America’s Growing Financial Literacy Problem
Making major personal finance decisions can be daunting for anyone.
Whether the decision is related to paying back student debt or how to invest for the first time, the outcomes of these decisions have a long-term impact on the quality of our lives. Smart decisions can lead to achieving financial independence, while bad decisions can lead to years of being stuck in the “hole”.
Even though it’s clear that financial literacy is important, there’s a big problem: it’s actually been dropping for years in the United States.
Diagnosing the Problem
Today’s infographic was done in conjunction with Next Gen Personal Finance, a non-profit that provides a free online curriculum of personal finance courses geared to students.
The graphic paints a troubling picture of the current financial literacy situation in the country, while demonstrating why personal finance is a crucial area of study for our youth.
Here are some of the indicators that show literacy is dropping:
- The U.S. ranks 14th globally in terms of financial literacy
- With a 57% literacy, the U.S. beats Botswana (52%) but gets edged out by countries like Germany (66%) or Canada (68%)
- Only 16.4% of U.S. students are required to take a personal finance class in schools
- 76% of millennials lack basic financial knowledge
- Between 2009-2015, Americans got worse at answering five key personal finance questions posed by FINRA – a major U.S. financial regulator
And worse, this lack of knowledge is translating into anxiety and even fear.
- Four of five adults say they were never given the opportunity to learn about personal finance
- 70% of millennials are stressed and anxious about saving for retirement
- 22% of millennials feel overwhelmed about their finances
- 13% of millennials feel scared
Meanwhile, student debt is soaring to new highs – how do we put our students in a better spot to succeed?
The Road Ahead
As financial products continue to increase in complexity, the road ahead is not an easy one.
However, there is still a great case for optimism: 60% of Americans say they know someday they will need to be more financially secure – they just don’t know how to get there. This number increases to 70% for those between the ages of 18-39 years old.
This means there is actually a great thirst for financial education out there – the question is just how to best deliver that information in a compelling way.
Another good sign? The youngest generation, Gen Z, is already starting to think about money differently:
Gen Z saw millennials struggle with wage stagnation and huge college debt, so they took note and are making a conscious effort to approach money and debt differently.
– Jason Dorsey, Center for Generational Kinetics
Real World Benefits
Increased financial literacy translates into real world benefits for individuals, and to the economy as a whole.
People with strong financial skills are better at job planning and saving for retirement. Meanwhile, financial savvy investors are more likely to diversify risk, and students that take a personal finance course see up to a 5.2% increase in credit scores within two years.
Lastly, consumers that understand compound interest:
- Spend less on transaction fees
- Accrue less debt
- Incur lower interest rates on loans
- Save more money
And this is just scratching the surface of what could be possible.
Making the right financial decisions can help people meet their own personal goals, live a life of abundance, get out of debt, and become financially independent.
This infographic was originally published on the Wealth 101: A Crash Course in Personal Finance minisite, a collaboration between NGPF and Visual Capitalist
Ranked: The Best and Worst Pension Plans, by Country
As the global population ages, pension reform is more important than ever. Here’s a breakdown of how key countries rank in terms of pension plans.
Ranked: Countries with the Best and Worst Pension Plans
The global population is aging—by 2050, one in six people will be over the age of 65.
As our aging population nears retirement and gets closer to cashing in their pensions, countries need to ensure their pension systems can withstand the extra strain.
This graphic uses data from the Melbourne Mercer Global Pension Index (MMGPI) to showcase which countries are best equipped to support their older citizens, and which ones aren’t.
Each country’s pension system has been shaped by its own economic and historical context. This makes it difficult to draw precise comparisons between countries—yet there are certain universal elements that typically lead to adequate and stable support for older citizens.
MMGPI organized these universal elements into three sub-indexes:
- Adequacy: The base-level of income, as well as the design of a region’s private pension system.
- Sustainability: The state pension age, the level of advanced funding from government, and the level of government debt.
- Integrity: Regulations and governance put in place to protect plan members.
These three measures were used to rank the pension system of 37 different countries, representing over 63% of the world’s population.
Here’s how each country ranked:
The Importance of Sustainability
While all three sub-indexes are important to consider when ranking a country’s pension system, sustainability is particularly significant in the modern context. This is because our global population is increasingly skewing older, meaning an influx of people will soon be cashing in their retirement funds. As a consequence, countries need to ensure their pension systems are sustainable over the long-term.
There are several factors that affect a pension system’s sustainability, including a region’s private pension system, the state pension age, and the balance between workers and retirees.
The country with the most sustainable pension system is Denmark. Not only does the country have a strong basic pension plan—it also has a mandatory occupational scheme, which means employers are obligated by law to provide pension plans for their employees.
Adequacy versus Sustainability
Several countries scored high on adequacy but ranked low when it came to sustainability. Here’s a comparison of both measures, and how each country scored:
Ireland took first place for adequacy, but scored relatively low on the sustainability front at 27th place. This can be partly explained by Ireland’s low level of occupational coverage. The country also has a rapidly aging population, which skews the ratio of workers to retirees. By 2050, Ireland’s worker to retiree ratio is estimated to go from 5:1 to 2:1.
Similar to Ireland, Spain ranks high in adequacy but places extremely low in sustainability.
There are several possible explanations for this—while occupational pension schemes exist, they are optional and participation is low. Spain also has a low fertility rate, which means their worker-to-retiree ratio is expected to decrease.
Steps Towards a Better System
All countries have room for improvement—even the highest-ranking ones. Some general recommendations from MMGPI on how to build a better pension system include:
- Increasing the age of retirement: Helps maintain a more balanced worker-to-retiree ratio.
- Enforcing mandatory occupational schemes: Makes employers obligated to provide pension plans for their employees.
- Limiting access to benefits: Prevents people from dipping into their savings preemptively, thus preserving funds until retirement.
- Establishing strong pension assets to fund future liabilities: Ideally, these assets are more than 100% of a country’s GDP.
Pension systems across the globe are under an increasing amount of pressure. It’s time for countries to take a hard look at their pension systems to make sure they’re ready to support their aging population.
Understanding the Disconnect Between Consumers and the Stock Market
Consumer sentiment has dropped significantly since the emergence of COVID-19, but why haven’t stock markets seemed to notice?
The Disconnect Between Consumers and Stock Markets
Consumer sentiment indices are relatively accurate indicators for the outlook of an economy. They rise during periods of growth as consumers become more financially confident, and fall during recessions as consumers cut back on discretionary spending.
Since the direction of the overall economy also affects stock markets, measures of consumer sentiment have historically moved in tandem with major indices like the S&P 500. Since the COVID-19 pandemic began, however, consumers and stock markets have become noticeably disjointed from one another.
To help us understand why this may be the case, this infographic charts the University of Michigan’s Index of Consumer Sentiment against the S&P 500, before diving into potential underlying factors for their divergence.
A Tale of Two Indices
Before we compare these two indices, it’s helpful to first understand how they’re comprised.
The Index of Consumer Sentiment
The University of Michigan’s Index of Consumer Sentiment (ICS) is derived from a monthly survey of consumers that aims to get a snapshot of personal finances, business conditions, and buying conditions in the market.
The survey consists of five questions (paraphrased):
- Are you better or worse off financially compared to a year ago?
- Will you be better or worse off financially a year in the future?
- Will business conditions during the next year be good, bad, or other?
- Will business conditions over the next five years be good, bad, or other?
- Is it a good time to make large purchases such as major household appliances?
A score for each of these questions is calculated based on the percent of favorable and nonfavorable replies. The scores are then aggregated to arrive at the final index value, relative to 6.8—the 1966 base period value.
The S&P 500
The S&P 500 is a market capitalization-weighted index of the 500 largest publicly traded U.S. companies. A company’s market capitalization is calculated as its current stock price multiplied by its total number of outstanding shares.
Market caps change over time, with movements determined by daily stock price fluctuations, the issuance of new stock, or the repurchase of existing shares (also known as share buybacks).
The COVID-19 Divergence
Throughout past market cycles, these two indices have displayed some degree of correlation.
During the bull market of the ‘90s, the S&P 500 generated an astonishing 417% return, and was accompanied by a 75% increase in consumer sentiment. Critically, both indices also peaked at roughly the same time. The ICS began to decline after reaching its record high of 112.0 in January 2000, while the S&P 500 began to falter in August that same year.
Fast forwarding to 2020, we can see that these indices have responded quite differently during the pandemic so far:
|Index||Jan 2020||Feb 2020||Mar 2020||Apr 2020||May 2020||June 2020||July 17, 2020|
|S&P 500 Value||3225.5||2954.2||2584.6||2912.4||3044.3||3100.3||3224.7|
|S&P 500 YTD||-0.2%||-8.6%||-20.0%||-9.9%||-5.8%||-4.0%||-0.2%|
All figures as of month end unless otherwise specified. Source: Yahoo Finance
The ICS has not yet recovered from its initial decline beginning in March, whereas the S&P 500 has seemingly bounced back during the same time frame.
Examining the Disconnect
Why are stock markets failing to recognize the hardships that consumers are feeling? Let’s examine two central factors behind this disconnect.
Reason 1: Tech’s Dominance of the S&P 500
Recall that a company’s weight in the S&P 500 is determined by its market cap. This means that certain sectors can form a larger part of the index than others. Here’s how each sector sizes up:
|S&P 500 Sector||Index weight as of June 30, 2020 (%)|
Source: S&P Global
Based on this breakdown, we can see that the information technology (IT) sector accounts for over a quarter of the S&P 500. With a weighting of 27.5%, the sector alone is bigger than the bottom six combined (Industrials to Materials).
This inequality means the performance of the IT sector has a stronger relative impact on the index’s overall returns. Within IT, we can highlight the FAANGM subset of stocks, which include some of America’s biggest names in tech:
|Stock||Market Cap as of June 30, 2020 ($)|
|S&P 500 average||$53 billion|
Source: Yahoo Finance
These companies have grown rapidly over the past decade, and continue to perform strongly during the pandemic. If this trend continues, the S&P 500 could skew even further towards the IT sector, and become less representative of America’s overall economy.
Reason 2: The U.S. Federal Reserve
Stock prices typically reflect a company’s future earnings prospects, meaning they are influenced, to a degree, by the outlook for the broader economy.
With an ongoing pandemic and steep decline in consumer sentiment, it’s reasonable to believe that many company prospects would look bleak. This is especially true for consumer cyclicals—companies like automobile manufacturers that rely on discretionary spending.
In a somewhat controversial move, the U.S. Federal Reserve has stepped in to counter these effects by creating the Secondary Market Corporate Credit Facility (SMCCF). This facility operates two programs which ensure businesses have access to funding during the pandemic.
Corporate Bond Purchase Program
The SMCCF is currently buying corporate bonds from an index of nearly 800 companies. Of the ten largest recipients of this program, five are categorized as consumer cyclical:
|Issuer||Category||Index Weight (%)|
|Toyota Motor Credit Corp||Consumer cyclical||1.74%|
|Volkswagen Group America||Consumer cyclical||1.74%|
|Daimler Finance NA LLC||Consumer cyclical||1.72%|
|General Electric||Capital goods||1.48%|
|Ford Motor Credit Co LLC||Consumer cyclical||1.34%|
|BMW US Capital LLC||Consumer cyclical||1.25%|
This program is intended to support the flow of credit, but its announcement in June also gave stock markets a boost in confidence. With the Fed directly supporting corporations, shareholders are being shielded from risks related to declining sales and bankruptcy.
By the end of June, the SMCCF had purchased $429 million in corporate bonds.
ETF Purchase Program
The SMCCF is also authorized to purchase corporate bond ETFs, a historic first for the Fed. The facility’s five largest ETF purchases as of June 18, 2020, are detailed below:
|ETF Name||Purchase size ($)||ETF Description|
|iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD)||$1.7 billion||Tracks an index composed of USD-denominated, investment grade corporate bonds.|
|Vanguard Short-Term Corporate Bond ETF (VCSH)||$1.3 billion||Invests primarily in investment grade corporate bonds, maintaining an average maturity of 1 to 5 years.|
|Vanguard Intermediate-Term Corporate Bond ETF (VCIT)||$1.0 billion||Invests primarily in investment grade corporate bonds, maintaining an average maturity of 5 to 10 years.|
|iShares Short-Term Corporate Bond ETF (IGSB)||$608 million||Tracks an index composed of USD-denominated investment-grade corporate bonds with maturities between 1 and 5 years.|
|SPDR Barclays High Yield Bond ETF (JNK)||$412 million||Seeks to provide a diversified exposure to USD-denominated high yield corporate bonds.|
Although the SMCCF’s purchase of ETFs outsize those of corporate bonds, the Fed has signaled its intention to make direct bond purchases its primary focus going forward.
Will Markets and Consumers Reconnect Anytime Soon?
It’s hard to see the S&P 500 moving towards a more balanced sector composition in the near future. America’s big tech stocks have been resilient during the pandemic, with some even reaching new highs.
The Fed also remains committed to providing corporations with credit, thereby enabling them to “borrow” their way out of the pandemic. These commitments have propped up stock markets by reducing bankruptcy risk and potentially speeding up the economic recovery.
Consumer sentiment, on the other hand, has yet to show signs of recovery. Surveys released in early July may shed some light on why—63% of Americans believe it will take a year or more for the economy to fully recover, while 82% are hoping for an extension of COVID-19 relief programs.
With both sides moving in opposite directions, it’s possible the disconnect could grow even larger before it starts to shrink.
Technology1 month ago
The World’s Tech Giants, Ranked by Brand Value
Maps2 months ago
Animated Map: The History of U.S. Counties
Technology1 month ago
AIoT: When Artificial Intelligence Meets the Internet of Things
Energy2 months ago
Connected Workers: How Digital Transformation is Shaping Industry’s Future
Technology3 weeks ago
Visualizing the Social Media Universe in 2020
Technology3 weeks ago
Ranked: The Most Popular Websites Since 1993
Politics2 months ago
How Much Do Countries Spend on Healthcare Compared to the Military?
Markets2 months ago
Understanding the Disconnect Between Consumers and the Stock Market