Saturday, May 06, 2006

Is Mandantory Financial Education A Solution?

Earlier in our conversation, Buddha Mouse suggested that a mandantory program of financial lessons might be implemented in school for most folks.

While I won't oppose such an idea, I think that this will not have as great an effect on poverty as she might hope becaues:
  1. To be able to save, you must have enough money to eat, pay rent, and pay for clothing. If you're making below the national poverty level, it's quite likely that you'll have trouble saving.
  2. Most people are surprisingly bad investors. Many folks I know either aren't interested in the subject of financial planning (in which case, they'll get Cs or Ds) in the class, or even when they know what the right thing to do is, they're not emotionally capable of doing it. I have a very smart and intelligent friend who can't bring himself to buy I-bonds, because the electronic product is too intangible.
  3. Financial planning is suprisingly hard! Even people like me take more than an hour to rebalance a relatively simple portfolio. If you're short on time, or don't enjoy it, you're simply not likely to do it.
I think the best chance of getting people to save is to have a national savings plan that's matched at lower to middle income levels, and professionally managed (in a balanced portfolio) in a low cost manner (similar to what federal employees get). The economies of scale by doing this nationally is huge, and the progressive savings matching will get more people to save, regardless of them knowing what they're doing. By setting up the investment plan automatically, people have a harder time making poor decisions. The fact that lower incomes are matched also means that younger workers develop the habit of saving while they are relatively early in their careers, when their investments have the most opportunity to grow.

This idea was proposed in Gene Sperling's book , and I think it has a lot of merit. The chances of it happening in our pro-wealthy Republican Congress, Senate, and White House are effectively nil. But the reason I'm pissed at Democrats as well is that not one of the forty-something senators in the Senate have had the guts to even propose something like this. If the Democrats continue not proposing and trying to get through such good ideas, they're going to keep losing elections.
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