We Must Give People
Basic Financial Knowledge
May 23, 2002 — Special Committee on Aging, US Senate, Washington DC
Thank you for inviting me, Senator [Larry Craig], to present my views before the Special Committee on Aging.
In addition to my written testimony, I would like to make a few points. In 1999, women drew an average monthly Social Security check of $8,364 a year versus $10,848 for men. That is a 30 percent difference, and that represents a real quality of life difference.
We cannot do much to change their former earnings, but we could pay for their prescriptions, possibly food stamps; we could help them consolidate their debt so if they have monthly payments, they could pay less; we could help them refinance their mortgages.
I think we could reach these people and tell them about programs through their Social Security monthly check, or on a website, or through a local library.
Most women in our country today work because they have to even though they are married. Their paycheck is necessary. Congress has created retirement vehicles to enable both working and nonworking spouses to have self-funding IRAs in addition to 401(k)s. But many people do not have the basic financial skills to take advantage of these programs.
Financial literacy is the key, and we must give people basic financial knowledge if they are to understand financial products which have become much more complicated today.
For example, a 45-year-old woman with $35,000 in an IRA or a 401(k), and let us assume she is going to work until she is 65 years old, which is 20 more years, sets aside $100 a month for 20 years. If she invested that in a bank at 3 percent, at 65, she would have $136,044. If she invested it in U.S. Treasuries at 5 percent, she would have at the same age $193,447. If she wanted to put it in the stock market and stocks continued to earn an average, as they have over the last 30 years, of 10 percent, she would have $332,417.
Now, there is a big difference between stocks and the first two, but Treasuries are certainly as secure as a bank deposit. So you can see that if she had the knowledge to buy Treasuries at 5 percent, she has 50 percent more money at the end of that period of time.
If a 25-year-old woman puts aside $100 a month for 40 years, and if it earns 10 percent, compounds at 10 percent, she will have $632,000 at age 65. People do not have this knowledge. It must be taught in school, and it must be made available at banks, on the website, at places of business.
I learned about the lack of knowledge that women have. The first year I had a seat on the Stock Exchange, which was 1968, I think every woman who had been widowed and left money walked through my door. I could not say I was not in, because I had a two-room office, and if you opened the door, there I was. I could see they had absolutely no knowledge. They had portfolios which had the wrong stocks in them.
Similarly, every young woman looking for work on Wall Street walked through my door, and I learned that they did not have basic knowledge to qualify themselves for jobs on Wall Street.
I did a survey of every 4-year senior women’s colleges. It was a 5-or 6-page survey, and we even counted home economics as a “Yes” — and 90 percent of the fourth-year senior women’s colleges did not have one course in personal finance. That is not right.
I learned about the lack of knowledge when I was Superintendent of Banks for the State of New York, where I served for 5 years. Besides regulating all the major foreign banks and big commercial banks and savings banks in New York, we regulated the check cashers and the licensed lenders. I can tell you in the case of the check cashers that people were using check cashers, paying an egregious amount of money, because they did not know how to use a checking account.
Similarly, licensed lenders, our credit card companies — nowhere do they state on their statements in simple, easy-to-understand language that if you meet the minimum payment that the front of the bill shows that is due, you will be paying for last night’s pizza dinner for 15 to 25 years. That is reality.
I tried to tackle this when I was President of NYWA, the New York Women’s Agenda, a coalition of 90 different women’s organizations. I took my idea to the board, and we took it to the Department of Education in New York. It has taken 3 years, and my program, which teaches kids about credit cards and checking accounts, and the teachers added taxation to it, is now being enlarged. It has been tested, and in the fall, it will include basic financial tools like different kinds of mortgages, the kinds of tools that people in the workforce today need — regular people.
We tested it in two schools and each of the five boroughs, and then we paid to have teachers from the 40 enterprise schools trained, and now it will be citywide. This must be done on a national scale.
Anybody graduating from high school and entering the workforce should know about checking accounts, should know different kinds of bank accounts; they should be able to figure out if they should buy or lease a car. I am not talking about learning how to analyze stocks, but they should know about retirement. They should know the tax advantages of owning a house or contributing to an IRA.
I am talking about real things they need in real life.
You have a bankruptcy bill in front of you, and for the first time, if people who declare personal bankruptcy have money available, they are going to have to make a partial payment for the next I believe it is 5 years. They have to be told this in easy-to-understand language when they take out a credit card.
The language on the monthly statement is like the terms of Enron. They need plain easy to understand language that clearly states that if you pay the minimum, you are going to be paying for the purchases on your card or the balance for “x’ number of years. If you want to pay it off over a period of one year, send “x” dollars — just plain, simple language.
We cannot stop people from overextending themselves, but it is our duty to get them information so they understand what they are doing. In that way, they can only blame it on themselves.
I think that the basic financial terms must be inserted, in plain, easy-to-understand language, the same way that we are going to be doing it in indentures of bonds so that investors can understand it, and in quarterly earnings reports. It is just as important.
If it is decided — and I am in favor of privatizing a portion of Social Security — I would like to suggest that individuals not be able to pick individual stocks. My reason is that people who know the least will lose the most. I would like to see them invest in a choice of index funds.
I would also recommend — and I believe in it extremely strongly — that the Government under no circumstances should vote the proxies, because Government should not control private industry. I would like to see the Government’s votes “neutralized.” If the outside voters are voting 80-20, the proxies controlled by Government or Government agencies should vote 80-20.
Thank you for inviting me to testify.
Source: “Settling for Silver in the Golden Years: The Special Challenges of Women in Retirement Planning and Security,” Hearing Before the Special Committee on Aging, US Senate, 107th Cong., 2nd Sess. (Washington DC: US Government Printing Office) 2002, pp. 29-31.