been adopted. Some of the most exciting work that has been
done is using the Internet to bring the outside world into the
classroom.
Our boys are now 11 and 13. But maybe 2 years ago when my
youngest boy was in the 4th grade, I got up one morning and I
went in to wake him up about 6:30 a.m. He is a kid who likes to
sleep. He was up. He was up and his computer was on. I said,
Ben, first, what are you doing up? And what are you doing with
your computer on? He said, I am following the Iditarod. I said,
you are following what? He said, I am following the Iditarod,
this dog race up in Alaska. Most people have heard about it
now. It is over a thousand miles long.
And what his clever teacher had done was find a way to use
the Iditarod and use the Internet to make that come alive for
her students. They used the Iditarod for a period of a couple
of weeks in order to, teach geography, teach geology, teach
weather, teach mathematics, and to work on reading and writing
skills.
Everyone picked a dogsled driver. So, they had a team that
they were rooting for. They had to create an award to give to
one of the other dogsled drivers, one of the students in their
class. They had a banquet and had Alaskan food. It was really
quite something.
There is a great need in Delaware schools and in other
schools around the country to discover Iditarod-like events
which we can use to make real our standards in math, science,
English, and social studies that are fun, that are interesting,
that may involve technology and bring the outside world in.
I think those of us in this room, at this table, but the
rest of us as well, to the extent that we can work in those
vineyards--and this is not for the Federal Government to fix,
but this is one where we can all have a role and we all can do
something. And I would just encourage us to take our energy and
our interest and to focus it in that direction toward that
purpose.
That was not a question, but just some insights from an old
Governor who cares a lot about these things and now, thanks to
Ben, knows a thing or two about the Iditarod.
Thank you, Mr. Chairman.
Chairman Sarbanes. Well, you have been an enormously
helpful panel and we look forward to staying in touch with you
as we try to find some way to give an additional impetus to
this issue. I think it is a very important, long-run issue and
we want to stay with it. Thank you all very much for coming.
Mr. Swygert. Thank you, Mr. Chairman.
Mr. Blandin. Thank you.
Chairman Sarbanes. The hearing is adjourned.
[Whereupon, at 12:00 noon, the hearing was adjourned.]
[Prepared statements, response to written questions, and
additional material supplied for the record follow:]

PREPARED STATEMENT OF SENATOR PAUL S. SARBANES

Today, we hold our second hearing on the state of financial
literacy and education in the United States. We are very pleased to
have such a distinguished panel of witnesses, all with significant
expertise on this subject.
We began our exploration of this issue yesterday, when we heard
from Treasury Secretary O'Neill, Federal Reserve Board Chairman
Greenspan, and SEC Chairman Pitt. Their testimony underscored the
urgent need for improved financial education in America. Yesterday, one
witness observed in response to the Committee's questions, that the
problem of financial illiteracy in this country is one of ``epidemic
proportions.'' Each of their agencies is actively engaged in efforts to
improve Americans' financial understanding, and I commend each of them
for their commitment to this issue.
Of course, as I said yesterday, financial literacy is not a magical
solution that will solve all the problems consumers face in making
financial decisions. We obviously need a framework in which this takes
place that also includes strong legal protections, vigorous
enforcement, and best practices in the industry in providing
responsible credit alternatives.
Nonetheless, financial education can go a long way toward preparing
consumers to make decisions that will be in their long-term financial
interest. As was noted yesterday, the costly consequences that
inadequate financial education can have, include such difficulties as:

Increasing reliance on the high-cost fringe-banking sector by
those who find themselves closed out of mainstream banking
institutions.
Predatory lending, when people are persuaded to borrow on
terms they do not fully understand and cannot afford.
Accumulation of dangerous amounts of credit card and household
debt.
Inability to save, to build a nest egg.
Inability to plan for a secure retirement.

I indicated yesterday that I think we need a national strategy to
bring the public and private sectors together to address the problem of
financial illiteracy. The commitment of yesterday's witnesses to
improving financial education gives me some confidence that we can
undertake increased coordination and cooperation on this issue at the
very highest levels of the Federal Government.
Today, we will hear from representatives of the private and
nonprofit sectors, as well as from a representative of State
government. We had far more requests to testify than we could
accommodate, and frankly, I am gratified that there are so many
organizations and groups working on this issue; it is a testament to
the growing awareness of the important role financial literacy plays in
helping people make the financial choices necessary to give them the
opportunity to succeed in our society.
Our panel today covers the broad spectrum of issues related to
financial literacy and education, from school-aged children to young
people who are handling credit for the first time, first-time mortgage
borrowers, and those who are trying to save enough for retirement. I
believe the testimony we will receive this morning will help to inform
our development of a national strategy to address this critical issue,
and I look forward to continuing to work with each of them as we move
forward.

----------

PREPARED STATEMENT OF SENATOR DANIEL K. AKAKA

Mr. Chairman, thank you for convening this second hearing on
financial literacy. I thank the witnesses for appearing today. I look
forward to your testimony as we continue this national dialogue on
financial literacy.
In the wealthiest country in the world, we must increase the
ability of citizens of all ages and backgrounds to manage their
resources, participate in the workforce, make wise investments, and
become better informed about public policy. All Americans need to have
the necessary skills and information to prepare for a secure financial
future.
The current economic recession highlights the importance of
financial literacy. American families are now facing an enormous amount
of financial stress. The Department of Labor reports that 7.9 million
Americans were unemployed in January. These unemployment statistics do
not include those whose hours and pay have been reduced. In Hawaii,
bankruptcy filings for the third quarter of 2001 were 20 percent higher
than in 2000.
It is obvious that financial stress is not solely caused by a lack
of financial literacy. There are many factors that can cause financial
difficulty, including the bankruptcy of an employer or a reduction in
tourism due to the September 11 terrorist attacks. However, having or
knowing how to acquire financial knowledge can prevent or reduce the
consequences of a difficult financial situation. Increased education
about basic economic concepts will help people to make better financial
decisions and increase opportunities for participation in today's
global economy.
Today's hearing will feature organizations on the front line of
financial education. I look forward to your recommendations on how we
can increase financial literacy.
Mr. Chairman, thank you again for convening these hearings.

----------

PREPARED STATEMENT OF SENATOR DEBBIE STABENOW

Thank you, Mr. Chairman. It is good to be back here for a second
day of hearings on financial literacy. I am glad that yesterday we were
able to begin to lay out the problem with the help of Chairmen
Greenspan and Pitt, as well as Secretary O'Neill. I think it is clear
that there is a consensus that something needs to be done.
I know today that we are going to hear from a diverse array of
groups who have been working very hard to combat financial illiteracy.
Their work is to be commended. Too often educational outreach like this
goes unappreciated. Reaching the financially illiterate is not simple.
Many in society are intimidated by financial services and are too
embarrassed to get help. Others do not fully understand the financial
planning mistakes they are making and the true costs of those
decisions. Others, simply wrapped up in their busy lives, never take
time to assess their financial situation, and consequently they lose
thousands of dollars unnecessarily to their creditors. I hope as we
examine this issue today, we can build off of the findings discussed
yesterday. We know the problem is severe. The question is: What do we
do about it?
There is a wealth of information out there, but, as I said, it is
not always reaching the communities most in need. In particular, the
Internet is a wonderful resource, but those with the most limited
financial skills often are doubly impaired because they lack access to
the web. This digital divide is something that we must work to bridge.
We must also look at language barriers as well. For many consumers,
the language of financial services already sounds like a foreign
language. Just imagine what it is like to take that confusing foreign
language of interest, A.P.R.'s, yields, fees, capital gains, et cetera,
translate it into plain English and then translate it into Spanish or
Arabic or Russian. As a Nation of immigrants, this is a challenge to
which we should pay close attention.
Finally, I hope that our witnesses will give us some insight as to
what they think the role of Government is in addressing this problem.
We obviously have an obligation to pass and enforce strong laws and
regulations. Furthermore, I can envision a role for our Government in
promoting education, but in many ways, educational efforts are often
most successful when they are done at the grass roots level. And, they
are often most successful when they are done in a sustained way. These
are difficult and expensive challenges, indeed.
Thank you, Mr. Chairman, and I look forward to hearing from our
witnesses and I welcome their insight.

----------

PREPARED STATEMENT OF SUSAN MOLINARI

National Chairperson
Americans for Consumer Education and Competition

February 6, 2002

Thank you, Congressman Dreier, for that kind introduction. Before I
begin my testimony, I would like to recognize Congressman Dreier's
efforts to improve financial literacy among our young people. He has
been at the forefront of this effort for several years, beginning in
the 105th Congress, where he introduced a House Resolution Expressing
Support for Personal Financial Literacy Programs and culminating with
this year's passage of the No Child Left Behind Act. Congressman Dreier
was instrumental in ensuring that financial literacy programs were
included and fully funded in the No Child Left Behind Act. This
legislation earmarks $5 million specifically for financial education. I
commend him for this accomplishment and applaud his dedication to
improving financial literacy.
Chairman Sarbanes, Ranking Member Gramm, Members of the Committee,
I am Susan Molinari and I am Chairperson of Americans for Consumer
Education and Competition (ACEC). I want to thank you for this
opportunity to testify and participate in this dialogue to improve our
Nation's financial literacy. Teaching our young people to manage their
finances should be as much a part of their curriculum as teaching them
math or grammar. It is a subject that will affect them throughout their
lives and will impact their ability to purchase a home, raise a family,
and prepare for retirement.
Financial literacy forms the foundation that supports such American
Dreams as homeownership and a secure retirement. Sound financial skills
are crucial to avoiding the pitfalls that result in many of our
citizens--particularly young ones--getting into financial hot water or
becoming victims of charlatans who prey on the financially illiterate.
Quite simply, being financially literate is essential to controlling,
rather than being controlled by one's financial circumstances
throughout life. And as Federal Reserve Board officials have pointed
out, mastery of these financial ABC's by consumers is essential to the
smooth and efficient functioning of our free market economy.
These hearings bear witness to the fact that you and your
colleagues, Mr. Chairman, share the view of many of us in the financial
community, that the sweeping education bill which President Bush
recently signed into law is a beginning--a first and important step--a
down payment if you will, toward the financial educational accounts of
the Nation's young people. This law marks the first time that a Federal
law has specifically allocated funds for financial literacy. It makes
available some $385,000,000 for local innovative education programs.
Among the 27 programs that qualify for this funding are ``Activities
related to financial literacy skills (including the basic principles
involved with earning, spending, saving, and investing).'' Senator Jon
Corzine championed this provision in the Senate. Senator it was an
honor to work with you and several of your colleagues on this
legislation including Senators Enzi, Akaka, Jeffords, Harkin, and
Kennedy. Congressman John Boehner (Chairman of the House Education and
the Workforce Committee) Congressman Dreier and Congressman Pomeroy led
the way in the House.
I am honored and grateful to be here, on behalf of ACEC, to answer
the five most frequently asked questions regarding the importance of
financial literacy courses.

Question One
How bad is the problem? Let's look at the bottom line. Here is a
study that caught my eye--in a Lou Harris study testing basic economic
principles:

Adults received 57 percent.
High school students scored 48 percent.
Half of the adults and two-thirds of the students did not know
that the stock market provides a venue for people to buy and sell
stocks.
Only 54 percent of adults and 23 percent of students knew when
Government spending exceeds its revenue, a deficit is created.

ACEC sought to add to the data and we reported last year that 82
percent of high school seniors surveyed failed a personal financial
quiz. We tested them on real life questions such as interest rates,
loans, etc. According to the Norton Bankruptcy Law Advisor, individuals
25-34 declaring bankruptcy have risen from 417,510 to 464,647.

Question Two
So now that we have established the problem, the next question is
why are we suggesting that these problems be solved at the blackboard
rather than at home by the parents? While we may be great parents, we
may not be great investors and savers:

Fifty-six percent of U.S. households have failed to save
enough for retirement.
Fifty-three percent of Americans report that they often live
paycheck to paycheck.

And remember the first Lou Harris poll I cited, parents, as well as
teenagers flunked! Moreover, a VISA USA survey revealed that 81 percent
of parents want solid personal finances taught in schools because they
want their children better prepared to manage money than they were.

Question Three
Should we ask our teachers to assume one more responsibility in
preparing our children for the future?
I would answer that as we raise the next generation to be
successful do we not have an obligation to train them to deal
responsibly with success? For when they are not adequately taught,
retirement plans are not funded, medical plans are not paid,
bankruptcies are absorbed by consumers one way or the other and our
economy is negatively impacted.

Question Four
Do financial literacy courses work?
Students, like those at Woodrow Wilson High School's Academy of
Finance here in the District of Columbia, offers insight into the value
of personal financial classroom instruction. Whereas just 146 of the
801 seniors taking ACEC's 2001 personal financial quiz were able to
achieve a passing grade, all of Wilson's 12th graders passed. They did
so after just one semester of personal finance instruction that
included everything from borrowing money to estate planning. Similarly,
the National Endowment for Financial Education's High School Financial
Planning Program (HSFPP) made a significant difference in the financial
skills of students taking the course work. A survey of teens who
completed HSFPP in the 1997-1998 program found that nearly half (47
percent) knew more about credit costs and nearly two-fifths (38
percent) knew more about investments. The knowledge gained also brought
about important behavioral changes in the teens. Nearly two-fifths (37
percent) improved their skills for tracking spending, and nearly half
(45 percent) began saving or began saving more. More importantly,
according NEFE, teens taking the Financial Planning Program retained
what was taught to them and used these practices in their daily lives.
Teachers can incorporate financial literacy curriculum into their
applied math or economic courses simply by accessing the Internet. ACEC
has prepared a course that can be downloaded from its website
www.acecusa.org.

Question Five
Let me conclude with one more question: Can we afford to teach
financial literacy courses? We cannot afford not to!
The poet e.e. cummings once said that, ``I am living so far beyond
my income that we may also be said to be living apart.'' That might be
funny were it not for the fact that too many Americans have the same
relationship with their financial life. Working together to improve the
financial literacy of our young people we can reunite consumers and
their income so that they may live comfortably and productively under
the same roof.

----------
PREPARED STATEMENT OF STEPHEN BROBECK

Executive Director
Consumer Federation of America

February 6, 2002

I am Stephen Brobeck, Executive Director of the Consumer Federation
of America. For three decades, our organization and I have personally
sought to promote effective financial education. In our opinion, there
has never been a greater need to advance this education. So, we commend
you, Mr. Chairman, and your Committee for organizing these hearings.
Hopefully, they will focus national attention on consumer financial
literacy and the most effective educational strategies for improving
this literacy.
This testimony begins by arguing that the financial education needs
of the least affluent and well-educated Americans deserve special
attention, in part because recent changes in the financial services
marketplace have increased the financial vulnerability of these
households. The testimony then outlines five important principles for
effective financial education. The last of these principles stresses
the importance of a comprehensive plan for increasing financial
literacy, which probably cannot be developed and implemented without
effective Federal leadership. The testimony concludes by suggesting
that appropriate regulation provides a necessary complement to
financial education.

Lower-Income Consumers Need Special Attention
We cannot think of a large population with greater financial
education needs than the tens of millions of the least affluent and
well-educated Americans. Because these individuals lack financial
resources and often are charged high prices, they cannot afford to make
poor financial choices. But because of low general and financial
literacy levels, they often have difficulty making smart financial
decisions, in part because they are especially vulnerable to abusive
seller practices.
In 1998, 37 percent of all households had incomes under $25,000.
With the exception of older persons who had paid off home mortgages,
these households had accumulated few assets. In 1998, according to the
Federal Reserve Board's Survey of Consumer Finances, most of these
least affluent households had net financial assets (excluding home
equity) of less than $1,000. Moreover, between 1995 and 1998, a time of
rising household incomes, the net worth of lower-income households
actually declined.
Households with low-incomes and assets cannot afford to make unwise
financial decisions simply because they have few discretionary
financial resources. Failing to adequately budget expenditures may
pressure these consumers into taking out expensive credit card or pay
day loans. Mistakenly purchasing a predatory mortgage loan could cost
them most of their economic assets.
These households also need to make smart buying decisions because
they tend to be charged higher prices than more affluent families:
Higher homeowner and auto insurance rates because they live in riskier
neighborhoods; higher loan rates because of their low and often
unstable incomes; higher furniture and appliance prices from
neighborhood merchants that lack economies of scale and face relatively
high costs of doing business; and higher food prices in their many
neighborhoods without stores from major supermarket chains.
Lower-income families are also faced with higher prices for basic
banking services. Partly because of high minimum balance requirements
to open accounts and avoid fees, these households tend to pay high
prices for checking services, or they do their banking at check-cashing
outlets where check-cashing fees typically are at least
2 percent of the face value of checks. These families also lack access
to basic savings options.
Lower-income households also are charged higher prices because
their low general and financial literacy levels make effective product
searches difficult and expose them to seller abuse. Low-incomes are
highly, and increasingly, correlated with low-education levels, and
these low levels are closely associated with low general and financial
literacy levels. In our comprehensive 249 question test of the Nation's
consumer knowledge, conducted by the Educational Testing Service in
1989, lower-income households answered fewer than one-half of the
questions correctly. If the functionally illiterate and marginally
literate members of our sample population had not had the option of
having questions read to them, this percentage of correct answers would
have been much lower.
Consumers who have difficulty reading are unlikely to understand
the fine legal print in ads and contracts. Those with limited
mathematical skills often do not understand percentages that express
the key cost and yield indicators, respectively, for credit and savings
products. For example, research shows that only about three-fifths of
consumers understand and use the most important index of credit costs,
the annual percentage rate or APR, and that nonusers tend to have low-
incomes and education levels.
Lower-income households with low literacy levels are especially
vulnerable to seller abuse. Consumers who do not understand percentages
may well find it impossible to understand the costs of mortgage, home
equity, installment, credit card, pay day, and other high-cost loans.
Individuals who do not read well may find it difficult to check whether
the oral promises of salespersons were written into contracts. And
those who do not write fluently are limited in their ability to resolve
problems by writing to merchants or complaint agencies. Consumers who
do not speak, read, or write English well face special challenges
obtaining good value in their purchases.
More Available Credit Has Increased Financial Education Needs
Over the past decade, the financial vulnerability of low- and
moderate-income households has increased simply because of the dramatic
expansion of the availability of credit. Throughout the last century,
consumers were exposed to widespread and persistent marketing of goods
and services. Yet, they were insulated to an extent from the
potentially adverse effects of this marketing by the financial
constraints of their incomes and savings. Most of the credit extended
to households took the form of first mortgage loans and installment
loans, both of which were secured by the property purchased and
amortized in fixed, regular payments.
During the 1990's, lenders greatly eased these financial
constraints by significantly expanding credit available to consumers
and by marketing this credit aggressively. Since this credit tended to
be open-end and carry a high price, it exposed consumers to greater
financial risks than did the closed-end loans that had earlier
dominated consumer credit markets.
The loans that subjected the greatest number of Americans to
financial risk were made with credit cards. From 1990 to 2000, fueled
by billions of mail solicitations annually and low minimum monthly
payments of 2-3 percent, credit card debt outstanding more than tripled
from about $200 billion to more than $600 billion. Just as
significantly, the credit lines made available just to bank card
holders rose to well over $2 trillion. By the middle of the decade,
having saturated upper- and middle-class markets, issuers began marketing
to lower-income households. By the end of the decade, an estimated 80
percent of all households carried at least one
credit card.
Independent experts agree that expanding credit card debt has been
the principal reason for rising consumer bankruptcies. These
insolvencies were still precipitated by unexpected major expenditures
or income losses. However, many of those experiencing these new
financial burdens or losses would have been able to manage if they had
not been carrying large credit card debts. Contrary to the perception
of many, the annual incomes of typical Chapter 7 bankrupts average well
under $30,000.
Also worrisome has been the expansion of high-priced mortgage loans
and strato-
spherically priced smaller consumer loans. In the 1990's, creditors
began to aggressively market subprime mortgage loans carrying interest
rates greater than 10 percent and higher fees than those charged on
conventional mortgage loans. By 1999, the volume of subprime mortgage
loans peaked at $160 billion. Mortgage borrowers in low-income
neighborhoods were three times more likely to have subprime loans than
mortgage borrowers in high-income neighborhoods. A significant minority
of these subprime borrowers would have qualified for much less
expensive conventional mortgage loans. And a minority of these
borrowers were victimized by exorbitantly priced and frequently
refinanced predatory loans that ``stripped equity'' from the homes of
many lower-income households.
The 1990's also saw explosive growth in predatory small loans--pay
day loans, car title, pawn, rent-to-own, and refund anticipation
loans--typically carrying effective interest rates in triple digits.
The Fannie Mae Foundation estimates that these ``loans'' annually
involve 280 million transactions worth $78 billion and carrying $5.5
billion in fees. The typical purchaser of these financial products has
income in the $20,000 to $30,000 range with a disproportionate number
being women.

Principles for Effective Financial Education
There is no clear consensus about how to effectively provide
financial education, especially to those who have completed their
secondary education and to those with low literacy levels. However, our
own research and programs, as well as those of others, suggest five
principles on which successful financial education programs should be
built.
Seek behavioral change, not just improved knowledge. An important
threshold question is how one defines the purpose of financial
education. Is the goal simply to increase financial literacy--to expand
consumer knowledge about the financial services marketplace and how
consumers can best utilize this knowledge? Or, is
the goal, more fundamentally, to improve the quality of consumer
financial decisions--to help ensure that consumers not only have adequate knowledge, but also successfully apply this knowledge in decisions about spending, saving, and the use of credit?
We strongly believe that behavioral change should be our most
important financial education goal. After all, the principal reason for
the growing focus of attention on financial literacy is the fact that
the financial decisions of many consumers are viewed as unwise. These
decisions may relate to poor spending decisions, in particular,
spending beyond one's means. They may pertain to poor savings
decisions, such as not accumulating sufficient savings or concentrating
these savings either in cash or in highly speculative investments. Or
they may relate to poor credit decisions such as unsustainable
borrowing at very high prices. Perhaps nothing has increased our
interest in financial education more than the growth, over the past
decade, of consumer purchases of predatory mortgage and consumer loans.
Deciding to focus on the quality of consumer financial decisions
means that evaluation of financial education programs should examine
their behavioral effects, not just increased knowledge levels. The most
sophisticated efforts to measure these impacts, such as recent research
on financial education mandates and savings accumulation published in the Journal of Public Economics, do just this.
Make certain to include ``attractive'' useful knowledge that can be
easily applied by consumers making financial decisions. It is sometimes
assumed that the only effective financial education includes explanations
of how the economy and markets function. That knowledge, in our opinion,
is extremely important for Americans to have--we would support mandatory economic education for young people--but chiefly because it is essential
to an informed citizenry. Consumers also need practical information about household budgeting, consumption, use of credit, and saving. Particularly
for adults, knowledge about these subjects should be the focus of financial education.
What this knowledge includes will depend somewhat on the time and
interest of targeted consumers. But we feel strongly that this
knowledge should always include relatively short, simple messages
containing built-in motivators about how to meet financial needs and
attain financial wants. Many consumers will never take a financial
education course or workshop, or even read a lengthy pamphlet. Concise,
powerful messages can be communicated most easily to millions of
Americans, particularly if the same messages are disseminated by
Government, nonprofit, and business
``financial educators.''
In the early 1990's, after forming the Consumer Literacy
Consortium, 25 Government agencies, business groups, and consumer
organizations spent 2 years researching and developing 66 messages,
related to 28 products, on how shoppers could save money. The typical
motivators in these messages are potential dollar savings that result
from applying the tip, for example: ``You can save more than $100 a
year in fees by selecting a checking account with a low (or no) minimum
balance requirement that you can, and do, meet.'' Or: ``You can reduce
credit card fees, which may add up to more than $100 a year, by getting
rid of all but one or two cards, and by avoiding late payment and over-
the-credit limit fees.'' For several years, this publication has been
by far the most popular pamphlet distributed for a fee by the Federal
Government's Consumer Information Center. To date, 1.4 million copies
of the publication have been requested from the CIC and the Consortium.
Address values as well as knowledge. Financial literacy is a
necessary but insufficient condition for sensible financial decisions.
Consumers must also desire and make the effort to apply this knowledge
in this decisionmaking. Many consumers are greatly influenced by
product marketing that may create wants which they try to satisfy by
purchasing all the products that their incomes and credit lines permit.
For these individuals, financial planning is usually not a high
priority. Interestingly, ``spenders'' and ``savers'' can be found in
every income group. Our research shows that, despite modest
discretionary incomes, a significant number of lower-
income households manage, during their lifetimes, to accumulate six-
figure wealth. Our research also reveals that a number of high-income
families build little wealth.
Our America Saves campaign illustrates how financial education can
seek to communicate values as well as knowledge. This campaign is
directed at low- and moderate-income households who save little and are
convinced that they lack the ability to save and build wealth. An
important goal of our efforts is, through knowledge about who saves,
how to save, and the power of interest compounding, to persuade
consumers to consider saving more of their incomes. But through mass
advertising and encouragement from those organizations with which
potential savers are affiliated--notably, employers, primary financial
institutions, and churches--we also try to persuade these individuals
to value saving more highly. Then when fellow employees, customers, and
congregants begin saving, there is additional encouragement to shift
priorities from spending to saving. For two decades, this social
marketing approach has been used with much success in developed and
developing countries to persuade individuals to change health and
safety behaviors.
Provide opportunities to learn by doing as well as by studying.
Traditional classroom/workshop pedagogy may be sufficient for
increasing knowledge levels but not for changing behaviors. To improve
the quality of financial decisions, educators may also need to teach
students how to function in the marketplace through actual or simulated
participation. This participation can take the form of budgeting of
personal expenditures, maintaining checking accounts, or making regular
savings deposits. But it could also include using ``monopoly money'' to
invest in the stock market or purchase services from a ``classroom bank.''
Focusing on the behavioral effects of financial education seems
especially appropriate for low- and moderate-income consumers. We want
assurance not just that these individuals ``know'' how to budget, open
a checking account, and avoid high-priced loans, but that they actually
succeed in doing so. Some of the most successful financial education
programs serving lower-income households--National Foundation of Credit
Counselors' member credit counseling, Individual Development Accounts,
Cooperative Extension's Money 2000 program, and America Saves--closely
link education to successful budgeting, debt repayment, and savings
deposits.
Develop a comprehensive plan for increasing the financial literacy
of all Americans. While many worthwhile financial education programs
exist, they are not well-coordinated, effectively reach only a small
minority of the population, and do not reflect any broad, compelling
vision. What is most needed is a comprehensive needs assessment and
plan to guide and inspire financial educators and their supporters. At
worst, such a plan would help ensure that the efforts of individual
organizations were more cost-effective. However, a comprehensive plan
could also convince a broad array of Government, business, and
nonprofit groups to work together to try to persuade the Nation to
implement that plan.
A comprehensive plan should include, at minimum, the following
elements: First, a rigorous assessment of financial education needs.
Second, selection of those populations with the most pressing needs
that financial education would help meet. Third, evaluations of
existing programs to develop the most promising, cost-effective
strategies for meeting the needs of these targeted populations. Fourth,
organizing broad-based societal support to implement these strategies.
Fifth, at each stage of implementation, evaluating the success or
failure of these strategies.

The Federal Government Must Take Leadership
We believe that financial education can dramatically improve only
through support from a broad array of public and private institutions.
Yet, it is unlikely that any comprehensive plan could be developed and
win broad support without leadership from the Federal Government.
Accordingly, the hearings today represent a major step forward in
making financial education an important national priority. Yet, this
should only be the first step. The Congress and the Administration
should support the development of a plan, build support for this plan,
and then help implement it.
A promising second step would be a major study of the Nation's
financial education needs, vulnerable populations, and the most
effective financial education programs to meet the needs of these
groups. This study should go well beyond typical GAO and CRS reports or
those from existing financial agencies using current
resources. We suggest that those Federal entities with the greatest
interest and knowledge of financial education select leading
researchers to undertake this research, that the researchers be advised
not only by Federal agencies and Congress but also by a committee of
leading financial educators, and that Congress appropriate at least $1
million to undertake this project. Frankly, if the Federal Government
were not prepared to spend such a trivial amount on such evaluation and
planning, we would question its commitment to financial education.
One topic that the researchers and their advisors should consider
is whether it would be cost-effective to create a new Federal Office of
Financial Education to implement any recommendations of the study. If
adequately funded, that office could go well beyond a review of
existing research and programs to undertake new
research and test new programs. It could also be given responsibility
for communicating regularly with, and even help strengthen, the network
of financial educators. This network not only could provide the office
with useful advice, possibly through a formal advisory committee, but
also could help mobilize support for the implementation of any
comprehensive financial education plan.

Financial Education Is Not Sufficient But Still Necessary
For decades there has been a very vigorous debate in Washington and
around
the country about the relative merits of education and regulation to
solve societal
problems. In our view, both approaches are necessary and complementary.
In the financial area, regulation should proscribe socially destructive
practices (including financially reckless practices, as well as
consumer deception and fraud), insist that markets be as transparent as
feasible (chiefly through adequate reporting and disclosures), and
enforce related rules. The recent collapse of Enron highlights the
importance of effective regulation both for individuals and the whole
economy.
Even in an effectively regulated financial marketplace, however,
education is essential to ensure that consumers have the ability to
make rational decisions in relatively dynamic markets filled with a
broad array of complex products. After all, most regulation only sets
minimum standards or requires effective disclosures. It is up to
consumers to utilize the disclosures and other information to attain
good value in their product purchases. Only education can help ensure
that consumers undertake money management, consumption, use of credit,
and saving in effective ways. If they do, they and the entire society
will benefit because individual economic decisions, and the economy,
will become more efficient and productive.

----------
PREPARED STATEMENT OF H. PATRICK SWYGERT

President, Howard University
Appearing on Behalf of
Historically Black Colleges and Universities

February 6, 2002

Chairman Sarbanes and distinguished Members of the Senate Banking
Committee, good morning. My name is H. Patrick Swygert and, as the 15
President of Howard University, I am delighted to be here in support of
the Committee's initiative to further promote financial literacy. The
current deficiency in this regard is, indeed, one of the most under
reported, yet critical, problems plaguing our communities. I am
grateful to you, Mr. Chairman, and to the other Members of the
Committee for recognizing the magnitude of this problem, and for taking
the initiative to resolve it by holding these hearings. I am especially
honored to be in the company of such a diverse group of distinguished
panelists, including yesterday's panelists of leading financial
experts: Chairman Greenspan, Secretary O'Neill, and Chairman Pitt.
I especially appreciate the invitation to speak on behalf of higher
education, because I truly believe that, as educators, we have an
inherent obligation to educate, nurture, train, and prepare our
students for life's many challenges, and to help mold them into
tomorrow's great leaders.
This morning, I would like to provide some insight into the
significance of youth-oriented financial literacy from a university
perspective.

About Howard University
For nearly 135 years, Howard University has been educating students
and preparing them for the important leadership positions and social
responsibility in an increasingly complex world. Our mission as a comprehensive, research-oriented, predominantly African-American
university is to provide an educational experience of exceptional
quality at reasonable cost to students of high academic potential.
Particular emphasis is placed upon providing educational opportunities
for African-American men and women, and for other historically
disenfranchised groups. Furthermore, Howard University is dedicated to attracting, sustaining, and developing a cadre of faculty who, through
their teaching and research, are committed to producing distinguished
and compassionate graduates who seek solutions to human and social problems
in the United States and throughout the world.
Howard University is very unique in its diversity, and we value
that diversity. We are diverse in our community of faculty, staff,
students, and alumni who reflect the global community. Our fields of study
and scholarship are equally diverse. We recognize that such diversity is a critical component of the American way of life and freedom.
Many of our students have gone on to make significant contributions
to this Nation and to the world. They include a former Supreme Court
Justice, jurists at every level of the judicial system, mayors of
cities, a former Governor of Virginia, numerous national and State
congressional representatives, Cabinet Secretaries, Nobel laureates,
United Nations Ambassadors and world-renowned lawyers, historians,
musicians and artists, sociologists, psychologists, theologians, and
physicians.

Why Financial Literacy is Important to the Communities
With Significant Minority Populations

Traditionally, Historically Black Colleges and Universities
(HBCU's) have played a pivotal role in enhancing and empowering
communities through education. We are often pillars in our respective
communities, and have well-established relationships and the necessary
infrastructure in place to implement consumer education and a financial
literacy curriculum. Promoting financial education for our youth is
consistent with our core values.

Historical Disadvantage

The persistence of racial inequality from a socioeconomic
perspective has been well-documented (Darity and Myers, 1998). African-
Americans have historically remained secondary to White Americans on
almost every measure of economic well-being. For example, the median-
income for White households in 1999 was $54,904 compared to that of
African-American households, which was $30,439 (Bureau of Labor
Statistics 2001). In December 2001, the unemployment rate for White
Americans was 4.9 percent, compared to a rate of 9.9 percent for
African-Americans.

The Wealth Gap

The wealth gap between the minority and White households is
significant and
persistent.

The average American household had a net worth or wealth of
$71,670 in 1998.
White households had an average net worth of $94,800, an
amount six times that of African-American households at $15,500
(Straight 2002).

We have the opportunity to narrow the wealth gap by empowering
consumers with sound financial knowledge and skills to effectively
manage their money, and to improve their credit. The benefits of this
knowledge are intended to expand personal finance opportunities,
including homeownership.
Homeownership plays a big role in decreasing the wealth gap. Home
equity alone makes up about 44 percent of the wealth distribution. In
December of 2001, the U.S. Department of Commerce released
homeownership rates for the fourth quarter.

White households had a homeownership rate of 74.4 percent.
Black households had a homeownership rate of 48.1 percent,
which is 26 percentage points lower.
The homeownership rate of lower-income households (with family
income less than the median-family income) is 53 percent. This is
lower than the national homeownership rate of 68 percent.

To increase homeownership among minorities and low-income families,
we need to deploy financial education curricula that will be uniquely
designed to address their needs.
Mortgage denial rates for African-American applicants as compared
to White applicants continue to be significantly high.

In 2000, the denial disparity ratio for African-American
applicants was 2.02, meaning that they were more than twice as
likely as White loan applicants to be denied a loan (CLC Compliance
Technologies 2001).
In the 1990's, we witnessed the tremendous growth in subprime
lending for mortgages, and consumer and auto finance paper. These
transactions carry onerous terms, like excessive finance charges,
unnecessary insurance coverage, high interest rates, repayment
penalties and other debt traps. Frequently, African-Americans and
other minorities are targeted for these loans (Lindsey 1999).

This exploitation of minority consumers may be due to a variety of
factors. It is a very complex issue. We have the opportunity to narrow
the wealth gap and to mitigate impaired credit by empowering current
and future consumers with sound financial knowledge.

Credit Issues
A notable change in consumer financial services over the past few
decades has been the growth of the use of credit cards, both for
payments and as sources of revolving credit. From modest origins in the
1950's as a convenience for the wealthy, credit cards have become
ubiquitous financial products held by households across all economic
strata. (Durkin 2000).

In 1998, bank-type credit cards and outstanding balances
amounted to a family average of $4,073 dollars. It is significant
that 68 percent of the families surveyed had one or more credit
cards.
At the lowest-income level, the average balance was $2,240 and
28 percent of the families surveyed had one or more credit cards.
At the highest income level, the average balance was $5,232
and 95 percent of the families surveyed had one or more credit
cards.

In short, credit card use and outstanding balances are up. This
raises concerns about whether consumers fully understand the cost, and
whether credit cards have encouraged widespread deficit spending,
particularly among those least able to pay. Financial education can
help resolve these concerns and level the credit playing field by
preparing those least able to pay, including students and many African-
Americans, make informed financial decisions.

Impact on Students
Our students are particularly vulnerable to the enticement of
credit card predators. The Government Accounting Office (GAO) performed
a study in 2001, which found that one-third of students had credit
cards before they entered college, and another 46 percent acquired them
during their first year. Other recent reports and surveys have shed
even more light on the plastic invasion (Nellie Mae 2000, Manning 2000,
and Warren 2001).

Seventy-eight percent of college students have at least one
credit card; many students have four or more credit cards.
The average credit card debt among undergraduates was $2,748
in 2000--a 46 percent increase from 1998.
Nine percent of students carried a balance exceeding $7,000.
In 1998, 81 percent of college students had obtained their
first credit card by the end of their freshman year.
The number of young Americans between the ages of 18 and 25
who declared bankruptcy in the 1990's nearly doubled from 60,180 in
1991, to 118,000 in 1999.
In January 2001, young adults accounted for 7 percent of the
Nation's personal bankruptcies.

The Public Interest Research Group surveyed 460 students last year
and found the following:

One-third of the students applied for a credit card at an
``on-campus table.'' Of those, 80 percent cited ``free gift'' as
the reason for applying.
Fifty percent of students obtained their cards through the
mail. Another 15 percent obtained cards at on-campus tables and 10
percent over the phone.
Fifty percent of the students with cards always paid their
balance in full, 36 percent sometimes did, and 14 percent never
did.
Forty-eight percent of students with one or more cards pay
late fees, and 7
percent had a card cancelled due to missed or late payments.
Only 19 percent of students were confident that their school
had educational
resources to learn the responsible use of credit.

If used responsibly, credit cards allow students to build up credit
histories that facilitate increased access to credit in the future.
However, if college students have not learned financial management
skills in their secondary education or from their parents; and if they
misuse their credit cards or mismanage their credit card debt, the
disadvantages can far outweigh the advantages.

Role of Institutions of Higher Learning in Promoting Financial Literacy
In order to protect their students from unnecessary debt
accumulation, all learning institutions have an obligation to properly
educate them on consumer credit, and the dangers of credit card debt.
Howard University is already addressing the national financial
literacy problem as it relates to African-Americans and other
minorities. In partnership with Freddie Mac, Howard and four other
HBCU's (Benedict College, Clark Atlanta University, Florida A&M
University, and St. Augustine's College) are participating in the
CreditSmart program, which seeks to develop a comprehensive, classroom-
based consumer education curriculum.
Students are provided with an overview of credit and credit
management; insight as to how lenders access credit histories; and the
key steps to achieving financial goals. The curriculum's mission is
designed to increase financial literacy by enhancing successful life-
long money management skills.
Howard University has deployed CreditSmart in numerous workshops,
and in a range of existing business and finance courses. We have also
completed a CreditSmart training video, and scheduled television
appearances to promote the program in the Washington metropolitan area.

Other Organizations
It is refreshing to see other organizations attack the problem of
financial illiteracy head on. Howard University's strategic partner,
The Fannie Mae Foundation, has developed a Personal Finance Initiative
that prepares people for homeownership by providing free educational
materials on credit, budgeting, and the homebuying process; and through
key partnerships with organizations that assist consumers with money
management issues. The Foundation has collaborated with several organi-
zations to develop personal finance education programs, including a
partnership with Home Depot and Consumer Credit Counseling Services to
develop a replicable workplace education program; a partnership with
the Faith Center for Community Development to provide financial education through faith-based institutions; and, a partnership with the First
Nations Development Institute to help Native American communities develop
financial skills.
Investing for Success, cosponsored by the National Urban League,
the Coalition of Black Investors-Investment Education Fund, and the
Investment Institute Education Foundation is a special investor
education program designed for the African-American community. I
commend the program for its mission to strengthen the
understanding of middle-income African-Americans about opportunities to
invest and build wealth; demystify the world of investments and the
jargon that too often obscures it; contribute to realistic expectations
about the risks and rewards of investing; and encourage long-term
financial planning that can support the efforts of African-Americans to
save for their children's education and secure their retirement.
Although I am confident that the efforts of Howard University and
the host of other institutions and organizations with similar goals
will yield benefits, I believe that the real power to address this
issue uniformly rests with the legislative authority. The establishment
of a nationwide strategy that will protect and educate our citizens is,
indeed, worthy of a collective, nonpartisan effort that will have a
lasting impact on generations to come.
Should the Committee have any questions regarding financial
literacy programs at Howard University, our CreditSmart project manager
and Professor of Finance, Dr. Debby Lindsey, has accompanied me here
today.
Thank you, Mr. Chairman.

REFERENCES

CLC Compliance Technologies, Inc. HMDAWARETM. September 2001.
Darity, William A. and Samuel L. Myers, Jr. Persistent Disparity:
Race and Economic Inequality in the United States Since 1945. Edward Elgar
Publishing Limited. 1998.
Durkin, Thomas A. Credit Cards: Use and Consumer Attitudes, 1970-
2000. Federal Reserve Bulletin. September 2000.
Nellie Mae. Credit Card Usage Analysis. December 2000.
Lindsey Debby. ``Prime and Subprime Mortgage Lenders: Who Treats
Black Applicants Less Equally?'' International Advances in Economic
Research. May 1999 5(2).
Lindsey, Debby. Racial Impact of NMAC's Finance Charge Markup
Policy. Law Offices Clint Watkins, Brentwood, TN. November 9, 1999.
Manning, Robert D. Credit Cards on Campus: Costs and Consequences
of Students Debt. Consumer Federation of America. June 2000.
Straight, Ronald. Black-White: Assets Accumulation Differences by
Race. January 2002.
U.S. Department of Commerce. Census Bureau Report on Residential
Vacancies and Homeownership. January 2002.
U.S. Public Interest Research Group. Additional Studies of College
and Credit Cards. 2001.
Warren, Elizabeth. Consumer Bankruptcy Project II and Consumer
Bankruptcy Project III. Harvard Law School. January 2001.

----------

PREPARED STATEMENT OF DON M. BLANDIN

President, American Savings Education Council

February 6, 2002

Chairman Sarbanes, Ranking Member Gramm, and Members of the
Committee, I am pleased to appear before you this morning to testify on
the status and importance of financial literacy and education in
America. My name is Don Blandin and I am President of the American
Savings Education Council (ASEC)--a coalition of private- and public-
sector organizations that undertakes initiatives to raise public
awareness about what is needed to ensure long-term personal financial
independence.
ASEC works through its partners to educate Americans on all aspects
of personal finance, saving, and wealth development, including credit
management, college savings, home purchase, and retirement planning. ASEC develops and distributes educational materials, all of which are available
in hard copy and on the ASEC websites: www.asec.org and
www.choosetosave.org.
ASEC was launched in July 1995 as a result of discussions between
representatives of the U.S. Department of Labor and the Employee
Benefit Research Institute to take the savings message to the American
public. ASEC is a program of the EBRI Education and Research Fund
(EBRI-ERF), a 501(c)(3) nonprofit, nonpartisan public policy research
organization based in Washington, DC. We do not lobby or advocate
specific policy recommendations.
As President of the ASEC coalition over the past 6 years, I have
had the unique privilege and opportunity to witness firsthand the
growth and evolution of financial education in America. I can say with
great assurance that an increasing number of public- and private-sector
organizations are committed to the mission of helping Americans to save
and plan for their financial future. Although progress has sometimes
been very slow, we are confident that by continuing to build coalitions
of organizations that are committed to this common mission of teaching
Americans to save, we will achieve more success at a faster rate.
Today, I would like to give you a birds-eye view of financial
literacy education in America and address some of the challenges we
face as we move forward. I would also like to take this opportunity to
highlight a few initiatives that ASEC has undertaken in the past few
years. As the Committee knows, the need is obvious: Studies have shown
that the United States has the lowest national savings rate in the
industrialized world and that many Americans are not saving adequately
for their retirement, let alone be fully prepared for unexpected life
events such as medical emergencies. With increasing concern over public
programs such as Social Security and Medicare, there is a need, more
than ever, for individuals to take responsibility in planning and
saving for their long-term personal financial independence.
Personal Finance and the Rush to Competence:
Financial Literacy Education in the United States
In an effort to provide you with the most updated and comprehensive
overview of financial literacy education in the United States, I would
like to highlight some findings from a national field study conducted
by the Institute for Socio-Financial Studies (ISFS) and commissioned
and supported by the Fannie Mae Foundation entitled, Personal Finance
and the Rush to Competence: Financial Literacy Education in the United
States.
The study was done to assess major trends in financial literacy
education for adults and to learn the challenges program managers and
educators face in trying to educate their constituencies. The research
also identified the strategies and practices that are the most
effective in helping Americans to better understand money management.
The study found that the 90 personal financial education programs
they surveyed were very diverse. The financial literacy education
programs were broken into these main sectors: community-based (32
percent); Cooperative Extension Service (27 percent); workplace (20
percent); faith-based (9 percent); community college (8 percent); and
military (4 percent). The main reasons these organizations gave for
offering
financial education programs fell into four categories: (1) empower
participants to take charge of their financial lives; (2) help
participants get out of or avoid financial problems; (3) comply with
regulations or requirements imposed by an outside authority; and (4)
meet an organizational goal (that is military readiness, increased
stewardship, increased employee satisfaction or productivity).
Financial education topics that were most frequently taught fell
into these categories: budget and money management; saving/investing;
credit and debt; 401(k) investing; financing education; and financing
health care.
Program leaders and managers identified the following challenges as
those they faced during the design, implementation, and operations
stages of their programs: (1) having inadequate resources to design,
evaluate, revise, or expand programs;
(2) inexperience in sociocultural aspects of program design, marketing,
and evaluation; and (3) the need to attract or expand programs to reach
many more participants than they currently do.
What also emerged from the study were solutions found by other
program managers that addressed these various challenges. Following is
a list of the seven most effective strategies and practices in personal
financial education today: Clear mission statement; targeted outreach;
adequate resources; successful evaluation and
follow-up; easy access to program; relevant curriculum; and dynamic
partnering.
The research from the financial literacy study was collected in
better financial times, but one can argue that there is an even greater
need for basic financial education facts today. Here are some
additional recommendations from the study:

Urge more employers to offer personal finance courses in the
workplace (it is the best venue for reaching out to most people),
and provide public policy initiatives that offer incentives to
those employers who do so.
Increase public and philanthropic support for financial
education by faith-based and other community-based organizations,
since they provide a comfortable learning environment for many
people.
Incorporate socioculturally sensitive teaching methods in
financial education materials and curricula to address different
communities.
Utilize a life-planning approach when teaching about finances
to encourage individuals to think more proactively about their
future.
Make financial education for older Americans a national
priority (that is, daily money management, avoiding scams and other
forms of financial abuse, alternative sources for health care, home
care, medication, etc.).

According to a recent conversation EBRI staff had with the
Institute for Socio-Financial Studies, one concern that needs to be
addressed is the ability to sustain programs over a period of time.
Unfortunately, few programs have the resources and support they need to
be more than a one-time effort or to reach more than a fraction of the
people they need to reach.

Impact on Lower-Income Households
The lack of financial sophistication or awareness by lower-income
consumers translates into significantly lower participation in the
mainstream financial system. Another report by the Fannie Mae
Foundation titled Financial Services in Distressed Communities
highlights the fact that between 10 and 12 million households in the
United States have no relationship with a traditional bank or savings
institution. This population, also known as the unbanked, pays many
times more for access to routine financial services than the typical
American family.
Unbanked households are more likely to rely on check cashiers, pay
day lenders, rent-to-own establishments, and other alternative or
``fringe'' financial services providers whose interest rates can
average from 300 percent to more than 1,000 percent on an annualized
basis. Moreover, these institutions are growing exponentially in the
Nation's most impoverished and distressed communities. And over-
reliance on these alternative financial services firms significantly
undermines the ability of unbanked households to accumulate assets and
build wealth.
The report points out that while many factors lead unbanked
households to rely on excessively priced financial services, poor
choices is a leading reason. As a result, greatly increased financial
education for lower-income households, particularly those living in
distressed urban and rural communities, is essential.
Despite these somber findings, some organizations are addressing
this very important issue. According to the National Association of
Federal Credit Unions (NAFCU), credit unions across the country are
making a national effort to reach out to underserved communities through
their own local programs. San Antonio City Employees Federal Credit Union (CECU) is just one example. CECU uses its financial knowledge and
experience of its staff to prepare and teach basic financial courses for
the city's Adult Basic Education and GED Preparation Program.

The Second National Summit on Retirement Savings
In light of recent events in the news regarding 401(k)'s and
retirement planning, I want to remind everyone that the second National
Summit on Retirement Savings is scheduled for February 27-March 1, 2002.
In 1997, the Savings Are Vital to Everyone's Retirement (SAVER) Act was
passed in Congress and signed by the President. As part of the bill, the
first national summit was held on June 4-5, 1998, in Washington, DC. The summit, jointly convened by the President and the bipartisan leadership of Congress, strived to increase public awareness of the importance of
retirement planning and to identify ways to promote greater retirement
savings by all Americans.
This year's national summit should offer a very compelling and
enlightening look at the future of retirement savings in America.
Additional information on the 1998 National Summit on Retirement
Savings can be found at: www.saversummit.org. For information on the
upcoming Summit, see www.saversummit.dol.gov. The SAVER legislation (in
.pdf format) is available for your review at www.
saversummit.org.
Since the 1998 SAVER Summit, ASEC and its partner institutions have
participated in numerous efforts to increase public awareness about
savings and retirement planning. The selected initiatives outlined
below have attempted to achieve many of the goals expressed in the
SAVER Act, including: (1) coordinating with public- and private-sector
organizations to work together and share resources to support various
public education campaigns; (2) getting involved with local and State-
level organizations; (3) involving the media in helping inform the
public about retirement savings; and (4) urging employers to sponsor
retirement plans and educate employees about the importance of
retirement savings.
Delphi Survey
EBRI contracted with Mathew Greenwald & Associates (Greenwald),
Inc., to conduct a Delphi survey to evaluate ideas generated by
delegates to the first National Summit on Retirement Savings held on
June 4-5, 1998. Specifically, these ideas focused on ways to increase Americans' retirement savings and enhance the retirement income security
of today's workers. The results of the survey have been the foundation for various action steps undertaken by ASEC over the past few years.
In order to develop the questionnaire, EBRI provided Greenwald with
a categorized list of the ideas generated at the summit. Greenwald then
incorporated these ideas into a questionnaire asking respondents to
rate each idea according to the respondent's perception of its priority
for further action. For the second round of the study, respondents were
presented with the same list of ideas, ranked within each category
according to the results of the first round, and asked to rate each
idea again according to its priority. The third round of the study
again presented respondents with the same list of ideas, ranked
according to the results of the previous round (but no longer within
categories), and asked them to rate each idea a final time. Forty-one
percent of summit delegates responded to the first round of the survey.
The second round had a delegate response rate of 22 percent. Forty
percent of summit delegates responded to the final round of the survey.

The Top Twenty
Table 1 presents the top 20 ranked ideas by the percentage of
summit delegates rating each a high priority. While the rankings vary
somewhat by each survey round, they also show some surprising
consistency. ``Educating about the benefits of starting to save early''
is the top-ranked idea by delegates in the final two waves of the
survey. This signals that delegates believe that an educational
campaign with this idea as one of its central messages should be the
top priority for anyone seeking to implement ideas from the national
summit.
Seven of the ideas ranked among the top 10, and 13 of the ideas
ranked among the top 20, also concern education. ``Educate people on
the costs of retirement'' is the second-ranked idea, while ``develop
financial planning curriculum for high schools and colleges'' is ranked
4. A delegate priority is also to ``develop an on-going, funded, public
awareness program to create a culture of saving and thrift'' (ranked
8). There also appears to be a sentiment that such a campaign should
involve ``different messages targeted at different groups, such as
people at risk, young people, low-income people, savers vs. nonsavers,
ethnic groups, and high/low education levels'' (ranked 10). According to delegate responses, a priority should also be to ``encourage the use of payroll deductions'' (ranked 3) and to ``increase availability of payroll deductions and direct deposits for IRA's and/or other (retirement) savings
vehicles'' (ranked 9).
Three of the ideas ranked in the top 20 directly concern the high
priority that should be placed on the education of children and youth.
``Developing a financial-planning curriculum for high schools and
colleges'' is ranked 4, while ``institute education projects that start
at a young age'' is tied for 13 place and ``encourage financial
literacy in the schools through public-private partnerships'' is ranked
18. In addition, educating employers, specifically on how to set up
low-cost plans, is also a priority for summit delegates.

Choose to Save^'
EBRI and ASEC's Emmy-award winning Choose to Save^' (CTS)
education program was cited by delegates to the 1998 National Summit on
Retirement Savings as the type of campaign that should be conducted
throughout the Nation. Based on the findings of the RCS, this program
provides first-time savings information and also customizes the
financial planning message to different ``savings personalities.''
Underwritten by Fidelity Investments in the Washington, DC test
market, Choose to Save^' includes educational brochures,
radio, and TV public service announcements (PSA's) in primetime,
newspaper ads and outdoor displays, and ongoing news coverage through
our DC media partners--WJLA-TV (an ABC affiliate), WGMS Radio, and WTOP
Radio. Although the program stresses the seriousness of the savings
message, it uses humor and positive examples to help people overcome
their reluctance to address financial issues.
For more information, and to see and hear the TV and radio
education spots, visit the Choose to Save^' website at:
www.choosetosave.org. In addition, CTS PSA's are shown on military
bases and ships worldwide. The Public Sector CTS campaign, launched in
October 1998, aims to increase participation in State and local
government (Sec. 457) deferred-compensation plans. ICMA Retirement
Corporation (RC), the National League of Cities, and the Government
Finance Officers Association underwrite the program. The CTS program is
now in its 5th year.
PSA's are an integral component in the CTS campaign. The goal of
showing the PSA's is to raise the general savings awareness level among
viewers. The CTS PSA's have been disseminated nationally through a
partnership with Goodwill Communications, as well as the U.S. Treasury
Department, and the U.S. Social Security Administration.
Some interesting stats from the first national CTS PSA Campaign
television broadcast package that was launched in July 2000:

1,100 television broadcast stations
35 networks/NAB closed circuit
600 cable stations
181 broadcast stations; 14,945 plays
221 cable stations; 35,363 plays
Broadcast value as of July 2001: $4.9 million.

Additional stats from the second CTS PSA Campaign television
broadcast package launched in August 2001:

229 cable stations; 12,393 plays
Radio diskpak distribution: $407,773 (as of January 2002). It
also features a spot in Spanish.
253 radio outlets in 179 cities: 28,266 plays
Broadcast value as of January 2002: $5 million airing nearly
9,000 spots in 149 cities spread through 49 States.

Table 1. Top Twenty Ideas Among Delegates
[Ranked by percentage rating each a high priority]
------------------------------------------------------------------------
First Second Third
Rank Round Round Round
------------------------------------------------------------------------
1 Educate about the benefits of 2 1 1
starting to save early...........
2 Educate people on the costs of 1 5 2
retirement.......................
3 Encourage the use of payroll 3 3 3
deductions.......................
4 Develop financial-planning 16 2 4
curriculum for high schools and
colleges.........................
5 Provide simple, user-friendly, 10 6 5
easy-to-understand information on
retirement savings...............
6 Encourage portable models......... 8 10 5
7 Educate employers on how to set up 4 4 7
low-cost plans (as part of a
national public awareness
campaign)........................
8 Develop an on-going, funded, 5 6 8
public awareness program to
create a culture of savings and
thrift...........................
9 Increase availability of payroll 10 8 9
deductions and direct deposits
for IRA's and/or other savings
vehicles to encourage savings
(that would not be accessible
till retirement).................
10 Develop an education campaign that 13 9 10
includes different messages
targeted at different groups:
people at risk, young people, low-
income people, savers vs.
nonsavers, ethnic groups, and
high/low education levels........
11 Educate employers on how to set up 25 19 11
low-cost plans (as part of
opportunities for plan
expansion).......................
12 Position ``lifetime savings'' 43 27 11
campaign as opposed to
``retirement''--which does not
register for young people........
13 Encourage long-term investing..... 16 15 13
14 Institute education projects that 8 16 13
start at a young age.............
15 Simplify the message.............. 14 33 15
16 Use automatic enrollment/negative 27 12 16
consent to raise 401(k)
participation....................
17 Raise profile of retirement 6 13 17
savings plans when they are
offered..........................
18 Encourage financial literacy in 32 16 18
the schools through public-
private partnerships (that is,
``adopt a school'' programs).....
19 Provide more education for workers 28 21 19
on an ongoing basis..............
20 Translate retirement benefit 16 11 19
statements into estimated monthly
income statements at retirement,
to make these statements more
meaningful to workers............
------------------------------------------------------------------------

Choose to Save^' Forum on Retirement Security and Personal
Savings
On April 4-6, 2000, the Choose to Save^' Education
Program hosted a Forum on Retirement Security and Personal Savings in
Washington, DC. The forum brought together key representatives in the
private, public, and nonprofit sectors to share expertise and best
practices encouraging long-term, routine saving, planning, and
investing by individuals. The two principal topics of the forum,
covered in both plenary and breakout sessions, were: (1) increasing
retirement planning and retirement program sponsorship and
participation and contributions at all income and age levels, and (2)
minimizing the leakage of savings from the retirement system as more
defined benefit and defined contribution plans pay lump-sum
distributions.
Forum participants addressed the importance of creating a national
environment that encourages personal savings and investment for
retirement, and focused attention on actions and ``best practices''
that companies and organizations could replicate and use on their own.
At the end of the forum, delegates were presented with a menu of
initiatives that emerged from the previous day's breakout sessions. Out
of the many initiatives that surfaced, the delegates then reranked the
top five initiatives (six in practice, since there was a tie for the
no, five spot), after a period of discussion on their relative merits
and shortcomings. The final-rank ordering was:

1. Create a national media campaign to raise public awareness.
2. Promote negative election as a default design feature.
3. Promote consumer financial literacy in K-12.
4. Promote financial planning tools and websites through SSA
benefit statement mailings.
5. Promote preservation/rollover through the use of waivers
recognizing foregone future accumulations.
6. Require automatic rollover of lump sums as a default design
feature.

Annual Retirement Confidence Survey
The year 2002 marked the 12th year that EBRI, ASEC, and Greenwald
have undertaken the Retirement Confidence Survey (RCS) and the 5th year
for the Small Employer Retirement Confidence Survey (SERS). The 2002
surveys have just been returned from the field, and the results from
the 2002 RCS will be presented at the SAVER Summit later this month.
The RCS has asked certain key questions over these 12 years that have
tracked trends in retirement confidence and retirement planning
behavior for much of this time. I would like to focus on just a few of
the highlights from last year's surveys.
In general, the 2001 RCS found that retirement confidence had
declined during the year, with fewer nonretired individuals engaging in
retirement planning and savings activities than in recent years. First,
the percentage of nonretired individuals who have tried to calculate
how much they will need to accumulate to ensure a comfortable
retirement decreased from 51 percent in 2000 to 46 percent in 2001. And
the percentage who said they tried to do this calculation declined even
further, to 39 percent, when workers were first asked about their
knowledge of the various components that go into this type of
calculation. Second, the proportion of workers who say they have
personally saved for retirement has also gone down, albeit only
slightly. In 2001, only 7 in 10 workers said they have personally saved
for retirement, as opposed to 3 out of 4 workers in 2000.
With these trends in mind, it should not be surprising that the
workers were less
likely in the year 2001 to say they were on track in terms of planning
and saving for retirement than they were in 2000. In 2000, 38 percent
reported they felt they were on track, while in 2001 only 33 percent
felt they were on track in their financial preparation for retirement.
At the same time, the proportion saying they are a lot behind schedule
increased from 29 percent to 34 percent. This sense of being behind
schedule may be a result of rather small amounts that American workers
have thus far accumulated for retirement. Half of workers have saved
less than $50,000; 2 in 10 say they have saved nothing at all for
retirement. The average amount for retirement increases with age, of
course. But still only a quarter of the workers age 45 and over have
saved at least $100,000.
The increase in the number of workers who feel they are behind
schedule in preparing for retirement is no doubt linked to the
turnaround in confidence in having a financially secure retirement.
After 5 years of steady increase the proportion of workers who are
confident that they will have enough money to live comfortably in
retirement dropped from 72 percent in 2000 to 63 percent in 2001. Other
indicators of confidence also fell in 2001 after several years of
steady increase.

In 2000, 77 percent of workers said they were confident they
were doing a good job of preparing financially for retirement. In
2001, it dropped to 70 percent.
Similarly, 84 percent were confident of having enough money to
take care of basic expenses in 2000; only 78 percent were confident
in 2001.
Sixty-six percent were confident in 2000 of having enough for
medical expenses, compared with 58 percent in 2001.
And more than 51 percent of working respondents to the 2000
RCS were very confident of having enough to pay for long-term care,
compared with 44 percent of working respondents in 2001.

The decline in confidence was not spread evenly across the working
population. Workers ages 35-54 and those with household incomes of
$35,000 to $75,000 experienced the biggest declines.
One area where confidence has not declined this year is in Social
Security and Medicare, despite the large amount of press concerning the
financial health of these two systems. Confidence in these programs has
continued to increase from the lows recorded in 1995, although a
majority of workers continue to remain not confident. Confidence that
these programs would continue to pay benefits of value equal to today's
went up in 2001 by 6 percentage points to 34 percent for Social
Security and 4 percentage points to 39 percent for Medicare.
On another issue of importance, the 2001 RCS found that clear
differences remain between American workers as a whole and minority
workers on retirement planning and saving. African-American and
Hispanic Americans tend to have lower levels of confidence in their
financial prospects in retirement and lower levels of retirement
planning and saving. Among workers:

Forty-five percent of Hispanic Americans and 54 percent of
African-Americans were confident of having enough money to live
comfortably in retirement, compared with 63 percent overall.
Sixty-two percent of Hispanic Americans and 69 percent of
African-Americans were confident in having enough money for basic
expenses, compared with 78 percent overall.
Twenty-nine percent of Hispanic Americans and 29 percent of
African-Americans say they tried to figure out how much money they
will need to save to live a comfortable retirement, compared with
39 percent of all workers.

As a ``best practice'' example on this specific issue, I want to
highlight the Investing for Success program, an ongoing investor
education partnership between the Investment Company Institute
Education Foundation (ICIEF); the National Urban League (NUL); and the
Coalition of Black Investors-Investment Education Fund (COBI-IEF).
The program is designed to promote greater understanding among
middle-income African-Americans about the benefits of long-term
investing. To date, investor education workshops have been held in
cities throughout the country. The Investing for Success program offers
free personal finance workshops nationwide, conducted by African-
American investment professionals. Those who are unable to attend a
workshop can visit www.icief.org for all the materials in an
interactive, multimedia format. In addition, based on the success of
the program, the ICIEF is developing a Spanish-language Investing for
Success web course that will offer similar investor education
opportunities to the Hispanic community.

Youth and Money
Young people today are bombarded with messages to spend, yet the
average student graduating from high school lacks even the most basic
money management skills (that is, balancing a checkbook, understanding
compound interest, etc.) that can help him or her to make sound
financial decisions. Too often, we hear stories of parents bailing
their children out of debt--even before they have had a chance to bring
home their first paycheck.
It is imperative that children be taught about personal finance at
an early age so that they can develop the skills and knowledge they
need to have to be financially responsible adults. Helping individuals
prepare for long-term financial security needs to begin in the home--by
parents. The earlier good savings behavior is taught to children, the
better planners, savers, and investors America will have in the future.
Last year, ASEC cosponsored, along with EBRI and MGA, the 2001
Parents, Youth & Money Survey, underwritten by the TIAA-CREF Institute.
The survey was a follow-up to the 1999 Youth & Money Survey finding
that 94 percent of surveyed students look to their parents for
financial education. As the primary teachers of money management,
parents have a major impact on the financial attitudes and habits--
positive or negative--that their child develops.
The 2001 Parents, Youth and Money Survey found, however, that while
a majority of parents feel confident about their understanding of
financial matters, many of their actions and behaviors contradict this
self-assessment. For instance, 55 percent of parents roll over credit
card debt each month. When asked where they would put or advise their
child to put $5,000 to save for education or some other long-term goal,
58 percent do not identify specific long-term investment vehicles such
as mutual funds; rather, more than one out of three parents cited low-
yielding certificates of deposit (CD's), savings accounts, and savings
bonds. Finally, fewer than half (45 percent) of all parents say they
make a budget and stick to it most of the time.
The 2001 Parents Survey shows that many parents are missing day-to-
day opportunities to engage their children in conversations about money
management, and provides some ideas for parents to help kids become
savvy savers and consumers. One of the reasons for undertaking the
survey was to help parents and children recognize the enormous value of
understanding everyday financial basics, as well as to motivate
financial service providers, K-12 teachers, financial advisors, and
youth leaders to develop, provide, and employ tools and resources to
strengthen family
financial literacy.
In conjunction with the 2001 Parents Survey, ASEC and the TIAA-CREF
Institute have created the following tools to help educate parents and
kids about financial matters: ``Money Talk'' pamphlet series, Youth &
Money Poster, Interactive Savings Goal Calculator, and Piggy Bank
Wrapper. All tools are available on the ASEC and TIAA-CREF Institute
websites at www.asec.org and www.tiaa-crefinstitute.org.
One question that is often asked is how effective are financial
education classes in schools? A 2001 study done by Stanford University
entitled, ``Education and saving: The long-term effects of high school
financial curriculum mandates,'' attempts to answer that question. The
paper explains that between 1957 and 1985, 29 States adopted
legislation that required secondary schools to offer some kind of
``consumer'' education. Fourteen States specifically required that the
schools cover topics related to household financial decisionmaking
(that is, budgeting, credit management, investing, etc.). The goal of
the curricula was to ensure that the students gained practical
financial knowledge and skills that they could later use in their adult
lives.
The study abstract says, ``The evidence indicates that mandates
have raised both exposure to financial curricula and subsequent asset
accumulation once exposed students reached adulthood. The estimated effects are gradual, probably due to implementation lags.'' These findings support
the work of organizations such as the Jump$tart Coalition for Personal Financial Literacy, whose objective is to encourage curriculum enrichment
to insure that basic personal financial management skills are attained
during the K-12 educational experience.
ASEC is a founding organization of the Jump$tart Coalition and is
represented on its board of directors. ASEC helped to develop the
coalition's savings and investing guidelines, which include teaching
students about the importance of income, money management, savings and
investment, and spending. More information can be found at
www.jumpstart.org.
A post September 11, 2001 survey report released yesterday by
Certified Financial Planner Board of Standards shows the consequences
of young people not learning to manage their finances. Young people
today are more focused on managing and reducing debt than they were in
1999. Among individuals ages 20-39, 47 percent list managing and
reducing debt as a current financial goal, second only to building a
retirement fund. By comparison, 39 percent of that group listed it as a
current financial goal in 1999.
What this means is that young people are turning away from other
critical facets of the economy, CFP Board's survey shows. Interest in
home purchase/renovation as a current financial goal has declined, and
interest by the younger generation in vacation/travel also declined
from 40 percent in 1999 to 33 percent in 2001. By contrast, those
nearing retirement (ages 55-69) showed an increased interest in travel
with 45 percent listing it as a current financial goal, up from 41
percent in 1999.
Finally, on a more upbeat note, I would like to bring the
Committee's attention to an excellent example of a public- and private-
sector partnership aimed at educating America's youth about finances--
Money Math: Lessons for Life. In response to the country's low
financial literacy rates among teens, the U.S. Treasury Department
Savings Bonds Program, the Jump$tart Coalition for Personal Financial
Literacy, and the Center for Economic Education (University of St.
Louis, MO)--along with 17 other partners--developed a supplemental
middle school math curriculum that teaches important personal finance
skills to students in grades 7 through 9. Money Math lesson topics
include income, saving, taxes, and budgeting.
The four lessons included in the curriculum are available online at
www.savingsbonds.gov and at http://coach.dosomething.org. Both the web-
based lessons and print materials are available for free. To request a
paper copy of Money Math, send an e-mail to [email protected].

Conclusion
Unfortunately, no matter how you look at the statistics, the bottom
line is the same--many Americans are not saving enough for their future
or taking control of their current financial situation. Individuals
need to know that responsible money management is not rocket science,
but the financial cost of not starting to save today can have a serious
impact on their financial well-being 10, 20, or 30 years down the line.
America is the land of opportunities, but many Americans are opting
out of their opportunity to build wealth by overspending, carrying
excessive credit card debt, and not participating in their company's
employment-based retirement plans. Fortunately, many of us here are in
a position to make a difference and educate Americans about the
importance and urgency of planning financially.
ASEC is a national educational effort supported by public- and
private-sector
institutions that are fully engaged and committed to educating
Americans about the need to save, invest, and plan for retirement and
other important life stages. We have been down a road and made
significant progress, but we have also faced some turns in our path.
But in the end, I return to my thoughts at the beginning of the
testimony about the importance of coalition building. Organizations in
both the private and public sectors must collaborate on all levels to
help educate Americans about the importance of taking control of their
financial future. By combining and leveraging our comprehensive
networks and resources, we have a better chance of reaching people that
none of us would be able to reach alone.
Mr. Chairman and Members of the Committee, I thank you for the
opportunity to speak to you today on this important topic. I would be
pleased to take questions now, and to respond to written questions
following the hearing.

----------

PREPARED STATEMENT OF ESTHER ``TESS'' CANJA

President, AARP

February 6, 2002

Good morning, Chairman Sarbanes, Ranking Member Gramm, and other
distinguished Members of the Senate Banking Committee. My name is
``Tess'' Canja. I am President of AARP. I appreciate this opportunity
to offer our views regarding the status of personal financial literacy
and education in America--offered in support of the Committee's
examination of options for developing a national strategy. With a
membership of over 35 million midlife and older persons age 50 and
over, we consider the work being undertaken by this Committee regarding
financial literacy to be critical in its focus and in its timing.
If there is a positive aspect of the debacle known as ``ENRON''--
where thousands of employees and retirees have lost most of their
retirement savings--it is the realization that it is in our national as
well as our individual interest to make an effort to learn about,
understand clearly, and strive to protect the openness and fair play of
the investment process. Enron's collapse also has shed some much needed
light on a simple, fundamental truth--that Social Security's
guaranteed, defined benefits will be even more important to future
retirees than they are to today's retirees.
For our part, we at AARP continually work to weave personal
financial literacy into the fabric of all our program and service
offerings. To be certain, developing effective financial literacy
programs and services should not be viewed by anyone as a substitute
for clear and strong oversight and enforcement of investor protection
laws and regulations.
About a decade and a half ago (1987), E. D. Hirsch published his
thought provoking book on Cultural Literacy. His was a slender volume,
with the subtitle: ``What Every American Needs To Know.'' Hirsch helped
to spawn a national debate over what he argued was an absolute as well
as a comparative decline of literate knowledge in the United States.
This debate continues today, and your hearings reflect one important
aspect of that debate--a concern over the status and need for personal
financial literacy and education in America.
Complicating the challenge of developing a ``civic-based''
financial literacy strategy for adults, as well as curricula for
primary and secondary education, is that there are today a wide variety
of commercial initiatives being promoted as unbiased financial literacy
services that have--in reality--a ``conflicted agenda.'' The objective
of many of the latter type of literacy campaigns is to market new
products and services and systems of service delivery.
We believe that promotional initiatives can be very useful in the
introduction of new and of better financial services. And we understand
that the use of creative
marketing techniques is an essential program and service requirement
necessary to increase the public's awareness of their need to become
more financially literate--and to make citizens aware of available
resources and assistance. However, we see a need for a coherent and
coordinated national strategy for making available a
well-researched and well-evaluated progression of financial literacy
programs and services. This strategy should be targeted at the life-
spanning needs of busy adult Americans--and the orientation of the
programs should be independent of ulterior commercial motivations.
Senator Sarbanes, in inviting me to testify today you requested
that I share with the Committee an overview of what AARP has been
learning about the status of, and the need for financial literacy and
education among midlife and older Americans (those we generally
identify as being 50 or over). AARP has long been active in efforts to
assist midlife and older Americans improve their prospects for
achieving personal financial security. In this regard, we have been
active in conducting research,\1\ designing, testing and providing
financial education and counseling services to our members, and to the
broader midlife and older constituencies we aspire to serve.\2\
Currently, we are engaged in an effort to:
---------------------------------------------------------------------------
\1\ See, with reference to the interaction of computer and
financial literacy, the ``AARP National Survey on Consumer Preparedness
and E-Commerce: A Survey of Computer Users Age 45 and Older,'' March
2000.
\2\ For example, the AARP Andrus Foundation, in a joint venture
with the National Center for Women and Aging at the Heller Graduate
School at Brandeis University, has created a website (www.FAAR.org)
that provides direct access for researchers, practitioners, and
journalists, to the latest research on economic security, retirement
income and consumer expenditures issues. FAAR refers to ``Financial
Aspects of Aging Research.'' Also, AARP's own website (www.aarp.
org) has a venue for ``web financial resources'' that offers assistance
in finding financial information, financial planning, consumer
watchdog, work smart, wise spending, etc.

Assess the magnitude of the problems of insufficient savings
among adult Americans.
Identify and review research on the status of mature adult
financial planning and management as it relates to savings and
financial security.
Analyze existing savings education programs, focusing on those
that have been formally evaluated.
General Patterns of Saving and Investment \3\
A recent research report by AARP has identified four basic pillars
of retirement income security for the 21st century:
---------------------------------------------------------------------------
\3\ AARP has sponsored a number of studies detailing with different
aspects of savings and investment behavior for those age 50 and over.
Some of the most recent reports include: How Americans Save (July
1998). Do Baby Boomers Save and, If So, What For (June 1999). The
Impact of Pay Inequality, Occupational Segregation, and Lifetime Work
Experience of the Retirement Income of Women and Minorities (September
1999). Pension and IRA Coverage Among Boomer, Pre-Boomer, and Older
Workers (February 2000). Patterns of Dissaving in Retirement (August
2000).

Social Security.
Pensions and savings/investments.
Healthcare insurance coverage.
Earnings from working during one's ``retirement'' years.\4\
---------------------------------------------------------------------------
\4\ The first issue of a new AARP series: ``Beyond 50: A Report to
the Nation on Economic Security'' (2001) concludes that traditionally,
the structure of retirement security has been thought of as a ``three-
legged stool.'' Now, because one-fifth of the aggregate income of
Social Security beneficiaries derives from wages, earnings from
employment merit consideration as a pillar of retirement security.

---------------------------------------------------------------------------
This same research report reveals that Americans age 50 and older:

Controlled two-thirds of all household wealth in the Nation in
1998.
For most of these families, home equity made up the largest
percentage of the total--except for the very wealthiest.

However, in an independent analysis of 1994 Health and Retirement
Study data, prepared for AARP and released in 2001, a team of
researchers at Colorado State University found that low levels of
savings and high levels of personal and real estate debt are serious
problems for many households nearing retirement.\5\ The net effect, the
analysts conclude, is that many households have relatively little
wealth to rely on for retirement income.
---------------------------------------------------------------------------
\5\ See: ``Risk Preferences and the Investment Decisions of Older
Americans,'' June 2001. The views expressed in the study are for
information, debate, and discussion, and do not necessarily represent
formal policies of AARP.
---------------------------------------------------------------------------
These findings raise important policy questions about how to
improve the retirement income prospects for all Americans. One
important component is surely to
increase their financial literacy.

The Marketplace and Pace
There has been a sustained trend of greater popular participation
in the stock markets, and an increasing reliance on these investments
for retirement income. Approximately one-half of American households
own stock either directly or through mutual funds. According to the
Investment Company Institute, investors that are 65 and older own 17
percent of mutual funds. Nearly 40 million American households with
incomes under $55,000 own mutual funds.
According to the Census Bureau, more than 28 million Americans over
age 65 rely to some extent on investment income to meet their living
expenses. Three-quarters of older persons depend on investment income
to meet 25 percent or more of their income. This trend is likely to
accelerate as the baby-boomer generation ages and defined contribution
pension plans replace defined benefit pension plans. According to the
1998 Federal Reserve Survey of Consumer Finances, 18 percent of
American households have defined benefit plans, while 33 percent have
defined contribution (401(k) and 403(b)) plans.
Interrelated with this trend of greater popular participation has
been an explosion of information about investing, the stock markets,
the economy, and personal finance. The policy debate over the future of
the Social Security program and its benefits has provided additional
focus for AARP's members and the American public as a whole--those just
starting their working careers, as well as those anticipating or in
retirement--regarding the nature and risks of private investment.
And to be certain, the playing field is not level for all
investors. Large institutional investors (that is, pension and mutual
funds) have the resources to retain their own independent market
analysts. For most individuals interested in investing, the ability to
deal with the complexity of and choices in the stock markets
begins with the challenge of interpreting and assessing investment
quality rating systems--no mean task.

A Measure of Investor Knowledge and Vulnerability
AARP commissioned a national telephone survey and analysis of
consumer behavior, experience, and attitudes by Princeton Survey
Research Associates.\6\ Interviews with 1,504 adults aged 18 and older
were completed in November-December of 1998. This was during a period
in which the stock market had been soaring. Four questions were asked
to provide a general indication of the level of investment knowledge
possessed by this sample of consumers. Responses to these questions
were grouped into three age categories: Younger respondents (age 18
through 49), midlife respondents (age 50 through 64), and older
respondents (age 65 and over).
---------------------------------------------------------------------------
\6\ See: ``Consumer Behavior, Experiences and Attitudes: A
Comparison by Age Group,'' March 1999.
---------------------------------------------------------------------------
The questions were:

Do you think most full-service brokers and financial planners
are paid based on the quality of the advice they offer and how much
their clients earn, or based on the amount and type of investments
they sell to their clients?

--Only fifty percent (50 percent) of older respondents correctly
indicated that the amount and type of investments sold to their
clients was the basis of their pay.

--While over two-thirds of midlife and younger respondents (68
percent and 67 percent respectively) answered correctly.

As far as you know, if you lose money in a mutual fund you
invested in at a bank, will the FDIC, that is, the Federal Deposit
Insurance Corporation, cover your loses?

--Only forty-two percent (42 percent) of older respondents (aged
65+), knew the statement to be false (the remainder answered
incorrectly, indicated they did not know, or refused to
answer).

--While fifty-one percent (51 percent) of those respondents in
midlife (aged 50-64), were correct.

--Fifty-seven percent (57 percent) of the younger respondents (aged
18-49) were correct.

Next, do ``no-load'' mutual funds involve no sales charges or
other fees?

--Only 30 percent of older respondents knew that the statement was
false.

--While 36 percent of those in midlife answered correctly.

--Forty-one percent (41 percent) of the younger respondents answered
correctly.

And finally, when an investor diversifies his investments,
does his risk of losing money increase or decrease?

--Only twenty-six percent (26 percent) of older respondents correctly
indicated that their risk of losing money would decrease.

--While forty percent (40 percent) of those in midlife answered
correctly.

--Slightly fewer, thirty-eight percent (38 percent), of the younger
respondents answered correctly.

For all respondents, only 11 percent of this sample of consumers
correctly answered all four of these basic questions, while 25 percent
correctly answered three of the four questions. Among consumers under
the age of 65, 12 percent answered all four questions correctly, while
only 6 percent of the age 65 and older consumers could do so.
The responses to our simple set of investment questions are
worrisome. Today the individual investor confronts a market
characterized by multiple and increasingly complex investment choices,
a proliferation of information sources of uneven and uncertain quality,
and links the customer into a trading system designed for convenience
and efficiency. However, the growth in the proportion of Americans
investing in the stock market appears not to be supported by a
corresponding knowledge about fundamental product features, charges,
and risks.

Seeking a Baseline for a Literacy Strategy

In April 2001, AARP contacted with Ipsos-NPD to conduct a study of
persons age 50 through 59 to gain more information about their
interests, preferences, and behaviors (from a sample composed mostly of
baby boomers nearing retirement age). The questions relate to financial
planning and management.\7\ Among the key findings of this unpublished
survey:
---------------------------------------------------------------------------
\7\ Response to the mailed questionnaire was 57 percent (N = 1,932
responses out of 3,400
surveyed).

---------------------------------------------------------------------------
How they rated financial topics to learn about:

--Respondents were given a list of 22 financial topics and asked to
select five that they consider most important to learn about.
More than 6 in 10 (62 percent) say that Social Security
benefits are important to learn about. Roughly half as many
consider knowing how much money they will need in retirement
(39
percent), sources of retirement income (39 percent), saving for
retirement (30
percent), or pension benefits and 401(k)'s (29 percent) as
important topics to learn about.

--No more than one in four picked any of the other topics, listed
here in descending order in which they were selected as being
among the top five: Investing (24 percent), savings (22
percent), tax strategies (21 percent), interest in inheritance
issues (20 percent), home-based business (14 percent), estate
planning (14 percent), debt management (14 percent), financial
planning (12 percent), IRA's (11 percent), home equity or
reverse mortgages (9 percent), investment terms and concepts (8
percent), changing careers or career management (8 percent),
and paying for education (7 percent).

Preferred formats for receiving financial information:

--For each of the twelve financial topics about which they were
asked, the largest percentage of the respondents expressed a
preference for receiving written information.

--Only 3 to 7 percent preferred computer disks, workshops or
seminars, audio or videotapes, or web-based formats, large
print or Braille.

Levels of confidence in a financially secure retirement:

--Roughly 2 in 10 respondents say they are either extremely (5
percent) or very confident (14 percent) that they will have
enough money to live comfortably throughout their retirement
years. Roughly 4 in 10 (42 percent) say they are somewhat
confident in a financially secure retirement, while a similar
percent (39 percent) say they are either not too confident (22
percent) or not at all confident (17 percent).

Levels of involvement with various financial planning
activities:

--The largest percentage of respondents say they have read their
Social Security statement in the past year (56 percent). One-
third (33 percent) say that they have contributed to a 401(k)
or other similar employer retirement plan while roughly 2 in 10
say that they have determined their net worth (22 percent), or
reviewed their pension information (20 percent).

Media, individual or organizational sources of financial
information:

--When asked how they receive media information about financial
issues, over half (54 percent) say they get information from
newspapers, while slightly fewer (47 percent) say they get such
information from television. Four in 10 respondents note that
they receive financial information from print brochures (43
percent) and from magazines (42 percent), while roughly one-
fifth get information from the Internet (21 percent), from
books (20 percent), or from the radio (19 percent). Only 4
percent report that they receive financial information through
computer software or videos.

--Respondents were also asked what individuals or what organizations
provide financial information to them. Four in 10 say banks or
other financial institutions (44 percent) or Government
programs or agencies (41 percent). Roughly one-third of the
respondents say that their financial planner (33 percent),
family or friends (32 percent), and their employer (32 percent)
provide financial information to them. Between one-fifth and
one-quarter of the respondents say they receive information
from financial services companies (21 percent) and insurance
companies (25 percent). Less than 1 in 10 respondents say they
receive information from national financial organizations (8
percent), religious organizations (5 percent), and community
groups or clubs (3 percent).

The most trusted source for financial information:
--Respondents were asked to select their one most trusted source of
financial-
related topics. Nearly one-third (32 percent) of respondents
pick a well-known
financial expert or professional, while slightly less than one-
quarter selects a local financial professional (24 percent) or
AARP (23 percent). Only 3 percent of the respondents pick an
insurance company.

Lifelong Learning
Complementing the Ipsos-NPD survey are the results from a survey
that AARP contracted for with Harris Interactive Inc., in September
1999, to explore how and why people over 50 years of age learn about
new things.\8\ This research examines typical learning motivations,
learning interests, and the life-event contexts in which learning takes
place. In brief, the survey findings suggest that lifelong learning
experiences that would likely hold the most appeal for mature adults
include subjects that are:
---------------------------------------------------------------------------
\8\ See: ``AARP Survey on Lifelong Learning,'' July 2000.

Personally meaningful.
Taught in environments which provide a direct learning
experience.
Allow adults control over all aspects of the learning process.
Are not too expensive.

The findings also indicate that mature adults prefer methods that
are:

Easy to access.
Require small investments of time and money to get started.
Allow learning to begin immediately.
Lessons to Explore
A number of potential program guidelines have surfaced, derived
from the limited survey and literature review reported above, that
suggest further exploration and testing. Ideally, financial literacy
programs should:

Have a close linkage to basic literacy skills.
Be based on clear and focused learning objectives and
standards.
Emphasize demystifying financial products and services.
Engage people to learn when they are most receptive, that is,
when they are:

--Near key life stage events.

--Approaching the time for making a choice/selection of a financial
service or
product.

Last, the credibility of the program, and therefore its
effectiveness is enhanced if:

--Traditionally respected sources of information are the source or
sponsor of the program.

--There is (affordable and ready) access to a choice of programs and
services.

--A navigation (referencing) strategy is in place for making this
information known and current.

Conclusions
It is premature to conclude too much regarding how best to address
the inadequate state of financial literacy among adults in this
country. Because of changing work patterns, a rapidly growing
population of retirement-age Americans, increasingly complex financial
products and services and greater personal responsibility for managing
one's own finances, the demand for ``nonconflicted'' financial literacy
programs and services will continue to grow. This modest projection
assumes that there will be an increased awareness and expectation by an
alerted public that, by necessity, we must become more self-reliant.
At the same time, it is worth repeating our concern that support
for adult financial literacy should not be viewed as a substitute for a
clear and strong oversight and enforcement of investor protection laws
and regulations.
We look forward to working with you, Chairman Sarbanes, and Members
of the Senate Banking Committee, on both fronts--strengthening investor
protections and strengthening the investor.
Thank you for this opportunity to testify before you today. I would
be happy to answer any questions you may have.

PREPARED STATEMENT OF RAUL YZAGUIRRE

President and Chief Executive Officer
National Council of La Raza

February 6, 2002

Introduction

My name is Raul Yzaguirre and I am President of the National
Council of La Raza (NCLR). NCLR is a private, nonprofit, nonpartisan
organization established in 1968 to reduce poverty and discrimination
and improve life opportunities for Hispanic Americans. NCLR is the
largest national Hispanic constituency-based organization, serving all
Hispanic nationality groups in all regions of the country through our
network of 277 affiliate community-based groups and regional offices.
NCLR established its Economic Mobility Initiative several years ago
in an effort to address the economic issues faced by Latino working
families. An important element of this project is to explore the
financial and economic security of the Nation's Latino families, and to
develop and propose clear public policy measures to improve the ability
of Latino families to move more successfully into the ranks of the
American middle class. With this charge, NCLR committed itself to
focusing on an array of issues not traditionally viewed as ``Latino
issues,'' such as savings and investment, retirement security, pension
coverage, homeownership, tax policy, and financial literacy, and
general issues of asset accumulation and wealth-building for American
families.
In light of this, I appreciate this opportunity to appear before
the Committee today to share with you what we have learned about the
economic security of the Hispanic community and the role that financial
literacy and education could play in improving the economic status of
U.S. Latino families.
My comments focus, in particular, on where Latino families are
positioned in today's economy and how improved financial literacy is
especially important to Latinos and to the Nation as a whole. I will
also outline some key issues in financial education which are relevant
to the Latino community and highlight ``elements of success'' with
respect to education strategies. Finally, I call for a national
partnership among Government, the financial services industry, and
community groups to focus both on providing effective financial
education to those who want and need it and eradicating financial
illiteracy within the Latino community.

Background

In recent years it has become clear that the economic well-being
and financial
security of families is no longer simply predicated on one's income
from work, but rather on the net worth, or wealth, of a family or
household. The Federal Reserve recently reported that over the last
decade overall household wealth nearly doubled from $21 trillion in
1990 to about $40 trillion at the beginning of 2001. It also reported
that about 80 percent of this growth was attributable to capital gains,
a substantial amount of which was due to the strong performance of the
stock market. Thanks, in large part, to a vibrant financial services
market--made more asset-friendly by favorable Government intervention--
American families have become wealthier and more financially secure
than Americans in previous decades, even though their income has grown
at a more modest rate. Today, more American workers have robust
employer-provided pension plans, Individual Retirement Accounts
(IRA's), stocks, and bonds, and many have seen the value of their homes
grow exponentially in recent years.
Today, there are 35.3 million Hispanics in the United States; 1 in
8 Americans are Latino. We are more than 1 in 10 workers, 1 in 5
students, and are a vital part of the economies of States, cities, and
communities across the country. The number of Hispanic-owned businesses
has continued to rise dramatically, and Latinos now have a buying power
that exceeds $450 billion annually. The evidence shows that Latinos
made serious contributions to the record economic growth experienced
across the Nation in the late 1990's with both their hard work and
consumer spending. Latinos, especially the Hispanic men, continue to
work at high levels, which has led to rising median income and to
falling poverty for many Hispanic families in recent years.
That said, as the Nation continued its transformation toward an
asset-based economy, most, though not all, Latinos have been left
behind. Recent data show that the median Latino family net worth
actually decreased in the middle of the last decade to $3,000 in 1998.
In 1998, Latino family net worth was just 4 percent of the average net
worth of non-Hispanic white families ($81,700), a ratio of 27 to 1. And
when home equity is taken out of the equation, we find that Hispanic
families have a median financial wealth of zero compared to $37,600 for
the average non-Hispanic white family.
Although there is a small but significant share of Latinos doing
well financially in the United States, today, Hispanic families are the
least likely of all Americans to own a home, have employer-provided
pension coverage, and save or invest in the stock market. While Latinos
have experienced gains in income in recent years thanks to their hard
work, the average Latino family appears to be no more financially
secure than they were in the early 1990's. Not only have many Latinos
failed to climb the economic ladder and attain the ``American Dream,''
but without assets far too many remain extremely vulnerable
economically to job loss--a concern that has materialized in recent
months.
However, lower net worth for Latinos has less to do with lack of
interaction with financial service providers than with the limited
types of providers, services, and products available to Latinos. To be
sure, the gulf that exists in asset accumulation and wealth among
American families can be attributed largely to distinctions in income
and education. But disparities in net worth persist even when access,
income, and education are not factors. A considerable problem is the
relatively narrow scope of providers and even more limited kinds of
products that meet the distinct financial and economic needs of Latino
families. In addition, many Latinos are unaware of the full range of
products available in the financial services market, and many often do
not have the benefit of adequate information. These factors effectively
limit the ability of Latinos to become more economically mobile and
help to keep Hispanic families prey to unscrupulous agents and
providers who offer high-cost products that effectively eat away at the
financial security of families.
In view of demographic trends and the increasingly important role
that Latinos are playing in the U.S. economy, ensuring that Latino
workers and families can reach their full economic potential, unimpeded
by elements in industry such as discrimination, is critical to the
future prosperity of the Nation. An important means of opening up the
doors of economic opportunity and financial security to more Latino
workers is improvements in financial literacy and more financial
education opportunities for Hispanic families.

Financial Education
As a practical matter, a basic understanding of how the financial
services industry operates helps workers and their families make more
informed choices about how best to progress economically. Even a modest
degree of financial literacy helps families to stay away from harmful
personal debt, fight discrimination, avoid predatory practices, and
invest wisely and purchase and accumulate assets. But for Latinos,
financial education and improvements in literacy are especially
important to begin the process of purchasing and accumulating assets.
For some Latinos it is a matter of more effectively understanding the
particular ebbs and flows of the financial services industry in the
United States and determining which are the most useful and cost-
effective services and products. But for most Latino families, most of
whom are native-born, low participation in financial markets can be
largely attributed to a lack of familiarity with financial institutions
and the process of building wealth.
For most Americans, including some Hispanics, financial knowledge
is simply passed down from one generation to the next. And because the
process of maintaining assets often naturally leads to greater
knowledge and literacy, those Americans born into families with assets
have the easiest road to a relatively secure middle-class life.
Accordingly, financial education services tend to be more vital to
those workers and families who have some means but no experience with
assets--a circumstance that best characterizes the position of many
Latinos in the market today. Clearly, although financial education
alone is insufficient to narrow the wealth gap significantly between
Hispanic and non-Hispanic families, it is a necessary component of any
antipoverty and asset-building strategy. As such, good quality, well-
developed, financial education programs targeted to Latinos offer
enormous economic benefits for families, the industry, and the Nation.

Elements of Successful Programs
There are a variety of financial literacy and education programs
currently operating across the country targeted to Latinos. These
programs range from those with a focus on consumer protection to those
targeted toward helping Latinos purchase homes. Notwithstanding the
volume of financial education activity, it remains unclear what
specific model or approach works best for Latinos. That said, there are
detectable elements of success.
First, successful financial education and outreach programs tend to
be both sophisticated and responsive to nuances among Latinos. The
Latino community is extra-ordinarily diverse. Financial education programs that have not recognized the significant, distinguishing characteristics between Latinos and non-Latinos, or even between native and foreign-born Latinos, have often proven unsuccessful. For this reason, especially, translating materials directly from English to Spanish often fails to
elicit the hoped for response.
Second, successful financial education programs for Latinos have
tended to link education to an actual product or service. As a general
rule, the promise of actually engaging in saving and purchasing of a
product at the end of a specified period have provided strong incentives
for Latinos to take time to attend classes and ask questions.
Third, financial education programs that are delivered by a group
the community knows and trusts, and which is culturally sensitive, are
often successful. Evidence suggests that for Latinos the best vehicles
for such strategies are community-based organizations that already have
strong relationships with the community and provide a range of social
services for Latino families. Such strategies provide culturally
relevant materials and training that directly link Latino families to
appropriate wealth-building products.
There are two noteworthy programs that combine these elements: The
Individual Development Account (IDA) program and homeownership
counseling programs. The IDA program is a Federally supported program
that matches the savings of low-income families in accounts that are held
by financial institutions. The IDA's are designed to provide financial incentives for savings and asset accumulation among low- and moderate-
income people. As part of this program, account holders must attend
mandatory financial education classes, often provided by a community-based organization. Besides providing basic finance and budgeting information,
many classes are structured around issues related to the asset development activities a person chooses to pursue. The act of saving and the promise of
an asset at the end of the process has offered a strong incentive for
Latinos to attend and participate in these financial education classes. Preliminary evaluation studies have found that Latinos save at higher
rates than other IDA participants.
Also, the Federally supported homeownership counseling programs
offer another model for effective financial education. A number of NCLR
affiliates provide prepurchase counseling, both to people who are ready
to buy a home and to people who are just starting the process of saving
for their first home. The education and assistance are effective for
both groups because they are working toward a goal and the information
provided is directly linked to achieving that aim. These programs are
geared to serve the distinct needs of the local community population,
promise a product or service, and are delivered by an agent that the
community trusts.
Conclusion
While more information is needed about best practices and
approaches to improving financial literacy, we do know that the such
measures are only useful insofar as they result in material
improvements in the asset levels and financial security of Latino
families nationwide. For this reason, approaches to this issue must be
comprehensive but also sophisticated and responsive to the nuances of
the Latino community. It is also clear that there are existing models
that should be a central part of the solution and offer good insights
into how best to address the financial education issues of Latinos. For
instance, any approaches must include a national partnership among the
financial services industry, community groups, and Government which can
work on determining effective strategies and then help to implement
various programs and policies that will address these financial
literacy concerns.
The Government can play an important role by taking public policy
measures to foment financial education efforts. The IDA program is
still a relatively modest demonstration project.
Moreover, the program has failed to take serious steps to include
Latino community-based providers and, as a result, this program does
not serve many Latinos, even though studies show Latinos to be ideal
participants. NCLR recommends expanding the existing IDA grant program
to $500 million and including a clear intent to target such programs to
serve more Latinos.
The homeownership counseling program is also a modest program, even
though it is proven to be highly successful for Latinos. NCLR
recommends expanding this program to $35 million this year. Creating
initiatives that entice the financial industry to play a role in
providing services, education, and opportunities for underserved
communities would do a great deal to reach millions of people and
increase financial literacy. For our part, advocates and community
groups are here to provide the services. We are committed to reaching
out to the community and providing the education to underscore the
importance of financial literacy and the opportunities it presents.
Finally, the financial services industry has an important role as
well. It should make the effort to learn about the Latino community and
become involved by partnering with community-based organizations.
Distrust of banks and financial
institutions is also common among many Hispanics. Some Latino
immigrants have deposited money in banks in their home countries only
to have it lost when the bank went out of business or devalued because
of a weak economy. Such personal experiences lead some Latinos to
prefer whatever is perceived to be safest to the possibility of a
profitable rate of return. Again, further exacerbating the problem is
the failure of most banks and other financial institutions to reach out
to the Latino community, especially in a way that addresses these
concerns. Yet by educating Hispanic immigrants about the financial
market in the United States, especially if the teacher is a trusted
member of the community, Latino families can begin to gain familiarity
with and confidence in these institutions.
Increasing financial literacy is an important goal and an endeavor
in which we must all embark together. It is important for the country
that all Americans understand the financial market and have the
opportunity to participate fully. I thank you for allowing me to speak
here today, and I look forward to working with you in the future to
help make all American families financially secure.

----------

PREPARED STATEMENT OF DENISE VOIGT CRAWFORD

Texas Securities Commissioner
Texas State Securities Board

February 6, 2002

Chairman Sarbanes, Ranking Member Gramm, and Members of the
Committee.
I am Denise Voigt Crawford, the Commissioner of the Texas State
Securities Board and Chair of the Investor Education Section of the
North American Securities Administrators Association, Inc. (NASAA), a
nonprofit association of securities administrators from the 50 States,
the District of Columbia, Puerto Rico, Canada, and Mexico. I am also a
Trustee of the Investor Protection Trust (IPT), a nonprofit trust
devoted to investor education.
I am pleased to appear before you today to discuss the importance
of financial literacy and education in America. Texas is a recognized
leader in this area, and I am pleased to have the opportunity to share
our experiences and suggestions with you.

Status of Financial Literacy and Education in the United States
On average, the general public is financially illiterate. That may
sound harsh, but unfortunately it is true. Despite numerous, well-
intentioned efforts over the last few years to increase investor
knowledge, recent surveys on financial literacy are finding nearly the
same dismal results that were found in surveys 5 or more years earlier.
Does this suggest that no amount of investor education will improve the
situation? I think not. Instead, it demonstrates that we must be
smarter about how we provide the information, motivate people to want
to learn, collaborate, and coordinate our efforts.
As a Nation, we have only recently recognized our financial
literacy education shortcomings. In response, many groups have taken
action, developed initiatives and programs, and offered their services
to various segments of society. Governmental agencies have recognized
that an important component of fraud prevention is investor education.
State securities regulators, the ``local cops on the beat,'' are
responsible for investor protection and education at the local level.
Nonprofit entities and public service organizations are finding an
endless need for their services. Industry participants realize that
educated investors are more savvy and less likely to be disappointed
with their investment decisions. The need for a better educated
populous becomes more apparent daily, and with this recognition there
is a disturbing awareness of the multitudes of investors who are ill-
equipped to make critical financial decisions for their lives.

We Are A Nation Of Investors
The Texas Example
From modest beginnings, Texas has grown to be a major market and is
eagerly sought out by national and international securities issuers.
The dollar volume of securities registrations and filings processed in
Texas in fiscal year 2001 was approximately $330 billion. (This number
does not include, for example, sales of exchange-listed securities and
other securities sold pursuant to exemptions.) The dollar volume in the
Texas securities market now exceeds the combined deposits of all banks, savings and loans, savings banks, and credit unions in Texas.
The Texas experience mirrors what has, to varying degrees, occurred
throughout the United States. Over the last 10 years, the United States
has been transformed into a Nation of investors. Over half of all
Americans are now invested in the securities markets. Many individuals
have become investors because they participate in employer-sponsored
401(k) programs. At year-end 2000, about 42 million American workers
held 401(k) plan accounts with a total of $1.8 trillion in assets. As
most Americans have become investors, attention has focused on making
sure students are prepared for the credit card offers they will receive
upon going to college, preventing investors from being defrauded,
making sure that individuals are financially prepared for retirement,
and ensuring that Americans have a basic understanding of the
principles of saving and investing, as well as preserving their
accumulated wealth.
We no longer have the comfort we experienced during the passbook-
savings years of our childhoods. Our current standard of living and our
plans for the future are increasingly tied to the ups and downs of the
markets, and the variety and complexity of investment options can be
overwhelming even to those with some degree of financial knowledge. In
addition, the markets and the investment products are constantly changing. Today, it takes knowledge of financial literacy basics just to keep up.

Importance of Financial Literacy and Education
Investors Who Lack Knowledge Are Subject To Unwise Choices
Without basic financial education, investors are less savvy in
making important financial choices. For example, with an increasingly
mobile workforce, many people will, upon changing employers, be asked
whether they should roll over their retirement account into the
retirement plan of their new employer or cash it out. To someone who is
30 years old and has built up several thousand dollars through
automatic payroll deductions, the prospect of using this ``nest egg''
for travel, a new car, or even to purchase a home, might be a strong
temptation. Without a fundamental understanding of the time value of
money, the compounding factor in savings, tax penalties for early
withdrawal of retirement funds, and an appreciation for what this nest
egg will mean to his overall retirement plan, he may choose to cash it
out. Unfortunately, this is a common mistake.
Take the example of a middle-aged married couple, with a working
father and a stay-at-home mom. If the father becomes disabled on the
job, then receives a significant settlement, in the absence of strong
investment knowledge, the money might all be used for immediate needs,
rather than assuring that an adequate amount is invested so that the
family can live off of the income and still have retirement funds for
their later years.
Another example is of a person who has worked all the way up to
retirement, building a retirement account through her employer, then,
at retirement, is offered a lump sum settlement. Like the first
example, it may sound like a lot of money to her. She may want to spend
some on home improvements, her children, et cetera. If she does not
understand and appreciate that she will need income from the investment
of her retirement funds, she may find herself over 65 years of age and
unable to pay her bills.
There is one additional example you may have seen in the press
lately: Professional athletes. The U.S. Securities and Exchange
Commission (SEC) has been investigating an investment adviser whose
smooth-talking mannerisms engendered the trust of several sports
figures who lost millions in a scam. Another scandal involves a former
teammate-turned-investment counselor who swindled his friends by
talking them into investing in his failed business, then using their
funds for personal purposes. Such well-paid, high-profile investors are
seemingly easy targets because they often come from modest beginnings,
they do not have the time to manage their own investments, and often
are all too trusting of people they know through previous
relationships.
In each of these examples, understanding the need to invest is only
the first consideration. They should have knowledge of who to invest
with, how to check out the background of their investment professional,
and how to participate in their investments by reviewing account
statements and changing investment goals and risk tolerances as their
life situations evolve and change.

Without Basic Education, Investors Are More Susceptible To Fraud
What follows is a compilation of examples from the records of the
Texas State Securities Board, describing Main Street investors and how
they lost their investments to investment fraud. These stories
exemplify the importance of educating investors to help protect them
from being defrauded.
Just last month, a Texas court convicted an unregistered agent who
sold approximately $300,000 worth of viatical certificates in Texas.
Her employer, a Florida-based company, sold over $115 million in
viatical certificates. Ultimately, a Texas judge sentenced her to 9
years in prison for selling securities without being registered as a
securities dealer or agent, but there was no restitution--there rarely
is in this type of case.
The financial literacy concept that was lacking here is the
knowledge to call a securities regulator and check out the legitimacy
of the promoter, the company, and the securities. Had investors done
so, they would have found out that the company and agent were not
registered and that should have been a red flag.
In another situation, investors were offered a ``Prime Bank/
Debenture'' deal, marketed as a ``little known secret'' ostensibly
unavailable previously because of an ``exclusive trading program''
having to do with blocking and leveraging of funds. Over the past 3
years, State regulators have brought actions on behalf of more than
41,000 people nationwide who invested at least $470 million in prime
bank scams.
A financial literacy concept that might have helped here is that
there is no such thing as a ``prime bank'' and any investments offered
by such a promoter are entirely fictitious.
In Texas, we investigated another case in which investors pooled
money to invest in speculative trading in ``foreign currencies'' that
the promoter promised would capitalize on the momentum in the
marketplace via minute-by-minute currency trading. The promoter also
promised that the funds invested were protected against loss through
``clever hedging'' strategies. However, whenever investors tried to
``cash-out'' they were told the money was ``lost.'' The amount was
approximately $50 million. The promoter was sentenced to a total of 84
months in prison but much of the investors' money was lost.
The financial literacy concept that was lacking here is the need to
review account statements carefully and consider them in light of
actual market fluctuations.
With the volatility of the stock market in recent months, investors
have looked for safer places to put their money. Elderly investors have
been encouraged to buy higher yielding ``callable'' certificates of
deposit (CD's). Investors are not always aware that these days not all
CD's are created equally. A number of these ``callable'' CD's are
callable only by the issuer. Cases across the Nation demonstrate that
investors in their 1970's and 1980's were sold CD's with 10 to 20 year
maturities. One retiree was persuaded to invest more than $100,000 of
her 97 year old mother's money in three callable CD's with 20 year
maturities.
The financial literacy concept missing here is that buying a CD
from a dealer is different from buying a CD at the issuing bank.
Commissions, availability of FDIC insurance, ultimate ownership of the
CD, and the age and risk tolerances of the investors are important factors
to understand and consider before investing in brokered CD's.
If these investors had been educated on investing, they would not
have been so vulnerable. In each of these cases, the investors could
have contacted licensing and regulatory agencies to determine if the
security they were offered and the brokerage firm and its agents were
appropriately registered and, if the firm or agents had ever been
registered, they could have had access to the disciplinary histories.
By simply visiting the website of a State or Federal securities
regulator, they would have learned about prime bank scams, callable
CD's, and currency exchange schemes, and would have armed themselves
with revealing questions to ask the program promoters.

Direct Education To Current And Prospective Investors
In order to address the vast need for investor education, we must
recognize the challenge of directing our efforts toward the varying
audiences: (1) young people, who are finishing high school and headed
toward their first job or to college; (2) young married couples,
beginning their careers and planning to buy a home, and planning for
their children's education and for their own retirement; (3) middle-
aged persons trying to meet their retirement goals in the limited
number of work years ahead of them; (4) retirees who have built their
nest eggs and are beginning to take active roles with their
investments; and (5) surviving spouses, lawsuit award winners, lottery
winners, ``baby boomers'' and others who are expected to inherit or
otherwise come into significant funds and are ill-equipped to properly
manage the funds for their future use.
Which group has the greatest need and how much effort should be
directed toward each of them? We find ourselves with an overall
financial literacy crisis in part because the learning curve is long,
due to the absence of financial education at the primary level. These
days, people have to manage their own money yet they often do not have
the necessary background to do it wisely. We must act upon the
realization that we will never overcome this deficiency without
incorporating financial literacy into our education systems. We simply
cannot leave Americans unable to save and invest wisely.

Recommendations For Improving Financial Literacy And Education
State and Federal Legislative Efforts
The Texas State Legislature in 2001 added investor education as an
official duty of the Securities Commissioner. New Section 43 of the
Texas Securities Act expressly recognizes the importance of investor
education initiatives to inform the public about the basics of
investing in securities, with special emphasis placed on prevention and
detection of securities fraud. The Legislature recognized the need to
provide such education to Spanish-speaking individuals as well by
requiring that materials developed and distributed in connection with
investor education programs must be published in both English and
Spanish.
It was recognized that this function would cost money, of course.
Rather than providing tax payer funding to accomplish this objective,
the Texas Legislature directed me to use my best efforts to collaborate
with public or nonprofit entities with an interest in investor
education. We hope that these collaborative efforts will result in
greater investor awareness, as the Legislature intended.
Some other States have investor education provisions in their
securities statutes and the number is rising. These statutes provide
for various funding mechanisms, but all share a common goal of
educating the public on personal finance and creating greater awareness
of the dangers of securities fraud. Some, like Texas, were directed to
establish public-private partnerships to carry out their programs.
However, money needed to support these State investor education
initiatives is still
sorely lacking.
In Congress, the recent passage of H.R. 1, the No Child Left Behind
Act of 2001, which provides authorization for a personal finance grant
program, may be a source for assistance to States for investor
education initiatives aimed at public schools. NASAA is currently
reviewing this legislation to assist the States in assessing the
opportunities created by this Act. We are appreciative of this
legislation and of other efforts in Congress to address the problem.
NASAA, Financial Literacy 2010 and the Investor Protection Trust
State securities agencies, through the North American Securities
Administrators Association (NASAA), have developed questions for
investors to ask before committing capital to any investment;
straightforward information about mutual funds; and a list of ways to
spot fraudulent investments and con artists. In 1999, NASAA created a
section that is coequal with its enforcement, broker-dealer, and
investment adviser sections, to focus on investor education. I have had
the honor of chairing this section since its inception. Today, the
NASAA Investor Education Section consists of the following Project
Groups: Affinity Based Outreach, Ethnic Based Outreach, FL 2010,
Investor Education Coordination, and Online Trading Awareness. Members
of these project groups are drawn from the staff of State securities
agencies across the United States.
NASAA promotes an Investor Education Month in April of each year.
Events are planned to bring investing issues to the attention of the
general public and the month is a kick-off for other such projects that
go on throughout the year. A variety of activities such as
presentations in public schools, senior centers, and retirement
communities are conducted and Governors routinely issue proclamations
to increase the public awareness of the events. President Bush issued
several such proclamations as Governor of Texas and last year he issued
a written statement from the White House commending participants in
Saving and Investing Campaign Month and urging all Americans to take
action to secure their financial futures. Due, in part, to such high-
level support, we see a growing public interest each year and our goal
is to establish these activities as part of everyday life in America,
not just a series of events that happen once a year.
NASAA and its members joined forces with the Investor Protection
Trust (IPT), a nonprofit trust devoted to investor education, the
National Association of Securities Dealers-Regulation, Inc. (NASD-R),
and the National Institute for Consumer Education to launch an
ambitious program, FL 2010 (formerly, Financial Literacy 2001), to
teach the basics of finance to high school students across the country.
We know that the young people of today soon will begin making
personal finance decisions that will affect the quality of the rest of
their lives. They will be compelled to make critical decisions about
earning, spending, saving, and investing their money. However, very few
American teenagers today have the tools they need to make these
important choices. FL 2010 was launched in 1998 to help combat the
widespread financial illiteracy among the next generation of American
savers and investors.

Financial Literacy 2010 Campaign Features
State-customized teaching guides that have been shipped to
more than 40,000 high school teachers throughout the United States.
The FL 2010 program includes two teaching guides, one geared toward
general business or consumer education teachers and one focusing on
the unique needs of high school economics teachers. Each of the two
guides includes units that can be used together or on a stand-alone
basis. State-customized information provides local and statewide
information on investment education and protection.

Training sessions. Through the end of 2001, a network of more
than 100 State securities agency officials and volunteers had
conducted more than 350 training workshops at State and national
education association conferences. In the first
3 years of FL 2010, an estimated 8,500 teachers took part in the
training.

Teacher support through a website (www.fl2010.org) and
newsletter published three times a year.

The project has been enormously successful. In Texas, we have
distributed guides to more than 1,000 high school teachers. Many States
have had similar success. For the most part, high school teachers have
worked financial education into the final semester for high school
seniors, as they focus on issues such as financing a college education,
choosing a job, getting married, and so on.
FL 2010 is but one example of a way to reach audiences where they
are most reachable. The public schools provide us with a great
opportunity, but we need to do much more. More resources are needed and
this is a ripe area for public-private
partnerships.

Coordination of Investor Education Efforts
Now that significant participants in the securities and financial
industries have recognized the need for financial education, many
efforts have been undertaken to develop more savvy investors. Similar
to the programs described above, genuine
efforts are being made by governmental bodies, by nonprofits, and by
private and public organizations. The States, individually and through
NASAA, have multifaceted education efforts. The SEC and NASD-R have
programs. The American Savings Education Council, the AARP, the
National Council on Economic Education--to mention only a few--all have
on-going efforts to increase the public awareness of the need for
financial planning and investor education programs.
Every investor can benefit from financial education. However,
instead of every educational effort attempting to reach every need,
perhaps a division into focus groups, similar to what has been done at
NASAA, would be more successful overall. I envision an action plan for
attacking the problem at deliberate points, with specific objectives
that are quantifiable, toward the final goal of having an educated
investing public.
The ability of investors to make wise, informed choices is a major
assumption and is the cornerstone of a capitalistic economy. Investment
fraud drains the economy of needed resources and can instill fear, not
only in those defrauded, but also in the millions of other Americans
who learn about it. The ability of consumers to buy what they need
throughout their lives provides markets for the goods we produce and
the services we provide. A stifling debt load or uninformed planning
can preclude that ability. Financial concepts touch every facet of
every life in this great Nation and the financial health of our
families is a prerequisite to the health of our markets and our
economy.
While financial education in the classroom is a necessity, that
alone is insufficient. Financial professionals in the Government arena,
the securities, banking and insurance industries and in the accounting
and legal professions must work tirelessly and together to make the
knowledge we each have, from our unique perspectives, readily available
to the public. We are on the right path, but the journey has been
slower than we would like.
Elected officials have a unique perspective as well and can help.
The scheduling of the hearings this week have already helped to raise
public awareness. Individually, you and your staffs can participate in
national saving and investing month activities and can encourage your
own State to sponsor and/or fund such activities as well. As a
Committee, you have access to numerous financial professionals who
would be happy to participate in any activities you may choose to
initiate.
Working together, we have the expertise needed to reach the goal of
a financially literate populace. It is our hope that, working together,
we can find creative ways to reach every American.
Thank you for the opportunity to testify before you today.

RESPONSE TO WRITTEN QUESTIONS OF SENATOR AKAKA
FROM H. PATRICK SWYGERT

Q.1. Why have bankruptcy filings by those under 25 years of age
increased by 51 percent from 1991 to 1999?

A.1. It appears that the increase in bankruptcy filings among
this age group is largely influenced by increases in the level
of borrowing for post-secondary education and credit card debt,
coupled with modest/zero income. Credit card companies have
been overly aggressive in pursuing students for credit cards:
They often visit college campuses with credit card
applications, enticing students with offers of free gifts and
easy credit. By the time the student graduates, he or she has
often ``maxed out'' the cards and have the additional burden of
student loans. Although some parents incur the debt, many do
not.

Q.2. According to the General Accounting Office, the average
college graduate leaves school with an average of $19,400 in
student loans. This combined with credit card debt can place a
large burden on recent graduates. What debt management services
are currently available for recent college graduates?

A.2. Last year, the Society for Financial Education and
Professional Development (SFEPD) launched a series of debt
management seminars which have been conducted at Historically
Black Colleges and Universities during their Freshmen
orientations. Debt management training is also offered through
most college and university financial aid programs.
Additionally, the U.S. Department of Education and various
lenders offer repayment plans that correspond to the student's
income.

RESPONSE TO WRITTEN QUESTION OF SENATOR AKAKA
FROM ESTHER ``TESS'' CANJA

Q.1. As life spans increase, what should we be doing to help
Americans adequately prepare for the extended length of
retirement?

A.1. Improving well-being among those 50 and older begins
logically with improving the adequacy of economic resources.
However, Americans have been consistently undersaving for
retirement and other purposes for over a decade. Trends in
retirement income (including less generous public and private
pensions, preretirement distributions from 401(k) plans and
demographically driven reforms to Social Security) suggest an
ever-increasing need for higher rates of personal savings.
An increasingly mobile and competitive workforce requires
much more education, at all ages, about what income needs in
retirement are likely to be and how workers can meet them. AARP
supports strengthening public policies that encourage people to
save for their retirement and that ensure the preservation of
such funds for retirement. Such policies should more strongly
emphasize educating Americans of all ages--through schools,
colleges, religious institutions, workplaces, and other
avenues--on the importance of lifelong saving.

RESPONSE TO WRITTEN QUESTION OF SENATOR AKAKA
FROM RAUL YZAGUIRRE

Q.1. For States such as Hawaii, with significant numbers of
recent immigrants, what can be done to encourage the unbanked
to develop a relationship with a financial institution?

A.1. There are several important steps that can be taken. One,
encouraging partnerships between community-based organizations
(CBO's) and financial institutions would be beneficial. For
example, CBO's serve as great vehicles for delivering financial
education to immigrant groups by helping them to understanding
what options are available for financial industry
participation, as well as helping them gain trust in these
institutions where it may be lacking. These partnerships can
also work to foster an Individual Development Account (IDA) or
similar type of savings program. Two, it is equally important
that financial institutions be encouraged to create products
conducive to the needs of immigrants, many of whom are low-
income. This could involve offering low-cost and starter
checking accounts; remittance and fee-based check cashing
services; and access to low-cost money orders and deposit-
secured emergency loans for those whose credit histories may be
flawed or nonexistent. It is also very important that banks and
their tellers understand what types of identification are required--
and which kinds are not--in order to open an account. For example,
banks are not required by law to obtain their customer's Social
Security numbers, and Individual Tax Identification Number
(ITIN) is acceptable. Finally, financial institutions must
start marketing their products and services to immigrant
communities. This involves opening branches conveniently
located for immigrant customers, offering materials that are
culturally sensitive and in the appropriate language, and
hiring employees who are a part of and understand the needs of
the immigrant community.

STATEMENT OF ADAM J. BASS

Senior Executive Vice President
Ameriquest Mortgage Company

February 6, 2002

I appreciate Chairman Sarbanes and the Committee's attention to the
critical issue of financial literacy and submit the following testimony
on behalf of Ameri-
quest Mortgage Company. Ameriquest Mortgage Company is one of the
Nation's largest retail subprime lenders. Headquartered in Orange,
California, and operating in more than 220 offices in 33 States, we
provide affordable loans to homeowners who have credit needs but
imperfect credit profiles. We assist our customers in utilizing their
most important asset--their homes--to obtain affordable credit and meet
their personal financial commitments.
Ameriquest commends the efforts of the organizations that testify
before the Committee today to provide Americans opportunities to
enhance their financial knowledge and skills, particularly in the area
of homeownership. We believe mortgage industry professionals can and
should join the push to end unscrupulous lending and play a leading
role in enhancing financial literacy. Ultimately, we think it is in the
lenders' best business interests to do so. We are convinced that only
knowledgeable borrowers are in the best position to negotiate their
loans and skillfully manage their financial resources in order to
protect their homes.
In an ideal world, every consumer would obtain a solid financial
foundation before entering into a money transaction. However, many
Americans have not had the opportunity to learn such information at
home, school, or work. This lack of financial education, combined with
a slumping economy, has contributed to a skyrocketing consumer debt
load that is growing beyond that encountered in any previous re-
cession. The country's financial woes necessitate, now more than ever,
the need for increased financial literacy.
Among the many facets of financial literacy--learning to properly
balance a checking account, understanding one's credit score and its
implications, identifying smart investment opportunities, etc.--perhaps
the most important and profitable financial know-how concerns
homeownership. As a hallmark of ``the American Dream'' and the highest-
capital consumer investment, owning one's home can be an overwhelming
responsibility, and getting to that point can be even more of a
challenge. Consumers purchasing first mortgages and those refinancing
current ones all face a complex web of decisions, which they can
navigate successfully only when equipped with adequate knowledge of
borrowing basics.
Our business philosophy ``Do the Right Thing'' conveys a commitment
to customer service, which goes beyond providing the financial means
for borrowers to refinance their homes and obtain credit. We view each
financial transaction as an opportunity to educate borrowers and ensure
they have full and complete information concerning all loan features
before they make binding decisions.
The terms of a loan contract should always be a matter of
negotiation between the borrower and the lender. But in order for this
negotiating process to produce fair results, borrowers must be fully
informed about the nature of the products being offered. Only when
armed with the understanding of the terms and commitments involved in
the transaction can the borrower make his or her own decision about
whether or not to accept a loan, and upon what terms.
While we are proud of our history of honestly and fairly making
credit accessible to underserved markets, we understand that not all
lenders do business in such a manner. The growing concern regarding the
use of so-called ``predatory'' lending calls for a renewed commitment
to financial literacy training.
Borrowers must understand basic fair lending principles and be able
to recognize the warning signs of illegal abusive lending practices,
such as ``bait and switch'' sales tactics, and those practices, which
are technically legal but sometimes applied in a way not fully
understood by the borrower. To ensure our customers do not bear the
potential risk associated with such practices, Ameriquest simply does
not offer them with any of our loan products.
While legal and conducted by some lenders, as a matter of corporate
policy and practice, Ameriquest provides:

NO single premium credit life insurance to borrowers.
NO soliciting refinance of a borrower's loan within 24 months
of its origination.
NO loans with mandatory arbitration clauses.
NO loans with balloon payments.
NO negative amortization loans.

In our own effort to promote financial literacy, Ameriquest
supported the formation of the Consumer Mortgage Education Consortium
(CMEC) in 1996 in conjunction with three leading Washington DC-based
civil rights organizations--the Leadership Conference of Civil Rights,
the Nation's oldest and largest civil rights coalition; the National Fair Housing Alliance; and the National Association of Neighborhoods. CMEC was founded to stimulate the availability of home loans for all Americans
and to promote a better understanding of loan products and lending
processes through national workshops and the creation of a how-to workbook
for advocates and consumers.
Ameriquest asked our CMEC partners and other key community group
allies, including the Association of Community Organizations for Reform
Now (ACORN), to identify their principal concerns regarding subprime
lending activities. While Ameriquest had long ago addressed many of
those concerns, we developed and implemented an official set of company
``Best Practices.'' These fair lending guidelines ensure that our
borrowers receive top quality service and fair treatment and are able
to make intelligent, informed decisions about their credit needs.
Our ``Best Practices'' include a pledge to communicate with our
borrowers in plain English, using clear language and familiar terms
they understand. We provide each customer simple-to-read disclosure
documents that clearly identify all of the important terms of the loan
using phrases such as:

your interest rate is;
you have a prepayment charge of ; and
your total fees are.

The document also contains a list of cautionary tips to ensure that
borrowers do not unwittingly make unwise decisions including:
borrow within your income and budget;
do not be pressured into signing documents you do not
understand;
shop around;
be advised that the price of the loan or other loan terms
might change by the time of closing; and
maintain a good payment record prior to the loan closing.

Copies of these documents are attached for your review.
Ameriquest makes HUD-certified credit counseling available to all
borrowers and encourages them to utilize it prior to loan closing and
during the rescission period. Contrary to the industry standard of a
legally mandated 3 day rescission period, we provide a one-week, post-
approval period during which borrowers can shop our loan and evaluate,
with the help of a credit counselor, whether our loan is best for them.
After customers obtain a loan from Ameriquest, our Servicing
Department welcomes new borrowers immediately by phoning them to verify
basic loan information and to ensure that they understand the loan
terms, payment amount and payment date. These welcome calls allow us to
promptly identify and to rectify origination-
related problems.
In short, all of our ``Best Practices'' empower consumers to make
the right choice for them. We use them because it is the ``Right
Thing'' to do, and frankly, we believe our business benefits from them,
too. We benefit from having borrowers who fully understand the
financial responsibility involved in taking out a loan with us, and who
are therefore better prepared to pay their mortgage. We also benefit
from having fully informed, loyal borrowers who exhibit financial
confidence and recognize that they have been treated fairly.
Ameriquest commends the Committee for focusing attention on the
dangers of financial illiteracy and the need for heightened efforts to
increase America's money smarts. Ameriquest believes there is no more
important lesson in life than learning to achieve financial security.
We remain committed to educating our customers and to advocating
national education programs to help consumers make better informed home
mortgage decisions. We hope to have the opportunity to work with you to
further financial literacy for all Americans.
Thank you very much.

STATEMENT OF ROBERT F. DUVALL

President and Chief Executive Officer
National Council on Economic Education

February 6, 2002

Mr. Chairman and Members of the Committee, my name is Robert F.
Duvall and I am the President and Chief Executive Officer of the
National Council on Economic Education (NCEE). We appreciate the
opportunity to submit this statement and we applaud the Committee's
decision to hold hearings on ``The State of Financial Literacy and
Education in America.'' This is a subject of critical importance to the
Nation and the future well-being of its citizens.
It is also the critical issue for NCEE. As you may know, advancing
economic and financial literacy is the singular reason why we exist.
NCEE, like the Committee, is deeply troubled with the staggering
consequences of economic illiteracy. First and foremost, it affects the
productivity of the Nation and it negatively impacts the standard of
living of all its citizens. It creates barriers that keep people from
participating in, and enjoying the many benefits of, our free market
system, the envy of the world. And it limits the ability of many to
make informed financial decisions that oftentimes affect families and
households for years to come.
To combat this problem, we are waging a war on economic illiteracy
on many fronts. To be sure, these are difficult battles, but I am
pleased to report that we have had many successes. At this point, it
might be helpful if I were to briefly
describe our organization and some of the key things we are doing to
help ensure the future health and prosperity of our Nation.
To begin with, NCEE is a unique private and public partnership of
business, Government, and education that for more than 50 years has
been helping students in grades kindergarten through 12 develop
economic ways of thinking and problem solving. Our mission is to
increase economic and personal financial literacy by teaching teachers
how to make these subjects come alive in the classroom and by equipping
them with the materials to do it well, designing curriculum and
assessing the results.
Through our nationwide network of State Councils and 250
university-based Centers of Economic Education, NCEE administers
programs that each year reach approximately 120,000 teachers and over
seven million students in more than 70,000 schools. In carrying out
these activities, we work closely with the State boards of
education and school districts. Also, through grants from the U.S.
Department of
Education, NCEE programs have also reached 1.8 million students in 21
countries in Central and Eastern Europe and the former Soviet Union.
As the Committee is well aware, financial illiteracy is a very real
and serious problem. A series of recent studies and surveys provide
convincing evidence that a majority of adults and more than two-thirds
of high school students are unable to pass a simple quiz on basic
financial and economic concepts. The data tell us, for example, that 50
percent do not know what a Federal deficit is, 60 percent do not
understand the purpose of profits and 70 percent do not understand that
competition in the marketplace serves to lower prices and increase
quality.
The reason that so many know so little about how our free
enterprise system works is simple: most have never been taught anything
about it. Currently, only
13 States require high school students to take a course in economics
prior to their
graduation. Clearly, what you do not teach, they do not learn. And that
is cause
for concern.
For many, being financially illiterate means futures filled with
money, credit, and career problems. It also means that many of these
same people will never become knowledgeable consumers, prudent savers
and investors, productive members of the workforce, or informed voters
on issues critical to their communities.
If we are to remedy these problems, respond to growing threats to
our economic way of life and raise the standard of living in our Nation
for all of our citizens, both children and their parents must possess
the requisite skills to be economically and financially literate. These
are life-long skills and as such, this education must start early, at
the lowest grade level, continue through high school and carryover into
the workforce.
It is for that reason that in 1999, NCEE launched its multiyear
Campaign for Economic Literacy. Our goal is to focus national attention
on the need to make
economics and personal finance education a priority for every American,
especially students, and to engage the public and private sectors in
launching creative and innovative programs that foster economic and
financial literacy in our Nation.
Among these Campaign for Economic Literacy programs we currently
have underway are the following:

NCEE / Nasdaq National Teaching Awards--Awards and some of the
largest cash prizes in education are given annually to 25
outstanding teachers for their originality, creativity, and
effectiveness in teaching such subjects as personal finance, the
financial markets, the investment process, capital formation, and
entrepreneurship, among others.

NCEE / Goldman Sachs Foundation Economics Challenge--This
nationwide competition, featuring State, regional, and national
championship ``Challenges,'' combines academics with the
competitive instincts of students. In offering tangible rewards for
demonstrated achievement, the ``Challenge'' encourages more
students, especially underrepresented students, to take economics
courses and improve their overall test scores.

EconEdLink--The classroom and the world merge on the Internet
as EconEdLink reveals the economics behind the news. EconEdLink is
part of the WorldCom Foundation's Marco Polo Project, one of the
most heavily tracked educational sites on the web. By visiting the
website, teachers and students can choose from MillionaireMinute,
EconomicsMinute, and NetNewsLine for true interactive learning
sessions.

ItAllAddsUp--Developed by NCEE and sponsored by the American
Express Foundation, ItAllAddsUp is a brand new economics and
personal finance interactive website that helps junior high and
high school students learn about budgeting, managing credit, paying
for college, and decisionmaking through game-like activities.

ECONnections--Through the generosity of The McGraw-Hill
Companies, high quality, standards-based economics lessons from
NCEE are now available in an easy-to-use Internet format. Using
audio and interactive lessons, ECONnections links Standard & Poors
experts, Business Week journalists and other McGraw-Hill volunteers
to students in the classroom.

The ``Mint''--The ``Mint'' is an interactive website that has
been designed to increase middle and high school students' economic
and financial literacy skills. It includes interactive games for
students to make learning interesting, understandable and fun;
lesson plans for teachers; and tools to help parents reinforce the
personal finance education of their children at home.

The Community Publishing Project--With the funding provided by
the Worth
Charitable Fund, a pilot NCEE classroom program was begun this past
year at P.S. 125 in New York. The program teaches children in
grades 3, 4, and 5 how to function as entrepreneurs as they produce
and sell a handbook about and for their community. This program
will be expanded nationwide shortly.

Mathematics and Economics: Connections for Life--This
innovative curriculum for grades 9-12, developed by NCEE with
funding from State Farm Insurance Companies, integrates mathematics
and economics. The multidiscipline approach to teaching is
furthering students' understanding of the application of
mathematics and economics to everyday life. State Farm is also
funding a nationwide teacher-training program.

Economics for All Teachers--This program, funded by
International Paper Company, is designed to help educators teach
economics effectively in grades kindergarten to 12 using NCEE
materials. The program features economic education and technology
workshops and a complementary Virtual Economics CD-ROM, given to
all participants.

Homeownership and Lending Practices--This NCEE curriculum
project, funded by the Mortgage Bankers Association, is designed to
teach teenagers and adults about the economic benefits and personal
finance aspects of homeownership. This practical, academic course
is offered free and includes a component on the need to recognize
predatory lending practices.

As the above description of our core activities and this summary of
programs indicate, NCEE and its corporate partners are working
diligently to address the problem of financial literacy. However, it is
clear much more remains to be done. In that connection, later this
month we will unveil our most ambitious undertaking ever to address the
problem of financial literacy.
On February 26, 2002, NCEE and the Bank of America will formally
unveil
Financial Fitness for Life, a new and innovative financial education
curriculum, based on national teaching standards, that will help
students from kindergarten to senior high school become skilled
consumers, savers, and investors.
The product of several years of development and testing, this
first-of-its-kind program has been designed to prepare students to make
intelligent choices that will affect their entire lives--from managing
money and making financial decisions to staying in school and selecting
careers. Parental involvement is another key design feature of the
program.
This creative education system, funded at a cost of $3.2 million,
presents key concepts in personal finance in an easy-to-understand
style, using real-life examples, that appeals to even the youngest of
students. Drawing on an analogous concept, the Financial Fitness for
Life curriculum makes extensive use of ``physical fitness'' terminology
in all course materials.
The curriculum includes four student workbooks (for Grades K-2, 3-
5, 6-8, and 9-12), four parallel teacher texts and two parent guides
covering every grade level. An interactive CD-ROM and supporting
website complement the ``Financial Fitness for Life'' curriculum and a
Spanish language version of the primary grade material is now being
developed. Additional aspects of the program include several ``train
the trainers'' sessions, hundreds of professional development workshops
in personal finance for teachers and extensive field testing of the
curriculum in 18 rural and urban schools in California, Florida, and
Texas.
Financial Fitness for Life meets national and most State standards
in four critical areas--Economics, Language Arts, Mathematics, and
Personal Finance. In addition, all of the curriculum materials employ
economics, for example, the science of decisionmaking, as a way to
prioritize the staggering array of choices facing students when they
make decisions. By prioritizing, students learn how to make better
decisions, and, equally important, how to avoid poor ones. The emphasis
on using economic concepts and an economic way of thinking
distinguishes these materials from other quality materials used to
develop personal financial literacy.
Because of the modeling they do in everyday life, parents play an
important role in developing the personal financial literacy of their
children. For that reason, parents are an integral part of the
Financial Fitness for Life system. A unique set of ``Parent Guides,''
which tracks lessons contained in each of the student books, is an
essential component of this novel learning system. The guides provide
parents with material for discussion and an assortment of recommended
activities they can do with their children at every grade level.
``Financial Fitness for Life'' also gives parents who need to expand
their own ``personal finance'' horizons an opportunity to learn along
with their children.
We believe that this new and unique personal finance curriculum
fills an educational void and, when implemented nationwide, will make a
significant difference in the lives and standard of living of many
people.
Other major programs that would contribute immeasurably to
improving economic and financial literacy in this country are embodied
in the Excellence in Economic Education legislation introduced by
Senator Daniel K. Akaka and included in the No Child Left Behind Act of
2001. From a public interest perspective, we fully support his bill and
strongly encourage its passage.
Clearly, economic and financial literacy is of vital importance to
the Nation and prompt action must be taken to address it. What we
recommend is the following:

Elevate economics and its subset, personal finance, to the
fourth ``R.''

Establish standards and benchmarks for teaching economics in
every State to ensure that students throughout the country receive
uniformly excellent economic education.

Develop new and innovative approaches for reaching the
Nation's youth and teaching economics.

Mobilize a coalition of leaders in business, labor education,
and Government to advance a nationwide, multiyear initiative to
enhance and extend economic education in our schools, our
communities, and the workplace.

Secure the active participation and financial support of both
the public and private sectors in this effort.

These are the goals that we have set for ourselves at NCEE as part
of our Campaign for Economic Literacy. We are aiming for nothing less
than a transformation of our society to one that is economically
literate. It is a grand vision, an achievable vision, and an inevitable
reality. Economics is the quality of life issue for this
millennium and economic and financial literacy is the vehicle that will
make a
difference.
We believe that the goals we have set for ourselves are highly
compatible with those of the Committee and others who have appeared
before it at these hearings. We welcome the opportunity to work with
the Committee on these important matters and to discuss our thoughts on
this subject in greater detail at the convenience of the Committee.
Again, we commend the Committee for convening these hearings and
drawing national attention to the importance of financial literacy and
education in America and the need for prompt, coordinated action.
Thank you.

STATEMENT OF LYNDA GLASS
on behalf of the
American Bankers Association

February 6, 2002

The Financial Illiteracy Epidemic: Why Johnny Can't Save
The problem of financial illiteracy is epidemic in this country.
Consider the following facts:

In the year 2000, a survey by the Jump$tart Coalition for
Personal Financial Literacy tested high school seniors' knowledge
of personal finance. The average score was 51.9 percent, down from
57.3 percent 3 years earlier.

Less than 40 percent of high school students receive any
formal financial education. Over a third of teenagers polled said
they learned about money by figuring it out themselves.

Kids from 12-19 spend or influence the spending of over $150
billion a year.

The average credit card debt of teenagers rose 300 percent
from 1990 to 2000.

Kids are graduating from high school being able to do little more
than make change. The consequences of their financial ignorance are
staggering--especially since 50 percent of kids in this country do not
go to college and head straight into the workforce. The adults they
will quickly become will not know how to budget, handle their debt or
save, making the prospect of building a good credit rating, renting or
buying a home, sending their kids to college and funding a comfortable
retirement a slim one indeed.
Their parents have not done much better. Three quarters of a
million people filed for bankruptcy in the first half of 2001.
Over time, the challenge of money management has only grown more
difficult, as the number of financial products and options has
mushroomed. Even banking terminology--from amortization to zero-coupon
bonds--does not trip off the tongue. And banking as a subject does not
grab people by the lapels. It seems complicated, difficult. Yet banking
is a relationship for life, holding as integral and indelible a place
among human needs as food and shelter. Imagine a society without
checking accounts, 24-hour ATM's around the world, credit cards. It is
possible to function without them, but not nearly as conveniently, as
safely, or as confidently.
Next to their health, money ranks at the top of most people's
concerns. Yet most would probably say they do not manage theirs well.
Just as too many Americans are overweight or smoke or drive too fast,
too many bank customers bounce checks or incur needless ATM fees or
charge too much on plastic. These bad financial behaviors, for the most
part, are avoidable--if you know what to do and what not to do. Today's
kids--and a lot of their parents--do not know what they do not know.
Like other industries, banking has undergone radical change. It was
not that long ago that people accepted what their doctor--who was their
one and only doctor--said as an article of faith. Now, they routinely
seek out second opinions, read up on medical information, take vitamins
by the fistful, and practice alternative methods of good health from
the traditional--more green vegetables, less couch potato; more
jogging, less jiggling--to the less traditional--acupuncture,
transcendental meditation, tai-chi, yoga.
So, too, with financial matters. When today's boomers were babies,
Ozzie and Harriet were not reading Money magazine or watching Louis
Rukeyser. Banking, like much else in life in the 1950's was
uncomplicated. No more. There is a lot of sophisticated material out
about financial matters. But some of the basics--and the discipline to
incorporate them into a person's daily life--often slip through the
cracks.
We teach today's children how to drive, how to play ball, and who
invented the cotton gin, but not how to manage money. Learning to
budget and save, to invest and spend without getting in over your head
is, like learning to read, easier when done at an early age. Yet for
the most part, it is not being done. It can and should be. The
education system nationwide can do significantly more to fill this gap
and to encourage teachers to broaden their curricula to incorporate one
of the most basic, yet woefully neglected areas of practical learning.
The American Bankers Association is working to address this problem in
several ways.

The ABA Education Foundation is committed to educating
consumers of all ages about money and helping bankers be a source
of user-friendly financial information. It has produced booklets on
budgeting, credit, and saving, as well as a credit education
toolbox to teach young adults how to establish credit, select
credit cards, read a credit report and identify danger signals if
they are overspending.
Through a partnership with Scholastic, the world's largest
publisher of children's books, it will bring financial teaching
materials to 450,000 students in 15,000 schools across the country.
A second partnership with Neale Godfrey, the author of financial
books for children, is enabling banks to pilot her curriculum to
teach elementary school students about money.
Its National Teach Children to Save Day brings thousands of bankers
into local schools to talk with students and their teachers about
money management.
And the Foundation's Kidstuff! Web page provides books, activities,
programs, products and links to other websites.

ABA also partners with America's Promise, Colin Powell's
campaign to mobilize public and private sectors to reach out to
kids across the country. Twenty-four hundred banks have become
Banks of Promise, helping young people in their communities in
various ways.

ABA's Center for Community Development--created in 1992 to
encourage and promote sound lending, equal access to credit and
attendant banking services and investments in minority and low- and
moderate-income communities--has produced a guide for first-time
homebuyers. To effectively educate first-time homebuyers and consumers
overall, you need to start early, in the schools, so the Center's staff
and bankers are collaborating with the Treasury Department and others
to grow homebuyers and money managers from the ground up.
It is a daunting task. There are 12 million kids in high school
today, and many millions more adults who struggle to keep their head
above the swirling financial waters. No one group--not the ABA nor
anyone else--can get it done alone. It takes all of us doing a lot of
things. But it needs doing. In terms of producing a society populated
with people who know how to look out for their own best interests and
to make life better for themselves and their children, helping people
take care of what they earn is a good place to start.

STATEMENT OF
THE AMERICAN FINANCIAL SERVICES ASSOCIATION AND
THE AMERICAN FINANCIAL SERVICES ASSOCIATION
EDUCATION FOUNDATION

February 6, 2002

Introduction
The American Financial Services Association (AFSA) is the leading
trade association representing market funded financial services
companies. AFSA was founded in 1916. Its 400 member companies include
auto finance/leasing lenders, mortgage and equity lenders, credit card
issuers, sales finance companies, direct small loan lenders and
industry suppliers. Most of the AFSA companies provide credit to both
consumers and small businesses. The American Financial Services
Association Education Foundation (AFSAEF) was founded to promote
financial literacy in 1990. The AFSAEF has produced substantial
material to educate consumers, and has part-
nered with a number of Federal Government agencies to develop and
distribute materials beneficial to the consumer.
American Financial Services Association Education Foundation
The AFSA Education Foundation mission is broad. Its objectives
include financial literacy initiatives for all age levels. The
Foundation for the past 7 years has been centered in the development of
a strategy to improve the delivery of financial literacy education in
the Nation's schools. AFSAEF is a founding member and leader of the
Jump$tart Coalition for Personal Financial Literacy.
The Jump$tart Coalition effectively advocates for the
implementation and the
improvement of personal finance curriculum in grades K thru 12.
Currently, Jump$tart has 14 State coalitions that are working with
State and local decisionmakers to implement personal finance in the
curriculum of the schools. Jump$tart has more than 105 partners,
including Federal agencies, nonprofit organizations, education
organizations, and education advocacy groups.
AFSAEF also focuses on remedial financial literacy for adults.
Providing remedial help for hundreds of thousands, if not millions of
Americans who have made poor choices or fundamentally bad financial
decisions, is a daunting task. Therefore, the AFSAEF uses extensive
resources to provide specific financial literacy information that will
benefit consumers.

Multimedia Communications Efforts
Specific aspects of responsible money management are communicated
to the general public through news releases, newspaper articles,
television and radio public service announcements, principally offering
brochures detailing what to do or not do in formulating financial
decisions. Fraud alerts, scam warnings, and more affirmative guides to
decisionmaking are offered regularly. The consequences of poor choices
made by individuals can be catastrophic in real life terms. Therefore,
knowledge and accountability for decisions need to be ingrained at the
individual level. AFSAEF is currently using multimedia resources to
inform consumers about making the right choices when considering a
mortgage loan and in the case of serious financial difficulties the
importance of seeking out alternatives and considerations to
restructure personal debt to avoid personal bankruptcy.
AFSAEF in collaboration with the American Association of
Residential Mortgage Regulators and the National Association of
Consumer Credit Administrators is distributing a brochure to assist
consumers in assessing residential loan offers before signing on the
dotted line. In addition, a number of mass media communications
efforts have been initiated to call attention to this material.\1\
---------------------------------------------------------------------------
\1\ News releases (October 2001 to January 2002); MONEY MATTERS:
Brochure Offers Recommendations Before You Borrow. This generated 344
newspaper articles in 27 States with readership of 52 million. HELP FOR
HOMEBUYERS: Get Guidance Before Making Mortgage Commitments COMO
ADMINISTRAR SU DINERO: Un Folleto Le Ofrece Recomendaciones Previr A
Pedir Un Prestamo Television and Radio Public Service Announcements:
Mortgage Shipping Tips: October 2001 television announcements were
broadcast on 132 TV stations in 42 States with a maximum audience of
137 million. September 2001 radio announcements were broadcast on 320
radio stations in 45 States with an audience of 7.5 million.
---------------------------------------------------------------------------
During the latter half of 2001, there were reports of sharp
increases in personal bankruptcy filings. This increase was fueled by
bankruptcy attorneys' advertisements urging consumers to file before
changes were made in bankruptcy law. The AFSAEF issued a ``consumer
alert'' designed to give advice to consumers who might jump on the
bankruptcy bandwagon to stop and think twice about the long-term
adverse impact bankruptcy might have on their financial future.\2\
---------------------------------------------------------------------------
\2\ News releases (October 2001 to January 2002); Consumer Alert!
Hasty Bankruptcy Filers to Regret it Later. This release generated 124
newspaper articles in 22 States with a readership of 10 million.
Television and Radio Public Service Announcements: Think Twice About
Bankruptcy and Consumer Alert: Think Twice About Bankruptcy. The TV
announcements have been broadcast on 145 stations in 38 States with a
maximum audience of 166 million. The radio
announcements have been broadcast on 222 radio stations in 46 States
with an audience of 7
million.
---------------------------------------------------------------------------
Personal Finance Education
AFSAEF develops and distributes personal finance educational
materials that provide tips on the responsible use of consumer credit
and the management of personal finances. One copy is provided free to
individuals upon request. Approximately 700,000 individual consumers
have received this material. (See Appendix A for the list of all AFSAEF
brochures.)
In order to support initiatives advocated by the Jump$tart
Coalition, including the recently published National Standards in
Personal Finance,\3\ AFSAEF has developed a comprehensive curriculum
devoid of commercial content or intervention to be utilized by middle
school and high school students. This curriculum is designed as an
electronic textbook and can be delivered either by CD Rom or on the
Internet. Through this personal finance electronic textbook, basic
skills concerning income, money management, spending and credit,
savings and investing can be taught to high school students. The goal
of this material is to expose students to real life simulations such as
the accumulation of assets through savings, and using debt to purchase
a car or home. The E-text will allow the student to see the results of
their decisions as they manage income and expenses, assets and
liabilities within the curriculum before confronting real life and then
having to live with the consequences of poor decisions. This curriculum
is currently in a pilot program and upon completion will be available
nationwide for high school students through a
variety of electronic distribution mediums.
---------------------------------------------------------------------------
\3\ National Standards in Personal Finance, with Benchmarks,
Applications, and Glossary for
K-12 Classrooms. Jump$tart Coalition for Personal Financial Literacy,
www.jumpstart
coalition.org. (Benchmarks indicate knowledge and skills that must be
learned by grades 4, 8, and 12.)
---------------------------------------------------------------------------
Another initiative sponsored in part by the AFSAEF with a number of
other partners of Jump$tart is the Money Math: Lessons for Life. This
middle school curriculum teaches the importance of sound personal
finance. It helps provide a solid grounding to help young people
understand personal finance through practical math based exercises in
real life examples. The curriculum is available to 16,000 school
districts.
AFSAEF also provides in person seminars for consumers on personal
finance. In the District of Columbia, in cooperation with the DC Public
Housing Authority, AFSAEF conducted workshops on budgeting, managing
credit use and debt problems, using and maintaining a checking account,
reading and understanding credit reports, and alternative sources of
financing. Similar programs have been provided in New Mexico and
Arizona with support of the Navajo Social Services. These prototype
programs will be modified for facilitator presentations that can
substantially multiply information delivery outreach to community
organizations.
Partnerships are cultivated by AFSAEF with AFSA member
institutions, Government agencies and other nonprofit organizations on
personal finance issues to educate and benefit specific segments of the
marketplace. Some of the partnerships include the Consumer Literacy
Consortium,\4\ and National Consumer Protection Week.\5\ (For other
partnerships see Appendix B.)
---------------------------------------------------------------------------
\4\ Spearheaded by the Consumer Federation of America promotes
savings through the publication, 66 Ways to Save Money.
\5\ Spearheaded by the Federal Trade Commission and other nonprofit
organizations held each year in February.
---------------------------------------------------------------------------
Jump$tart Coalition
The Jump$tart Coalition for Personal Financial Literacy was founded
in 1997 by 28 nonprofit education foundations, Government agencies, and
education organizations. AFSAEF has provided hosting for the Coalition
from its inception. The Coalition's mission is configured in four
parts:

To evaluate the financial literacy of young adults.

To improve the personal financial literacy of young adults.

To develop, disseminate, and encourage use of materials that
are based on the Coalition's National Standards and Benchmarks.

To promote the teaching of personal financial skills so that
informed financial decisions will be made throughout life.

The initial survey was conducted in 1997. The project was under the
direction of Lewis Mandell, PhD, University at Buffalo, and it provided
a dismal insight into the accumulated money management skills of the
graduating senior class of 1997. In 2000, Dr. Mandell conducted the
second of a series of 5 studies planned for the period 1997-2008. The
objective of this series is to measure conditions at the inception of
Jump$tart and through a 12 year cycle. The disturbing reality is that
the 2000 study indicates that the Nation's youth have regressed rather
than progressed in the level of money management skills. The 2002 study
is in progress. Studies similar to the Mandell work have been conducted
in the State of Michigan. Results in that study were equally poor if
not worse.
We appreciate this opportunity to provide the Committee information
and comments on our efforts with financial literacy.

STATEMENT OF THE
CREDIT UNION NATIONAL ASSOCIATION (CUNA)

February 6, 2002

On behalf of the Credit Union National Association (CUNA) and the
Nation's 82 million credit union members, this statement is submitted
to be included in the record for the hearings of February 5-6, 2002 on
financial illiteracy. We are pleased that the Committee recognizes the
need to develop ``a national strategy to promote financial literacy and
education.'' Our statement attempts to describe the dimensions of the
problem, as well as some of the steps credit unions are taking in an
effort to solve it.
Defining Financial Literacy
As might be expected, numerous definitions of financial literacy
exist. Given advocates' wide-ranging agendas, reaching an agreement on
what a financially literate person knows and can do may well be
impossible. However, a quick survey of literature \1\ reveals that
certain topics appear frequently in discussions of what the subject
comprises, such as:
---------------------------------------------------------------------------
\1\ Hogarth, Jeanne M. (2002). Financial literacy and family and
consumer sciences. Journal of Family & Consumer Sciences, Vol. 94 #1,
pp. 14-28.

Money management skills--including budgeting, saving, and
spending and the financial ``tools'' (that is checking
accounts, insurance plans) and rules (that
is tax laws, credit contracts)--that consumers must use to
conduct financial
---------------------------------------------------------------------------
affairs.

Financial and economic principles--including the time value of
money and the effect of supply and demand--that affect
consumers in different ways at different times and under
different conditions.

Decisionmaking and planning guidelines--including information
on setting goals and modifying actions that consumers need to
achieve financial security in the future.

Whatever the precise description of a financially literate citizen,
it seems clear that he or she would require distinct emotional and
behavioral characteristics. It is not too hard to imagine that in
reality such a person must be confident, flexible, and disciplined to
function effectively over a lifetime of changing economic circumstances
and obligations. As with any ideal, different people achieve this state
to different degrees.
Measures of Financial Illiteracy
Results of attempts to measure ignorance about financial, economic,
and consumer matters are not conclusive, but they are not impressive
either.
The Consumer Federation of America (CFA) and American Express
subjected high school students (1990), college students (1991), and
adults (1993) to ``consumer literacy'' tests.^2,3,4 The
results showed that age brought greater knowledge, but the
average adult score of 54 percent answers correct was hardly the
equivalent of a
passing grade.
---------------------------------------------------------------------------
\2\ CFA (Consumer Federation of America). (1990). U.S. consumer
knowledge: The results of a nationwide test. Washington, DC.
\3\ CFA (1991). High school student consumer knowledge: A
nationwide test.
\4\ CFA (1993). College student consumer knowledge: The results of
a nationwide test.
---------------------------------------------------------------------------
Working with the Cooperative Extension System and the Consumer
Literacy Consortium in 1998, CFA gave 1,700 randomly selected adults a
second quiz of consumer skills.\5\ Examples of erroneous responses:
---------------------------------------------------------------------------
\5\ CFA (1998). American consumers get mixed grades on consumer
literacy quiz. Available: http://www.consumerfed.org/backpage/
press.html#four.

One in four (24 percent) thought that all else being equal, a
---------------------------------------------------------------------------
15 year mortgage would cost more in total than a 30 year mortgage.

One in three (32 percent) believed that all the savings and
investment products banks sell are Federally insured.

Adults in the 1998 test passed it with an average score of 75
percent. Because the earlier and later CFA tests were dissimilar, the
improvement in the score does not necessarily mean that adult consumers
had become more knowledgeable in the 5 years between testing. Nor does
the more recent CFA test prove that the typical U.S. adult today would
be able to earn a passing grade in consumer skills.
What the results do suggest, however, is cause for concern about
children. That is because most young people put their parents at the
top of the list of sources of financial information. According to the
American Savings Education Council's 1999 Youth & Money Survey,\6\ 94
percent of students (aged 16-22) say they are likely to turn to their
parents for financial information. If those parents are typical adults,
the information they have to offer may be mediocre at best.
---------------------------------------------------------------------------
\6\ ASEC (American Savings Education Council). (1999). Youth &
Money Survey. Available: http://www.asec.org/highlite.htm.
---------------------------------------------------------------------------
Of course, considering your parents a source of financial
information and actually discussing money with them are two different
things. ASEC's 2001 Parents, Youth & Money Survey \7\ revealed that
only 60 percent of parents reported that their children actually asked
them any questions about finances. Parents claimed to have taken a
number of actions to teach their children about finances, ranging from
encouraging them to save (96 percent), compare prices (93 percent), and
discuss future job prospects (92 percent) to teaching how to track
expenses (63 percent), make a budget (58 percent), and differentiate
kinds of investments (43 percent).
---------------------------------------------------------------------------
\7\ ASEC (2001). Parents, Youth & Money Survey. Available: http://
www.asec.org/2001pym/highlite.htm.
---------------------------------------------------------------------------
Even if one takes these survey results at face value, the transfer
of financial information from one generation to the next seems
incomplete and haphazard. And in the end how much financial knowledge
do U.S. youngsters absorb from their parents and other sources?
The extent of youthful ignorance about consumer issues in general
and personal finance in particular is well documented in the United
States. In recent years,
several national studies have quantified various aspects of the
phenomenon. For
example:

The average teenager's score on the 1990 CFA consumer literacy
test \3\ was less than half (42 percent answers correct).

The overall score among high school seniors taking the
Jump$tart Coalition's 1997 Personal Financial Survey \8\ was 57.3
percent correct.
---------------------------------------------------------------------------
\8\ Mandell, Lewis A., Jump$tart (Jump$tart Coalition for Personal
Financial Literacy). (1997). Our vulnerable youth: The financial
literacy of American 12th graders. Personal Financial Survey report.

When the Jump$tart Coalition repeated its survey in 1999-
2000,\9\ the overall average score for high school seniors had
dropped more than 5 percentage points to 51.9 percent. In addition,
the percentage of students scoring ``C'' or better dropped from
10.2 percent in 1997 to 6.7 percent. And the percentage of students
who failed the test rose from 51.9 percent to 59.1 percent, an
increase of more than 7 percentage points.
---------------------------------------------------------------------------
\9\ Mandell, Lewis A., Jump$tart. (1999-2000). Improving Financial
Literacy: What schools and parents can and cannot do. Personal
Financial Survey report. Available: http://www.jump
start.org/download.cfm.
---------------------------------------------------------------------------
The multiple-choice question below is typical of Jump$tart's 1999-
2000 test:
Which of the following is true about sales tax?

A. The Federal Government will deduct it from your paycheck.
B. It makes things more expensive for you to buy.
C. You do not have to pay the tax if your income is very low.
D. The national sales tax percentage rate is 6 percent.

Only one of two (48.8 percent) high school seniors chose B to
answer this question correctly. One of four (26.2 percent) chose D and
one of five (21.9 percent) chose A.

Finally, high school seniors taking the 2001 Money Skills quiz
\10\ developed by the Americans for Consumer Education and
Competition received an average score of 35 percent.
---------------------------------------------------------------------------
\10\ ACEC (Americans for Consumer Education and Competition).
(2001). Key finding from a national survey of high school seniors
regarding personal finance issues. Available: http://www.
acecusa.org/reportcard.
---------------------------------------------------------------------------
Effects of Financial Illiteracy
Recently, concern about personal bankruptcy rates has generated a
great deal of interest in locating causes of the currently rising
trend. Consumers' knowledge of financial topics seems to be one factor
that demands attention.
In conducting the Personal Financial Survey for the Jump$tart
Coalition in 1997,\8\ researcher Dr. Lewis Mandell (State University of
New York at Buffalo) looked for connections between the students'
scores and deleterious real world effects. In his analysis, Mandell
documented a strong negative correlation between test scores and adult
bankruptcy rates. He compared mean test scores per State and the rate
of personal bankruptcy filings per household per State. The exercise
showed that:

1. In States where the personal bankruptcy rate was very
low--less than 0.5 percent of households--mean scores on the
student survey were 70.3 percent (13 percentage points higher
than the overall score).

2. In States where the personal bankruptcy rate was very
high--more than 1.5 percent of households--mean scores on the
student survey were 55.6 percent (1.7 percentage points lower
than the overall score).

3. The negative correlation was not due to demographic
differences. Even after controlling for variables such as sex,
race, region, income, and education, ``bankruptcy is strongly
and negatively related to financial literacy.'' Mandell
concluded:

Although direct causation cannot be shown, because high
school seniors seldom declare bankruptcy, the results are very
meaningful. If a State has a high rate of personal bankruptcy,
it probably does little to insure that its citizens are well-
educated in personal finance.\8\

Other researchers support this observation. For example, Michelle
White (University of Michigan) examined a number of factors that might
influence consumers' decisions to file for bankruptcy. She found
consumers' general level of education to be a significant effect. White
says:

Other things being equal, better-educated people are less
likely to file for bankruptcy than less-educated people. If all
households had an extra year of education, then their
probability of filing for bankruptcy would drop by about 7
percent.\11\
---------------------------------------------------------------------------
\11\ White, Michelle. (2000). Fresh approaches to bankruptcy and
financial distress--vol 1: Why don't more people declare bankruptcy?
(Filene Research Institute & The Center for Credit Union Research).

White's statement does not refer to financial education. But if
such a strong effect exists between bankruptcy filings and educational
level in general, it is reasonable to assume that receiving an
education specifically in money management topics would yield a benefit
equal to or greater than the one White found.
It seems equally clear that becoming a financially literate person,
like becoming a skilled speaker or writer, is not likely to be an
overnight transformation. Financial literacy is a complex condition
that takes time and experience to acquire. And as is the case with
other forms of ignorance, financial illiteracy has concomitant costs.
Costs of Financial Illiteracy
Consumer ignorance can be expensive. Some consequences, such as the
impulsive purchase of a luxury item or the failure to negotiate a lower
price, are immediate. Learning simple skills such as budgeting and
comparison shopping has long been a staple of traditional home
economics courses. Stephen Brobeck, Executive Director of the Consumer
Federation of America, has estimated that the kind of basic consumer
knowledge students acquire in these classes translates to household
savings of more than $1,000 a year.\5\
But today's adult consumers face challenges unknown to their
parents or grandparents. New financial products with more options
present a bewildering array of decisions. Which telephone plan or
credit card costs the least given my calling and spending habits? What
kind of IRA or mix of different IRA's best fits my family's future
needs?
The proliferation of saving, investing, borrowing, and spending
choices can be expected to grow. For instance, participants in company
401(k) plans saw their investment choices grow from an average of 4.6
in 1994 to 8.4 in 1998.\12\ Trends like this mean that the bewilderment
adult consumers experience now will only become greater for their
children.
---------------------------------------------------------------------------
\12\ Kochard, L.E. & Gaumnitz, J. (2000). The transition from
defined benefit to defined contribution pension plans in the public
sector. Kansas Public Policy Institute.
---------------------------------------------------------------------------
Furthermore, consumers' responsibilities are becoming larger and
more complex. As Americans' longevity increases, more and more adults
are being asked to bear the triple financial burden of funding their
parents' long-term care while still raising children of their own and
trying to save for their own retirement. And at the same time that the
cost of retirement increases and the ability of the Social Security
system to supplement those costs wans, consumers are being asked to
take more responsibility for making their own investment decisions in
managing their pension and other retirement savings plans. From 1980 to
1997, the percentage of employee pension plans that were of the defined
contribution type, which requires that individuals become more active
in investment decisions, rose from 70 percent (covering one in three
workers) to 92 percent (covered one in two).\13\
---------------------------------------------------------------------------
\13\ Conte, C. (1998). The National Summit on Retirement Savings:
Agenda background materials.
---------------------------------------------------------------------------
And the more that consumers are being forced to make financial
decisions of greater complexity about their savings, the less
successful they seem to be in managing their debt. Consider these
facts:

Sixty percent of U.S. households carry over some portion of
their high-interest credit card debt each month. Of those that do,
the average balance was $4,100.\14\
---------------------------------------------------------------------------
\14\ Federal Reserve Board. (2000). 1998 SCF; Credit cards held by
households.

Seventy-eight percent of college undergraduates have a credit
card. Of those, each carries an average of three cards with an
average balance of $2,748.\15\
---------------------------------------------------------------------------
\15\ Nellie Mae. (2000). Credit card usage continues among college
students. Available: http://
www.nelliemae.com/library/research__8.html.

Ninety-five percent of college graduate students have a credit
card. Of those, each carries an average of four cards with an
---------------------------------------------------------------------------
average balance of $4,776.\15\

Credit card debt seems to be playing a large role in the fact that
one of five families with annual household income of less than $50,000
are now spending 40 percent or more of their after-tax income to
service their debt.\16\ And with this growing debt load come clear
signs that consumers are having a harder and harder time bearing the
weight:
---------------------------------------------------------------------------
\16\ Kennickell, A.B., McCluer, M.S., & Surette, B. (2000). Recent
changes in U.S. family
finances: Results from the 1998 Survey of Consumer Finances. Federal
Reserve Bulletin, 86
(1), 1-29.

The rate for credit card payments that were more that 30 days
late rose from 4.3 percent in 2000 to 5 percent in 2001. During the
same period, write-offs on bad loans increased from 5.6 percent to
6.4 percent.\17\
---------------------------------------------------------------------------
\17\ Card News. (2001). Credit card losses rise in second quarter,
Moody's reports. Card News, 16 (15, August 8).

Bankruptcy filings grew from 1.27 million households (1999-
2000) to 1.38 million (2000-2001). Projections for the current year
are between 1.4 to 1.5 million households.\18\
---------------------------------------------------------------------------
\18\ American Banker. (2001). Bankruptcy spike threatens card
profits. American Banker-bond Buyer, 1 (19), 1.

The next generation appears to be ready to join right in the
problem. Elizabeth Warren, a law professor at Harvard Law, has been
tracking bankruptcy among adults aged 25 and under. From 1991 to 1999,
she documented a 51 percent increase in annual filings among that age
group, from 60,000 to nearly 120,000. The age group now accounts for 7
percent of all U.S. personal bankruptcy filings.\19\
---------------------------------------------------------------------------
\19\ Warren, Elizabeth. (2001). Reported in Congratulations grads:
You are bankrupt. Business Week, May 21.
---------------------------------------------------------------------------
And if all this were not alarming enough, some financial
institutions appear to be following a strategy that will prepare
children as young as 13 to be active credit card users in the future by
issuing them stored value cards now. Parental permission is required,
and issuers claim that properly used, the cards with catchy names are a
valuable tool for teaching children to budget, spend, and save
responsibly. Unfortunately, parents do not have a solid track record
for fulfilling that mission. Some institutional effort seems to be
needed.
The Effectiveness of Financial Education
Several studies have been designed to quantify the belief that
teaching people about financial topics will help them make better
consumer decisions. By 1985,
29 States had passed laws requiring some kind of consumer education at
the high school level. (See http://www.jumpstart.org/legislation.cfm
for current State legislative mandates and resolutions.)
Last year saw the publication of the results of a study that
established a connection between State mandates and the subsequent
accumulation of assets as students reached adulthood. The authors
claimed to have found the first evidence of long-term behavioral
effects as a result of legislated financial education curriculum
requirements, and concluded:

We also find that mandates significantly increase exposure to
financial education, and ultimately elevate the rates at which
individuals save and accumulate wealth during their adult
lives. These results contribute to the growing body of evidence
that education may be a powerful tool for stimulating personal
saving.\20\
---------------------------------------------------------------------------
\20\ Bernheim, B.D., Garrett, D.M., & Maki, D.M. (2001). Education
and saving: The long-term effects of high school financial curriculum
mandates. Journal of Public Economics, 80, 435-465.

In his 1997 Jump$tart Coalition report Mandell stressed that it is
not enough to simply throw financial education at students. Materials
---------------------------------------------------------------------------
that purport to teach personal finance topics must be evaluated:

States that wish to reduce the pain and economic cost of
personal bankruptcies should probably consider mandating and
implementing an effective curriculum of personal finance in its
primary and secondary school systems.\8\ [Author's emphasis]

One personal financial curriculum that researchers evaluated for
efficacy was the NEFE High School Financial Planning Program (HSFPP),
which the National Endowment for Financial Education (NEFE) distributes
free of charge as a public service in partnership with the Credit Union
National Association (CUNA) and the U.S. Department of Agriculture
Cooperative State Research, Education, and Extension Service. The study
demonstrated that significant changes in knowledge, attitudes, and
behavior occurred in students as a result of participating in the
program. For example, in addition to those who maintained knowledge,
skill, and confidence levels, students exhibited the following changes:
\21\
---------------------------------------------------------------------------
\21\ Boyce, C.F. & Danes, S.M. (1998) Evaluation of the NEFE high
school financial planning program. Denver, CO: National Endowment for
Financial Education. Available: http://www.
nefe.org/pages/hsfppevaluation.html.

Nearly half (47 percent) knew more about credit costs, and
---------------------------------------------------------------------------
nearly two-fifths (38 percent) knew more about investments.

Nearly two-fifths (37 percent) improved skills for tracking
spending, and nearly half (45 percent) started saving or began
saving more.

Nearly two-fifths (38 percent) felt more confident about
managing their money.

During the 2000-2001 school year, NEFE distributed HSFPP materials
to 345,000 students in 4,330 schools. Credit unions, in their first
full year of program partnership, were responsible for about 10 percent
of both those figures.
Credit Unions and Financial Literacy
Credit unions have traditionally considered financial education to
be part of their social mission. Indeed, education is one of the
operating principles of the international credit union movement:

Credit unions actively promote the education of their
members, officers, and employees, along with the public in
general, in the economic, social, democratic, and mutual self-
help principles of credit unions. The promotion of thrift and
the wise use of credit, as well as education on the rights and
responsibilities of members, are essential to the dual social
and economic character of credit unions in serving member
needs.\22\
---------------------------------------------------------------------------
\22\ WOCCU (World Council of Credit Unions). International credit
union operating principles. Available: http://www.woccu.org/about/
princip.htm.

Founders of the U.S. movement made it clear that from the start
that they thought educating members was one of a credit union's
fundamental duties. Edward Filene once said, ``There is no permanent
remedy for our economic and social ills other than better thinking,
which must come through better education.'' \23\
---------------------------------------------------------------------------
\23\ Filene, Edward A. (1928). New York American, April 17.
---------------------------------------------------------------------------
Furthermore, early credit union leaders stressed the importance of
beginning financial education with the youngest family members. In
1936, one of CUNA's magazine editors said:

Our children of today will be the heads of families of
tomorrow. They will be the buyers and sellers of the Nation,
the financial executives of the world. If they are to be fitted
to meet these responsibilities we must give them an opportunity
to learn how to manage money and we must do it now.\24\
---------------------------------------------------------------------------
\24\ Feller, George F. (1936). The child and his money. The Bridge,
May, I (XI) No. 3.

Credit unions have responded to these challenges in a number of
ways. First, they provide information to members through newsletters
and other mailings. Since 1989, for example, credit unions have
purchased from CUNA for distribution to members 52.4 million brochures
on subjects ranging from managing a checking
account to using electronic signatures.
Second, credit unions provide financial information to members on a
one-on-one basis. As of the end of 2000:

Thirteen percent of credit unions (representing 49 percent of
U.S. members) offer financial planning programs to help with mid-
and long-term goals.

Thirty-one percent of credit unions (representing 56 percent
of U.S. members) offer ``remedial'' financial counseling to
intervene in times of financial crises due to excessive debt and
the mismanagement of income and spending.

Third, credit unions actively approach schools and after-school
programs to teach personal finance skills to children and teenagers, in
addition to participating in the NEFE High School Financial Planning
Program. Since 1972, the National Youth Involvement Board (NYIB), a
loose network of credit union volunteers, has educated youth about
money and credit. During the 2000-2001 school year, 628 NYIB volunteers
conducted 5,848 classroom presentations to 138,806 students.\25\
---------------------------------------------------------------------------
\25\ NYIB (National Youth Involvement Board). (2000-2001).
Available: http://www.nyib.org/Pages/Network%20News%20Articles/
NYIB%201999__2000%20Classroom%20Statistics.htm.
---------------------------------------------------------------------------
Fourth, credit unions seek every opportunity to draw attention to
youth--their accomplishments, as well as their needs. This year CUNA
will sponsor a National Credit Union Youth Week (April 14-20) during
the Jump$tart Coalition's Youth
Financial Literacy Month to showcase the members who will provide our
Nation's economic leadership and strength in the future. Modeled after
longstanding observances in States such as North Dakota and
Pennsylvania, the national event will shine the spotlight on the
problem of youth financial illiteracy and the many ways that credit
unions, in partnership with other local institutions, are giving young
people the tools of financial security.
From the beginning, the people of the credit union movement have
firmly believed in the power of information to better members' well-
being. An indication that their longstanding faith in the efficacy of
financial literacy to improve lives is well grounded, consider this: In
2000, the overall bankruptcy rate for the general U.S. population was
4.34 per 1,000.\26\ For the same period, the rate for U.S. credit union
members was only 2.48 per 1,000.\27\ Credit unions are doing many
things right.
---------------------------------------------------------------------------
\26\ Bankruptcy Institute. (2001). Bankruptcies fall again in 2000,
filings in fourth quarter rise slightly. Available: http://
www.abiworld.org/stats/feb2300.html.
\27\ NCUA (National Credit Union Administration). (2000). Call
report data.
---------------------------------------------------------------------------
Summary
In conclusion, there is considerable evidence that financial
illiteracy has reached record proportions, and its impact has
contributed significantly to rising levels of bankruptcy and to
lowering the standard of living in general for many American families.
Credit unions have traditionally made financial education a part of
their mission, and it is apparent that it has made a difference, as
credit union members are less likely to declare bankruptcy than the
general population. Credit unions will continue their efforts and are
encouraged that both the private sector and now the Government appear
to be ready to make financial literacy a high national priority.

----------
STATEMENT OF THE
NATIONAL ASSOCIATION OF FEDERAL CREDIT UNIONS

February 6, 2002

Introduction
The National Association of Federal Credit Unions (NAFCU) is the
only national organization exclusively representing the interests of
the Nation's Federally chartered credit unions. NAFCU is comprised of
nearly 1,000 Federal credit unions--financial cooperatives from across
the Nation--that collectively hold approximately 62 percent of total
Federal credit union assets; NAFCU represents the interests of
approximately 24 million individual credit union members. NAFCU, and
the entire credit union community, appreciates the opportunity to
participate in this important discussion about financial illiteracy.
Financial Literacy and Personal Savings Are Intertwined
NAFCU and our member credit unions know that financial illiteracy
is an issue that touches all Americans--at every age and income level.
Intertwined with financial literacy is personal savings. The Nation's
personal savings rate is slumping and personal savings rates are at
their lowest level in nearly 40 years. Large numbers of Americans
habitually spend instead of save. Credit unions know that saving is a
matter of choice and that the most important factor in long-term wealth
accumulation is the act of saving itself. NAFCU is proud to be
proactively involved in promoting financial literacy and personal
savings in America. NAFCU President / CEO Fred Becker's first major
speech before the credit union community in September 2000 addressed
the need to increase the personal savings levels of all Americans.
Many credit unions have special programs to educate their members
and assist them in achieving their savings goals. These programs not
only teach their members about saving, but also assist them in becoming
more financially literate. We want to tell you about just two such
success stories.

McCoy FCU: Teaching Youth About Money and Savings
NAFCU member McCoy Federal Credit Union, located in Orlando,
Florida, is the only community credit union in Central Florida. It has
assets of $235 million and serves the borrowing and saving needs of
about 55,000 members. In September 1993 McCoy FCU began a ``Youth
Savings Program'' to teach young people about saving and to give them
incentives to encourage them to save. This program reaches future
generations by establishing at an early age a meaningful relationship
or ``link'' between them and their financial institution--a credit
union.
The Youth Savings Program is set up in two age groups 5-10 years
and 11-17 years, with appropriate incentives targeting these two very
distinct age groups. A Youth Savings Brochure, available to credit
union members and potential members, explains eligibility based on
McCoy FCU's field of membership. The brochure is often the first
exposure many young people have to financial terms, providing
definitions of such terms as saving, deposits, interest, withdrawals
and balance, as well as a savings register and I.D. card. It also
explains savings goals and includes ideas of how students might obtain
the money to put into their savings accounts, for example piggy bank,
birthday, allowance, chores, good grades, or jobs.
When a young person joins McCoy FCU's Youth Savings Program and
opens an account for $5.00--$99.00, they receive several items
appropriate to their age designed to encourage savings and to help them
measure their progress in meeting their savings goals. McCoy FCU waives
the $5 credit union membership fee for the young people who join, and
there are no fees associated with Youth Savings Program accounts. To
encourage their active participation and savings, young people earn
various gifts when they attain savings goals of $100, $250, $500, $750,
and $1,000.
The program continues educating young people as they mature from
their teenage years to young adulthood. Upon reaching 18 years of age,
the participants receive a letter telling them that while they are no
longer eligible for McCoy's Youth Savings Program, as fiscally
responsible ``graduates'' of the Youth Savings Program they can now
take full advantage of the many other services that McCoy FCU has to
offer. The letter then proceeds to introduce them to other services
that McCoy FCU offers its members, such as Share Draft Accounts.
In order to effectively reach out to all segments of the community
and educate its young people about, and get them involved with, the
Youth Savings Program, McCoy FCU spreads the word in a number of ways:

1. Various youth organizations (for example YMCA)
2. Partners in Education (Orange County School System)
3. Presentations at local schools and church youth groups
4. Sponsorship of youth programs
5. Word of mouth
6. McCoy Financial Planner Newsletter
7. Brochures in the credit union's lobbies and new accounts
areas

Promoting Financial Literacy in San Antonio
San Antonio City Employees Federal Credit Union (SACEFCU), which
serves Government employees in San Antonio, has about 32,000 members
and $175 million in assets. SACEFCU was asked to prepare and teach
basic financial courses for the San Antonio's Adult Basic Education and
G.E.D. Preparation Program. The credit union was a logical choice for
implementing this program because of the depth of financial knowledge
and experience of its dedicated staff. The credit union, in turn,
availed itself of information and assistance offered by a resource
knowledgeable about financial education: the National Endowment for
Financial Education (NEFE), a nonprofit foundation committed to helping
Americans gain the skills and knowledge needed to control their
personal finances.
SACEFCU adopted an educational curriculum initially developed and
made available by NEFE. The curriculum includes courses on financial
planning, cash flow, spending and savings, credit and debt management,
insurance needs, savings and investments, homeownership and small
business opportunities. The credit union also made use of instructional
materials provided by NEFE without charge. SACEFCU's financial literacy
program is free, and the knowledge imparted via the curriculum is
supplemented by guest appearances by area professionals and experts.
The first class taught by SACEFCU was a pilot program comprised
primarily of people training to become literacy teachers themselves.
Twelve trainers and eight students have graduated from the pilot
course, taught entirely by SACEFCU.
SACEFCU realized that by committing itself to educating more people
to become financial literacy trainers and teachers, they could more
effectively promote financial literacy among its members and the San
Antonio community at large--spreading the word of financial literacy.
As a result, SACEFCU hosted a one-day ``train the trainer'' course for
24 city's of San Antonio county agencies and private industry trainers.
Eventually, with the financial literacy program well-developed and
solidly underway in San Antonio, SACEFCU stepped back with the city
taking over the financial literacy classes.
Having been well established under the auspices of SACEFCU, the
financial literacy course is now offered in a number of literacy
centers in San Antonio throughout the year. Meanwhile, SACEFCU has
maintained an active role in the advancement of the financial literacy
program it conceived by periodically monitoring and auditing the
classes. The city of San Antonio is very willing to share the
curriculum for this program with others who share their interest so
that other cities can benefit from San Antonio's experience as they
develop their own financial literacy courses.
Realizing that true financial literacy and healthy saving habits
are best fostered among the young, San Antonio has now enlisted SACEFCU
to do for the city's children what it has already done for the city's
adults: develop an age-appropriate
financial education course. The credit union is now working on creating
such a
financial information program to teach local elementary school children
about
financial literacy and help foster an appropriate awareness of the
value of money.

----------
STATEMENT OF THE
WOMEN'S INSTITUTE FOR A SECURE RETIREMENT

February 6, 2002

On behalf of the Women's Institute for a Secure Retirement (WISER)
we appreciate the opportunity to submit comments to the Senate
Committee on Banking, Housing, and Urban Affairs on the Hearing on the
State of Financial Literacy and Education in America for allowing us to
bring to your attention the ways in which women are affected as low
earners who are more likely to end up in poverty.
The Women's Institute for a Secure Retirement (WISER) is a
nonprofit organization whose primary mission is education. WISER and
its collaborative partners have established a clearinghouse on
retirement education, the POWERCenter (Program on Women's Education for
Retirement) which provides underserved women with a place to turn to
for basic financial education. The POWERCenter began as a cooperative
project funded by the U.S. Administration on Aging in 1998.

The POWERCenter's program goals are:

1. Reaching the maximum number of average and lower income women
with information.
2. Ensuring that the educational material and program reaches women
at their jobs, in their communities and places of worship.
3. Creating an awareness of retirement basics, pensions savings
plans, and the Social Security program, to help motivate women to plan
early for their economic security by stretching and managing their
resources and increasing their retirement income.
4. Preserving retirement income: helping older women protect the
income they have by avoiding the multiple pitfalls of consumer fraud,
financial scams, and predatory scams.
5. Helping women in crisis situations such as death and divorce.
Background
Despite all of the discussion about workers (and women in
particular) planning for their retirement, little has been done to
enable them to exert control over their own financial lives. This
starts with a lack of basic programs focused on the needs of women who
are living from paycheck to paycheck and struggling to keep their
families afloat. Simply telling the average woman--the woman who earns
less than $30,000--to start or increase her savings rate is not as easy
as it sounds.
For many women, particularly those with low incomes, the first
significant planning step they take is applying for their Social
Security benefits. These are women who will not have access to a
sophisticated employer education program--nor will they have the
substantial financial resources that will attract financial planners.
Millions of women fit this description. These women require basic
information to help them take the first steps toward a more secure
future. While there are more than three million pages of material
available on the internet and several hundred books on financial
planning, much of the material is not aimed at average earners or for
those who are looking for less complex information.
POWERCenter staff have learned that women need to hear the
financial literacy message from trusted individuals before they will
take the first steps toward action. In addition, they want information
that is independent and free of conflicts of interest or a sales pitch.
We have also learned that training community partners is a highly
effective strategy. WISER partners with many different organizations:
employers, women's organizations, financial institutions, churches,
government
agencies and local community groups.

Financial and Retirement Challenges for Women Workers:

More than two out of three full-time working women earn less
than $30,000 per year.

Women's earnings average $.73 for every $1 earned by men.
African-American women earn $.67 and Hispanic women earn $.54.

Women are more likely to work in part-time and minimum wage
jobs without
benefits.

Women retirees receive only half the average pension benefits
that men receive.

Women spend 15 percent of their careers caregiving outside of
the workforce compared to less than 2 percent by men.

Reasons Why Women Need More Retirement Income
Women live longer than men, nearly 4 years.

Women earn less than men so their Social Security and pension
benefits are smaller.

Women are likely to be single--and not remarry. Unmarried
women are more likely to live out their years in poverty.

Women are more likely to need long-term institutional care.

The Effect of Women's Longer Lives
Financial experts tell Americans generally to plan to replace
anywhere from 70 to 85 percent of their income at retirement.
Unfortunately, this advice does not work for women, who are likely to
need more than 100 percent of their preretirement income in order to
remain secure throughout their longer lives. Women need to start as
early as possible to understand how they are spending their money and
to take advantage of any opportunity to build assets whether through a
retirement plan or a community-based program to contribute to an
individual development asset (IDA).
The longer life expectancy of women necessarily means that at some
point during their retirement the vast majority will find themselves
alone. In fact, about 80 percent of men die married and 80 percent of
women die single.
Living alone is a predictor of elderly poverty and women are much
more likely than men to live alone--in 1998, only 43 percent of older
women lived with their spouses, compared to 73 percent of older men. A
single elderly woman is twice as likely as an elderly man to be poor--
in 1998, about one out of five single older white women were living in
poverty while almost half of all single older minority women were poor
or near poor.

Women's Roles As Caregivers
The reality of women's working lives is that no matter how women's
roles in society have changed, those changes have not relieved them of
their responsibilities as family caregivers. Women are still more
likely to leave the workforce or to work part-time to accommodate
caregiving responsibilities. In addition to maternity leave, they also
bear the primary responsibility for an ill child or a sick relative--
resulting in shorter job tenures--women's average job tenure is 4.4
years lagging behind men's (5.0 years).

Women as Low-Wage Earners Saving for the Future
Over the past 20 years there has been a shifting of the burden of
retirement from the employer to the employee--a trend that will almost
certainly have a disproportionate effect on all low-wage workers but
particularly women.
The fact that women earn less creates less of an opportunity for
retirement savings and means that women's retirement benefits will be
lower than those of men. It also means they have substantially less
income available to put in an IRA or a 401(k) savings plan.
Because the majority of full-time working women earn less than
$30,000 annually, even a disciplined saver will have trouble
accumulating much in savings at that level of income. Second, our
research shows that women's savings priorities are often focused on
their children and their grandchildren and not on their own financial
security. And again, because of priorities such as their children's
education and medical emergencies, women often opt to cash out their
401(k) accumulations when they leave a job rather than keep the funds
for retirement.
Finally, we commend this Committee for focusing attention on this
critically important issue. The implications of inadequate savings and
the inadequacy of retirement benefits is far-reaching. The major
challenge facing the Committee today is to make sure that working
Americans realize what steps they will need to take to support themselves
in their old age. We need to address these issues now and ensure that
workers begin to accumulate assets early in their careers rather
than debt.
Again, we thank the Committee for your leadership in acknowledging
the need for financial education.
The Women's Institute for a Secure Retirement is a nonprofit
organization that was launched in 1996 by the Teresa & H. John Heinz
III Foundation. WISER's overarching goal is to alleviate poverty among
older women and to include increasing awareness among the general
public, policymakers, and the business community of the structural
barriers that prevent women's adequate participation in the Nation's
retirement systems.