Today's economic landscape demands unreasonable levels of financial literacy

Early summer is the time of year when high school and college graduates are handed their diplomas (and, for college graduates, their student loan repayment books). They hear stirring words from commencement speakers about pursuing their passions, taking risks and making the world a better place.

I doubt many speakers dwelled at length (if at all) on the benefits of financial literacy, however. Extolling the virtues of compound interest and calling for graduates to embrace their future 401(k) is hardly a way to give an audience goose bumps.

Too bad. It's a safe bet that most graduates didn't learn much about personal finance at school — high school or college. Survey research shows that many people don't understand the terms of their mortgage, let alone the interest rate calculation on their credit cards. About one in five workers fails to participate in his company's 401(k) plan. And at the end of 2009, the average 401(k) balance was about $58,000 — enough to pay out $183 a month for 30 years (assuming a 3 percent return).

"There's a woeful lack of financial literacy in America," said Roger W. Ferguson Jr., chief executive at TIAA-CREF, at a May 25 savings and investing conference at Boston University School of Management.

Yet financial literacy matters more than before. The traditional paternalism of society's major institutions, from business to government to education, has crumbled. Employers insist that their workers take more responsibility for their retirement arrangements and funding (Think 401[k]s and 457s.) Colleges count on parents and students to come up with more tuition dollars (529 plans and Coverdell's). The modern credit economy comes with a steep price tag, with the merchants of debt adept at promoting the convenience of borrowing while hiding the true cost of loans, especially in low-income neighborhoods (payday lenders and subprime mortgages).

Taken altogether, individuals need to learn more about money and finance, because they have more responsibility.

Little wonder there's growing emphasis on financial literacy. It seems almost every day a press release goes out about the launching of a new program. Foundations, governments and nonprofits are backing initiatives targeted at grade schools, college students and military recruits.

There has been some progress. For example, many employees are far more knowledgeable about stocks and bonds, diversification and asset allocation than their peers three decades ago. The amount of financial information available at the click of a mouse is astonishing. A recent study by the Urban Institute showed that foreclosure rates for homebuyers who went through a financial literacy program geared toward low-income households was one-half to one-third the rate for other homebuyers in the same community.

That said, we're relying far too much on education. We're asking too much of people. Not all individuals at work and at home are up to the financial decision-making demands we're making of them. Even many highly educated people adept with a software spreadsheet or expert at the violin fall far short when it comes to understanding finance.

Part of the problem is that much of the discussion about financial literacy occurs in a vacuum. It doesn't take into account how great demands are on our time these days.

Think about it. We work hard for our money. Many of us have partners and families. We're expected to work with our children on their homework. We're told to eat a healthy diet, and we have to keep up with what that means. We try to exercise regularly and we don't only brush our teeth but we floss. We're supposed to keep up with the latest technologies, volunteer in the community, engage in national and local politics. And on top of all that we're supposed to be wise in the ways of Wall Street. (It's going to get worse as companies embrace health care insurance policies that rely on each of us becoming an educated consumer of medical care.) The list of recommended "literacies" is long and getting longer.

Instead, we need a greater focus on reforms that make it easier for people to accomplish their financial goal.

Take retirement. We know that America's population is aging and retirement savings aren't enough. Yet our retirement savings system is balkanized with 401(k)s for the private sector; 403(b)s for nonprofits; 457s for state and local government employees; SEP-IRAs and sole-401(k)s for the self-employed; IRAs and Roth-IRAs, and so on. The rules vary, too. The maximum a worker can put into a 401(k) is $16,500. For a homemaker with an IRA it's $5,000. Go figure. Why not just one set of rules for everyone?

Similarly, a college degree is a ticket to material success in our economy. Yet the complexity of the Free Application for Federal Student Aid (FAFSA) contributes to a disturbing gap in college attendance between students from high-income families and students from low-income families. William & Mary economists Robert B. Archibald and David H. Feldman — authors of "Why Does College Cost So Much?" — persuasively argue that better information isn't the solution. They would substitute a universal benefit modeled on the Georgia Hope program that would pay the equivalent of public college tuition and fees for all high school student with a "B" average. Simple, yet universal.

Don't get me wrong: Financial literacy is good. But it isn't enough. With better designs people could then spend time on things that are really useful, like starting companies, volunteering in their community and spending time with kids.

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Chris Farrell is economics editor of American Public Media's Marketplace Money and author of "The New Frugality: How to Consume Less, Save More and Live Better."

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