Even though Americans are more financially literate than ever before, economics professor Teresa Ghilarducci argues that workers are actually worse off than previous generations when it comes to retirement.
The culprit? A broken system. Ghilarducci appeared on TheStreet to discuss why financial literacy alone won’t get you secure in retirement and the need for reform.
Related: Average Americans face big 401(k) retirement plan dilemma
See the full video transcript below:
Conway Gittens: If we’re all going to make more decisions, how important is financial literacy to this? I’m scratching my head a little bit, because whether you’re a CEO or a member of Congress, you have to make your own financial decisions. So why don’t we have a seat at the table for everyone to make it easier?
Teresa Ghilarducci: Great question. The question is why. If everyone is suffering, why don’t the powers that be actually do anything? Because they must be suffering too. The problem with our system is really the haves and the have-nots. We have a very well-functioning, well-structured 401(k) system. And if you’re in that system, if your employer offers it as the federal government offers it to all employees, you’re in that system. So automatically, your legislators are exempt from everyone else suffering. Professors who do a lot of research in this field are kind of privileged. We work for states and we have our own pension plans there, or we have an old system called TIAA.
So we lack a little bit of empathy for what the people who work for us do. So the separation of experience is a big stumbling block to policymaking. You asked about financial literacy, this country is more financially literate than it has ever been. Today’s workers are much more knowledgeable about money. They’re borrowing for school. In fact, they’re learning more about mortgages than they ever have before, but they’re worse off than their parents’ and grandparents’ generations. So it’s not that people don’t know enough, that’s the problem. Our organizational structures don’t fit today’s people.
Conway Gittens: So why are they in a worse situation?
Teresa Ghilarducci: Well, because they don’t have a retirement plan. We’re sitting here on the floor of the stock exchange right now. Everybody here knows that the most powerful force in finance is compound interest. If you save only 3% of your pay in your 20s, save at that rate, and never withdraw. That’s a big deal in the American system. If you don’t withdraw, you save enough on Social Security to maintain your standard of living. If you start at 30, you have to save 6%. If you start at 40, you have to save more than 10%. If you start at 50, a lot of people ask me, I have to save for retirement. Retirement is only 10 years away. I have to save 50%.
So not everyone is in a system where they can compound interest. If you’re in a defined benefit traditional plan, your employer does the compounding for you and invests for you. You’re like me, you’ve been in the same plan for 40 years. I’m lucky. I’m amazed that I even know what the rest of the United States does. I can compound interest. So I’d say I’m very smart, but I’ve just been lucky. So I think it has a lot more to do with luck and good fortune than financial literacy. And some people have to go into debt. And that compounds in the opposite direction too.
