How Financial Education Can Narrow the Wealth Gap

By Dan Kadlec

October 18, 2016

Education generally correlates with financial know-how. The higher your degree, the greater your ability to sort out personal financial issues. That is true whether a student has taken a personal finance course or not.

Among workers eligible for a 401(k) plan, those with a college degree are 20% more likely to enroll in the plan than those who graduated high school but did not graduate college, according to a recent study out of the University of Kansas. Further, those with a college degree save an average 26% more each year.

This action gap is consistent even after controlling for variables that include income, occupation, field of employment, and company size, found the authors, ChangHwan Kim, associate professor of sociology, and Christopher Tamborini, a senior researcher for the Social Security Administration.

But having greater personal financial ability does not necessarily mean you have enough. Most Millennials—the most educated generation in history—cannot correctly answer these three basic financial questions:

  1. Do you think that the following statement is true or false? Buying a single company stock usually provides a safer return than a stock mutual fund. (False.)
  2. Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow: More than $102, exactly $102, or less than $102? (More than.)
  3. Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, would you be able to buy more than, exactly the same as, or less than today with the money in this account? (Less.)

These are startlingly simple concepts on which the next generation collectively whiffs. So while a good education is helpful, financial education is clearly needed to help young people get to the next level.

Much is at stake. Staying with the Kim-Tamborini study, the education gap has huge implications for the future retirement security of Millennials, a generation that must provide its own safety net through voluntary savings plans. As the less educated contribute less to their plans and the more educated contribute more the chasm between rich and poor will only widen.

That’s an issue for everyone. Income inequality has been growing since the 1970s but is reaching a breaking point for the economy, which cannot function well without a thriving middle-income population to produce and consume. Higher education helps. But financial education must be part of the solution.

 

 

 

Posted in Latest Research on October, 2016