Aloha. Thank you to Nancy Leamond for that kind introduction, and to Louis Vitt and Janet Hill for participating in this important session. I am pleased to join you all today in this international forum to discuss financial education initiatives.
Educating Americans to save and prepare for retirement continues to become more important. First, employees are more dependent on defined benefit rather than defined pension plans. Secondly, people are living longer. Finally, the reduction in employer-provided retirement health benefits demands more retirement dollars. Only 10 percent of companies are expected to offer any retirement health coverage by 2031, and 86 percent say they plan to increase what retirees pay for health insurance in the next three years. Medicare's solvency and a reckless tax policy further compound the problem and hinder the ability of the Federal government to fulfill its future entitlement obligations.
Unfortunately, people find too many reasons to postpone saving for retirement. One troublesome reason is the increasing debt burdens confronting many families that will make a comfortable retirement more difficult to achieve. As of May 31, 2005, the Federal Reserve reported that there was nearly $800 billion in revolving consumer credit outstanding in the United States, with an additional $1.3 trillion in nonrevolving consumer credit. That's more than $2 trillion in consumer debt. Substantial amounts of consumer debt will likely result in individuals having to work additional years beyond their preferred retirement age in order to pay off credit card and other consumer debt.
Another problem is that many people assume that expenses will go down in retirement, but ,frequently, that is not the case. Inflation may reduce the value of savings, and other expenses such as property taxes may be much more than anticipated.
Too many citizens are not retiring on their own terms. The Retirement Confidence Survey found that 39 percent of current retirees retired earlier than planned, due to an unexpected event, such as health problems or changes in their company, including downsizing or outsourcing of jobs. Currently there are 3 million retirees who find themselves in a precarious position because they have yet to turn 65 and are not yet eligible for Medicare coverage. Obviously, the earlier we can get people to start to prepare for retirement, the better able they will be to avoid such pitfalls.
Clearly, there is a great need for larger nest eggs and better debt management. The shift away from defined benefit to defined contribution retirement plans requires that employees be more involved in preparing for retirement. Employees must be encouraged to participate in their employer's savings plans. The matching contributions made by some employers can provide employees with an immediate return on their investment. However, a great percentage of younger employees who are not worried about retirement fail to capitalize on this benefit. Employees must fully understand the importance of planning for retirement and the significance of participating in tax-advantaged employer plans and investment options, such as Individual Retirement Accounts (IRAs).
In addition, defined contribution plans require employees to manage their investments and make important asset allocation decisions. If employees do not have a sufficient level of financial literacy they will not be able to adequately manage their retirement portfolio. Despite the need to ensure that employees have adequate resources for retirement, fewer employees are participating in employee sponsored plans and employers are sponsoring fewer plans. Among this population, participation in an employer sponsored retirement plans fell by more than 2 million from 2001 to 2002. If more employers must sponsor retirement plans and more employees participate in them, more working Americans will be better positioned to retire on their terms. More people must understand the ability of a longer time horizon to produce greater benefits from the compounding of investment returns.
Fortunately, more people are recognizing that an important component of retirement security is financial and economic literacy. We must do more to ensure that people are equipped to make informed financial decisions. Without a sufficient understanding of economics and personal finance, individuals will not be able to appropriately manage their finances, evaluate credit opportunities, and invest for long-term financial goals.
On March 17, 2005, the Senate approved my resolution, S. Res. 88, which recognized April as Financial Literacy Month. This action by the Senate is one example of the increasing focus -- by policymakers, educators, and the media -- on the importance of financial and economic education in the United States.
I began work on financial literacy initiatives in 1999, when I discovered that economic and financial literacy had not been specifically identified as a federal priority, while overseas, economic education efforts were in place. I could not understand the reason for this oversight, given the widespread lack of understanding about the need to increase savings, make decisions based on long-term concepts and tradeoffs, and take personal responsibility to learn how to wisely use and manage one's money. If our elementary and secondary schools effectively teach economics and personal finance, students can be better prepared for future challenges as business leaders, workers, heads of households, parents, and responsible citizens. A solid grounding in these subjects is essential to making sound decisions on credit, mortgages, savings, and retirement planning. The Federal government's failure to recognize the need for financial education led to research, outreach to the community, and finally, development of the Excellence in Economic Education (EEE) Act. The EEE Act focuses on our youth and was authorized in the No Child Left Behind Act. It provides resources for teacher training, evaluations, research, and other activities in K-12 education.
We are working hard to ensure that the EEE Act is maintained at $1.5 million in the appropriations process, for there is no better time than in childhood years to instill the knowledge and skills that individuals need to make good decisions throughout their lives.
I have also introduced S. 468, the College LIFE, or Literacy in Finance and Economics Act, to address financial literacy needs for the college population. Nearly half of college students have a general purpose credit card in their own name and 37 percent carry over a credit card balance from month to month. These are not comforting statistics. We must give students access to the tools that they need to make sound economic and financial decisions once they are on campus. I am working with my colleagues on both sides of the aisle to include key provisions of S. 468 in the Higher Education Act.
I have also introduced legislation to ensure that consumers receive improved, personalized, and relevant disclosures so that they may make better debt management decisions. I introduced the Credit Card Minimum Payment amendment to the Bankruptcy Reform Bill. The amendment would have required credit card companies to inform consumers how long it would take to repay their entire balance, and the total cost in interest and principal, if the consumer makes only minimum monthly payments. The amendment would also have required companies to provide consumers with the amount they could pay to eliminate outstanding balances within 36 months. Unfortunately, my amendment was defeated. However, I intend to offer it to other legislative vehicles in the future.
Another area that goes hand-in-hand with my financial literacy legislation is my Mutual Fund Transparency Act. I originally introduced this legislation in 2003, and recently re-introduced a modified version of it this Spring. This bill would bring about structural reform to the mutual fund industry and improve disclosures for mutual fund investors so that they can make better informed decisions and be made aware of conflicts of interest between brokers and mutual fund companies.
I have encouraged all my Senate colleagues to join me in these and other efforts to advance financial and economic literacy in this country. We must be committed to providing people of all ages with the financial skills and acumen to help them achieve financial independence and to make good choices when spending money and taking on additional debt. We need to improve the financial literacy of this country now, and the delivery and content of programs addressing this need should broaden and expand to students and adults alike. Our efforts need to continue so that individuals will be able to make informed decisions and be able to pursue their long-term financial goals, particularly into their golden years of retirement.
Mahalo for allowing me to share my views with you this morning.
