Economic Literacy Low
Source News for Social Justice Action
Date 05/04/27/13:40

April 27, 2005
Survey Finds Many Have Poor Grasp of Basic Economics

With Washington considering whether to strengthen Social Security by giving
Americans more responsibility for their own retirements, a survey released
yesterday suggested that the typical American does not know enough about
economics to prosper in such a system.

The survey, conducted by Harris Interactive, found, for example, that about
half of American adults did not know that if they kept their money at home,
in cash, they were at greater risk of losing ground to inflation than if
they invested it elsewhere.

"Given recent signs that inflation might be increasing, this is quite a
frightening finding," said Alan B. Krueger, an economics professor at
Princeton University who served as chief economist for the National Council
on Economic Education, a business group that commissioned the survey.

The survey of 3,512 adults and 2,242 high school students also suggested
that the intense attention Americans have paid to the pronouncements of the
Federal Reserve chairman, Alan Greenspan, in the last few years had done
little to help people grasp the role of interest rates. One-third of adults
were unable to explain how falling interest rates would affect business.

Young people - those the current Social Security proposals are intended to
help the most - performed more poorly on the survey's questions than
adults. Barely half of the high school students polled could correctly
state the role of the stock market in the economy, with a few choosing the
option that it makes stock prices rise.

Fewer than half the students could accurately define the term "budget
deficit." And there was confusion about the purpose of mutual funds, with
some students stating that they provided higher returns than individual
stocks, and others stating that they guaranteed a steadier income. Only 15
percent of students understood that the purpose of mutual funds was to
provide diversification.

Mr. Krueger, who contributes a column for the business section of The New
York Times, said these findings were disturbing, given the big increase in
the number of households that hold stocks and mutual funds.

"Many Americans are potentially open to scams because they don't understand
the purpose of the financial markets," he said yesterday.

Other analysts said they thought that the findings added to a growing body
of evidence that the typical American is poorly equipped to take advantage
of what proponents call the ownership society: a future in which
individuals are free to invest their own retirement money, rather than
having to accept the returns offered by the Social Security program or a
group retirement program at work, like a pension plan. Many surveys have
shown the public has doubts about the Social Security program, with young
people, in particular, confident that they could do better by investing on
their own.

Yet even their concern is poorly informed, according to the Employee
Benefits Research Institute, a nonpartisan research organization that is
financed by companies and labor unions. The institute's own research showed
that fewer than 20 percent of workers thought that Social Security would be
their primary source of income in retirement, even though Social Security
is currently the primary income source for more than two-thirds of retirees.

"It is abundantly clear that there are a large number of Americans who are
completely unprepared to make these decisions," said Steve Blakely, the
institute's editor and communications director.

Mr. Blakely said the institute's own research on financial literacy
measures the public's understanding of economics differently from the
economic education council's survey, but shows a similarly low level of
understanding. The institute has found that fewer than 40 percent of
American adults have ever tried to live on a budget, for instance, and that
large numbers of Americans cannot tell the difference between a stock and a
bond. Even though the Social Security Administration sends all
participating workers individual annual statements, the institute found
that only 18 percent of Americans know at what age they will be eligible to
retire with full benefits.

The purpose of the National Council on Economic Education is to raise the
public's understanding of the economy. It created a basic standard for high
school level financial literacy in 1997 and conducted its first survey in
1999. The economic literacy of both students and adults has improved since
then, but only slightly.

© 2005 NY Times

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