“Financially Illiterate” Boomers May Go Bust In Retirement

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As the debate heats up about reforming Medicare and Social Security — possibly even privatizing those programs to some degree — a majority of America’s “baby boomers” lack the knowledge and confidence to make financial choices for their retirement, a School of Social Work study has found. And when it comes to the intricacies of financing health care during retirement, the boomers know even less. The study was carried out by Dr. Steven Devlin, acting director of the school’s Boettner Center for Financial Gerontology, which studies the relationships between aging and financial well-being; and Dr. Neal Cutler, director of the school’s Financial Literacy 2000 project. The two warn that this lack of “financial literacy” could have serious consequences for the more than 75 million boomers, the oldest of whom turned 51 this year.

In early January, a special advisory panel urged President Clinton and Congress to act quickly on changes in Social Security, which faces a long-term financial crisis. Two of the three options in the Social Security Advisory Council’s report last month recommend the establishment of individual accounts or personal-security accounts that would allow individuals to invest a portion of their social-security payroll taxes in bonds or stocks.

“There’s no doubt that with the Social Security Advisory Council’s [actions], there will be and has to be fundamental changes in financing Social Security,” says Devlin, but he questions whether boomers and other pre-retirees are prepared to deal with the increasing responsibility being given to them as a result of changes in public policies and private pension systems. “Our study found that people do not have confidence in their abilities to make investment decisions,” he notes, “and they overestimate their knowledge.”

In the study — the first of several dealing with retirement issues in the Financial Literacy 2000 project — about 1,000 adults nationwide were questioned by a private polling company on a variety of topics, including financial literacy. There were questions about pensions, mutual funds, IRAs, retirement plans, and Medicare and Medicaid.

Two disturbing findings emerged. The first was that only a third of the respondents felt confident about making mutual-fund decisions; on the whole, people were much more likely to be confident buying televisions and cars than purchasing financial products, despite the growing extent to which pensions and IRAs are invested in mutual funds. What’s more, 49 percent of those who said they were fairly or very knowledgeable about the financial aspects of retirement were, in fact, not knowledgeable.

“Retirement is not an event; it’s a process,” says Cutler, a researcher who has a background in political science and economics. “It’s not something that begins and ends at sixty-five.”

Unlike their parents, whose financial lessons were learned in the Depression, boomers have enjoyed a relatively long period of financial stability and opportunity, says Devlin, whose background is in psychology. Many of them never thought about having to plan for retirement. Also complicating the picture, he adds, is that people are living longer. Most surveyed knew even less about retirement health-care issues such as Medicaid, long-term care, and nursing-home expenses than they did about other financial areas.

Cutler and Devlin also point to the huge change in the funding of retirement programs. As recently as 30 years ago, most Americans retired on pensions provided by employers. Now, most workers have to provide their own retirement programs, or at least contribute to them, and they need to make choices based on knowledge they don’t have.

In December, the University hosted a US Administration on Aging conference that sought to find ways to help people prepare for retirement. “We found that [increasing knowledge] has to be practical,” says Devlin. “We need to educate people about how they’re spending and saving money, teach them about very basic control of things like [ATM] cards, credit cards, and out-of-pocket expenses. Only after we have completed those tasks can we begin to teach individuals how to save for retirement.”

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