Additional Q&A from the SSIRLive! Hidden Financial Lives Webinar, Part 2
Preliminaries: This is a continuation of a series of posts answering questions from the SSIRLive! Webinar on the Hidden Financial Lives of America’s Poor and Middle Class. You can see the first post in the series here. The responses here are my opinions on these questions — Jonathan Morduch and Rachel Schneider may have different ones.
“Do you think that financial capability services e.g. financial coaching, would be beneficial interventions to the populations that you have studied?”
In the US Financial Diaries study we don’t see any systematic effect of financial literacy on households’ behavior or situation. For instance, once we control for households’ overall income and education, households with higher financial literacy did not have higher levels of emergency savings nor did they have higher goals for emergency savings. We’ll publish more on those findings later this year.
Beyond USFD, the general evidence on financial literacy training is consistent with this — there is no measurable effect of financial literacy training on financial behaviors, even when there is an effect on financial knowledge. So I think there’s little reason to believe that traditional financial literacy programs would be beneficial.
Now, for some qualifiers. Note that I specifically referred to traditional financial literacy training. There are a number of things happening in any financial literacy or financial coaching program, the four most important being: 1) What the curriculum is, 2) How it’s being delivered, 3) Who’s getting it, and 4) When they’re getting it. Beginning with the first, it’s not surprising that traditional curricula aren’t very helpful because they generally don’t address the core challenges that households are facing. Learning how to make a budget isn’t much help if you can’t predict your income. I haven’t seen any curricula that teach some of the toughest choices, like how to choose between cashing out your IRA or running up your credit card balances when an emergency strikes and someone in your household has just lost a job. Nor, for example, how to talk to a relative who wants a loan from you — or from whom you need a loan. There are similar issues in how training is delivered, how well targeted the programs are and delivering useful information at the time that people need it — the moment they are making vital financial decisions.
That being said, there are some encouraging signs from efforts to get those four issues in alignment — just-in-time training on actual choices households face, delivered in an engaging way to the right people. So it’s not hopeless, but it is a tough hill to climb and needs to be approached that way. One key issue that deserves close attention — we don’t actually know what the “right” advice is for some of the challenges that go along with income volatility. We need to know the right answers — and those answers will likely vary a lot from household to household — before we get financial capability services right.
“What metric(s) could be used to follow people’s progress or decline in relation to volatility and its impact and to assess if efforts are helping effectively?”
I agree that metrics are an important part of the story. We need ongoing data to assess volatility and its impact and we need metrics to track progress (or lack thereof).
What those metrics should be isn’t clear. Volatility is not necessarily a bad thing. If you have the tools to cope with income volatility, it may not matter that much. Keep in mind that households at the very high end of the income spectrum tend to have a lot of month-to-month and year-to-year volatility (which doesn’t move them out of the highest income brackets). But even for lower-income households, volatility isn’t always bad. Lump sums can be very useful and income spikes can be helpful in putting together a lump sum. It’s one reason why most American households seem to prefer getting a large tax refund. Some people purposely create volatility: working extra hours to save up for a big purchase, taking a family vacation when one or more of household members don’t have paid vacation time, quitting a bad job to take a better one.
Whatever metrics we create have to take these issues into account.
That being said, managing volatility does impose a cost. The Pew data on preference for stability is a strong indicator that there is too much volatility currently for too many households. I think we’ll need to develop multi-dimensional metrics and sliding scales that take into account things like household preferences, short-term savings balances, access to high-quality, low-cost credit, and insurance.
“Have you looked at the role insurance, as removed from pure savings, can play in these contexts?”
It’s important to note that savings, credit and insurance are financial tools that all accomplish similar things in different ways — moving money from when you have it and don’t need it to when you need it and don’t have it. As you note, savings is a form of self-insurance. Credit can be thought of as another (sometimes really expensive) way to save up a lump sum.
The differences between credit, savings and insurance are really about the business model, cost and what behavior they require from us. Savings requires a lot of discipline and patience in the short-term, credit (at least continued access to credit) requires discipline in the future but little in the present, and insurance requires being able to correctly evaluate risk. Little wonder that credit is so much more popular.
Insurance absolutely has a role to play, but I often think about something an economist that studies insurance markets told me, “Life insurance is the only insurance product that has thrived without regulation requiring people to buy it or large subsidy.” In the best of circumstances, human beings have a tough time evaluating risk. I’m not sure how well anyone experiencing a lot of financial volatility could do to assess the risk of more volatility.The biggest challenge in using insurance to address issues of household financial volatility is going to be convincing people to buy it or convincing policymakers to provide it.
Another limit to insurance is that some of the biggest risks (losing a job, being hit by an economic downturn, divorce or other change in the household) are likely uninsurable via private markets because they are either too correlated within a population to spread risk or too subject to adverse selection and moral hazard. That means that savings and credit will likely always play the biggest role.