FROM THE OFFICE OF PUBLIC AFFAIRS

I. Introduction

It is a pleasure to be here with you today. I would like to begin by thanking our hosts, President McTeer of the Dallas Federal Reserve Bank, and Wayne Hast, the Director of Economic Education at FRB Dallas. This conference is yet more evidence of your commitment to the important mission of improving the economic and financial proficiency of our young people. It can hardly be an accident that four out of the last five National Champion teams in the annual Fed Challenge - including this year's champion team - have come from Texas.

David Ramsour and the Texas Council on Economic Education also deserve great credit for their dedication and hard work in this area, and particularly for their role in facilitating this Conference.

Today, I would like to spend a few minutes putting the question of youth financial literacy in a broader context, touching specifically on the following questions:

• Why it is critically important that we redouble our efforts to help families improve the management of their personal finances;
• Why part of that effort ought to be directed toward our nation's youth;
• What one economist hopes a financially proficient graduating senior would understand about personal finances;
• What kind of a report card our kids would receive today on their financial proficiency; and finally,
• What efforts are currently under way outside the classroom that could complement your efforts as educators inside the classroom in furthering the financial training of your students.

Treasury Secretary Summers has set as one of his top priorities that we should work to improve the practice of personal finance in America today. A few sobering facts illustrate why:

• Nearly one in ten American households have no checking account, no saving account, and no place where they could establish a regular saving program. And among minority households, the fraction of so-called "unbanked" households is closer to one in four.
• Only about two-thirds of eligible workers choose to participate in the retirement saving plan sponsored by their employers, even when their employers turbo-charge the plan with a match on employee contributions.
• This year, ten years into a record-breaking economic expansion, we are on track toward having roughly 1.2 million personal bankruptcies declared in the United States. If the national average applies to this audience, that would mean that 2 of you will have declared bankruptcy before the year is out.

Clearly, we have a lot of work to do.

But why is this issue a national priority, and a priority for the Treasury Department as well as many other Federal agencies? Perhaps the most important reason is that greater financial proficiency very likely would translate into greater national saving. And increasing saving deserves a prominent place on our list of national priorities, because boosting national saving is the surest method we know of for boosting our standard of living.

Moreover, families understand that, when times are good, they should save even more than normal. The same principle applies for the nation as a whole. Yet with the unemployment rate at a 30-year low and the return to investment apparently unusually high, our national saving rate last year was only a little above its average over the past 20 years, and lower than it was in any year between 1950 and 1980, despite the fact that we ran the largest Federal surplus ever.

So at the macro level, increasing saving is a national imperative. But at the micro level, it is more important than ever that individual families increase their saving, for at least two reasons:

• First, because we face the happy prospect of financing a longer period of retirement than ever before. In 1935, when the Social Security system was being established, the average person retiring at age 65 could expect to live about another 13 years. Today, partly because we are retiring earlier and partly because we are living longer, the average person leaving the workforce will spend about half again as much time in retirement.
• Second, because we have an even greater responsibility to save for our children's education. In the New Economy, as Alan Greenspan has noted, a worker's value to an employer is more likely to reflect how much he or she knows than how much he or she can lift. If knowledge and education are more important than ever before, then it is correspondingly more important that we save for our children's education.

If there is a national imperative that we improve our financial proficiency generally, what is the rationale for focusing part of our efforts on youth in particular?

• First, children have never had more money of their own, and have never had more influence over the spending decisions of their families. Children between the ages of four and twelve directly influence an estimated $190 billion in purchases, and teenagers spend another $140 billion of their own and their parents' money. With spending power of that magnitude, kids will inevitably become the targets of enormous marketing pressures. They need to be equipped to deal with those pressures.
• Second, habits that are ingrained early on tend to be habits that are kept for a lifetime. One particularly compelling study by Bernheim, Garrett, and Maki, examined the long-term influence of high-school financial education courses. Even 15 to 20 years later, individuals who had taken such courses were still saving at significantly higher rates, and had accumulated significantly more wealth. What you are doing in the classroom today truly can have long-lasting effects.

IV. What should a financially proficient high-school senior know?

If we are to mount an effort to improve the practice of personal finance in America today, and if a part of that effort is to be directed toward kids, then what should our objectives be? In particular, what should it mean to say that a young person is financially proficient?

There are many people in this room and elsewhere who have devoted enormous amounts of time and energy to the task of defining what a child should know at each step of his or her educational development. Rather than presuming to second-guess that good work, let me simply offer one economist's perspective, in the form of my own list of the top three greatest concepts in personal finance. Let me emphasize: while I will promote my personal list with conviction, it is just exactly that - my own personal list.

• First, the concept of a budget constraint. Every graduating senior should understand that resources are finite, and accordingly that choices have to be made. A dollar spent on something today necessarily means either that a dollar less is available for spending on other items, or that a dollar less is available for saving for a better tomorrow.
• Second, the concept of present value. Every graduating senior should understand that a dollar today is worth more than a dollar in the future. This is the fundamental reason why the time to get started on retirement saving is now, regardless of how old you are. Every day of delay is a day in which the power of compound interest is lost.
• Third, the concept of risk. Every graduating senior should understand that the financial market is a very uncertain place. You could make more money than you expect, but you also might lose more than you expect. If something sounds too good to be true, it probably is. Diversification is a good way to reduce risk, but diversification cannot eliminate risk.

The challenge, as you know far better than I do, is to make these concepts tangible and real in the lives of your students. But that's where you come in - filling the crucial role of bringing these ideas to life for your students, and showing them how they apply in their everyday living.

Unfortunately, an abundance of evidence indicates that our children are not yet making the financial grade. For example:

• One survey of kids, the 1999 Youth and Money Survey, sponsored by the American Savings Education Council, the Employee Benefit Research Institute, and Mathew Greenwald & Associates, Inc., found that only about half of students between the ages of 16 and 22 feel that saving money is a very important goal, and only about half are saving regularly.
• A different survey conducted earlier this year on behalf of the Jump$tart Coalition suggests that the level of financial proficiency among high-school seniors actually declined a bit during the past three years. Nearly half of the students surveyed this year knew that retirement income paid by a company is called a pension, but 30 percent thought it was called Social Security. Only about a quarter picked stocks as likely to offer the highest return over the long term, while nearly three-fourths said a savings bond or a savings account would offer the best return.
• About two-thirds of our college students have at least one credit card, and many students have as many as 5 or 6. While most are responsible users of credit, about a fifth run balances averaging more than $1,000, and only 18 percent pay their balances in full each month.

In the face of that sobering reality, the good news is that there is a tremendous amount of exciting and creative effort being directed at the objective of reaching our children with a message of personal financial responsibility and proficiency.

• In an effort to help coalesce some of that effort around common goals and objectives, and to give the overall undertaking maximum visibility, the Treasury Department has been pleased to participate in the launch of a new organization called the National Partners for Financial Empowerment, or NPFE. Treasury Secretary Summers announced this effort in April as a collaborative undertaking of groups dedicated to helping improve personal finance skills. The objective of the NPFE is to bolster and support the work of its participating organizations in promoting the importance of personal financial management to all Americans.
• Working with a number of our partners in the NPFE, we are in the process of helping to form a Task Force that will focus specifically on the issue of improving the financial proficiency of our youth. We believe that the potential for positive impact is enormous, and I hope and expect that at some date not too far in the future, the Youth Task Force will begin to make a material contribution to your effort to teach kids about personal finances.

The very purpose of this conference is to present to you a wide range of materials that you might consider using in your classrooms. And without any doubt, formal education in the classroom will have to be part of the solution.

But you should know that there is also an enormous amount of energy being applied to the question of what can be done outside the classroom as well. Much of this could usefully reinforce the basic lessons you are teaching in the classroom. To illustrate the wonderful range of activity, I would like to highlight a few of these efforts, recognizing that this will necessarily omit a large number of other very worthy endeavors. For example:

• The Girl Scouts of the USA incorporate financial management skills in many of their activities for all age groups. Girl Scouts create a budget for their troop, figure out how to use troop dues for various projects and activities, and set goals for their annual cookie sale. In addition, various badge activities focus on specific financial skills such as personal budgeting and business management. And a book called "Money Smarts," produced for the Girl Scouts by the National Endowment for Financial Education, encourages Girl Scouts to develop lifelong skills in personal finance, such as creating a budget, starting a business, and exploring the stock market.
• The Texas 4-H clubs offer programs to teach wise consumer decision-making about the purchase of various goods and services, including financial services. They also sponsor a consumer decision-making contest, in which participants are given a situation and must decide which of several products will best meet their needs and why.
• Save for America is a school-based savings program sponsored by banks and run by adult volunteers. Once a week - either before school or during lunch - students can bring their money to school to make a deposit. Adult volunteers enter these deposits via the Internet and give each student a receipt recording his or her deposit. The program also includes a video that highlights the importance of saving, and discusses the mechanics of saving. Since 1982, student deposits have totaled more than $46 million. You can find out more about this program at the Save for America website, http://www.saveforamerica.org.

Promoting financial proficiency and increasing saving are critical for the well-being of our nation and for the personal financial security of so many American families.

Youth financial education is crucial to our future. We know that educating youth makes a difference to their saving behavior, even in today's culture. And we must make a strong effort to make this difference.

We believe that with a concerted effort, involving many different participants, we can make a difference. You, and all who teach and lead our youth are crucial to this undertaking. Let's work together to make sure our youth get the message and the tools they need to operate responsibly in the financial marketplace, and to put their financial futures on a secure footing.