Despite the fact that Americans are more financially literate than ever, Teresa Ghilarducci, Professor of Economics argues that workers are actually worse off than previous generations when it comes to retirement.
The culprit? A broken system. Ghilarducci joined TheStreet to discuss why financial literacy isn’t enough for retirement security and the need for reform.
Related: The average American faces one major 401(k) retirement dilemma
Full Video Transcript Below:
CONWAY GITTENS: And so how important is financial literacy to this if we’re all making more of our decisions. And I’m scratching my head just a little bit because even the CEOs, even if you’re in congress, you’re having to make your own financial decision, too. So why aren’t why are all the people coming to the table to make it easier.
TERESA GHILARDUCCI: Such a great question. The question is why. If everybody is having trouble, why don’t the people in power actually do something about it. Because they must be feeling it, too. The problem with our system is actually the haves and the have nots. We have a very well-oiled, well structured 401(k) system. And if you’re in, you’re in if your employer provides it like the federal government does to all of its employees. So automatically you have your lawmakers kind of immune to what everybody else is suffering. Professors who do a lot of work in this, we’re kind of sitting pretty. We’re either working for a state and we have our own pension plan there, or we have this old plan called TIAA.
So we’re a little unempathetic for what the people who are working for us are up to. So that separation of experience is a real big barrier to policy making. You asked me about financial literacy. We have the most financial literacy in this country than we’ve ever had. The workers now are the much more educated about money. They’ve taken on debt for school. They’ve actually learned about mortgages more than ever before, but they’re worse off than their parents or grandparents. So it’s not the people not knowing enough. It’s the problem. It’s the structure that doesn’t fit the people that we have.
CONWAY GITTENS: So why are they worse off?
TERESA GHILARDUCCI: Yeah, because they’re not in a retirement plan. We’re sitting here on the floor of the Stock Exchange. Everyone here knows the most powerful force in finance is compounding. And if you just start saving only 3% of your pay when you’re in your 20s and you keep that same percentage and you never take it out. That’s a big if in the American system. If you never take it out, you’ll have enough with Social Security to maintain your standard of living. If you start at 30. Well, you have to do 6% If you start at 40, you have to save over 10%. If you start at 50. And a lot of people ask me, well, I’ve got to save for my retirement. It’s only 10 years down the road. They have to save 50%.
So not everybody gets to be in that system where they can compound you are if you’re in a defined benefit plan, a traditional plan, the employer compounds it for you and invests it for you. You are like me, who have been in the same pension plan for 40 years. Lucky me. It’s amazing I even know about what the rest of America is up to. I’ve been able to compound. So I could say I’m really smart, but I was just lucky. And so I think luck and fortune has way too much more to do with it than financial literacy. And then some people have to take on debt, you know, and that compounds the other way as well.
