While not denying that personal financial planning can be useful, Helaine Olen emphasizes its shortcomings and its dangers. In a society where fewer jobs offer pension benefits and realistic prospects for upward mobility, personal saving and investment cannot provide economic security for enough people. Moreover, aggressive marketing and exaggerated claims by the financial industry are part of the problem. Financial institutions and their agents too often take advantage of people’s financial fears, economic insecurity and lack of information to steer them to financial products that profit the seller more than they help the buyer.
That being the case, one might expect Olen to support efforts to improve Americans’ financial literacy. This solution appeals both to liberals who want to empower people and conservatives who want them to take more financial responsibility. High schools in 25 states now require some form of financial education, and 13 require a semester-long personal finance class. So far the results are not encouraging: “By almost every available measure, the financial literacy of the American public has remained dismal in the almost two decades since the movement began.” Maybe one semester in high school isn’t enough. To be effective, finance might have to be as integral a part of education as the learning of second languages is in some countries (my analogy, not Olen’s). But Olen sees a deeper reason why financial education is ineffective: “The financial literacy movement…is led by the very people who have the most to gain by society’s continued financial ignorance: the financial services sector.” Financial services companies sponsor many of the financial literacy programs and have a hand in developing and selecting materials for them. Creators of the materials often pitch them not directly to the schools, who often lack money to spend on them, but to financial firms seeking to generate interest in their products on the part of a new generation of consumers. Protecting consumers against financial products and practices that serve them poorly is unlikely to be a focus of the materials.
Another reason why education and advice may not have much impact on people’s financial behavior or economic condition is that they have deep-seated psychological dispositions that interfere with rational decision-making. Just as some people have learned to associate food with all kinds of good stuff (food = love) to the point that they overeat, some people have such positive associations surrounding money that they habitually overspend. So people don’t just need financial literacy, they need financial therapy, another wonderful product to sell to people with money problems. Once again, Olen acknowledges that this can work for some people–especially those who can afford a personal financial coach or therapist–but it can hardly be a cost-effective solution to widespread economic insecurity. Here Olen cleverly turns the popular food analogy around. Yes, some individuals have food hangups, but that won’t explain why the number of obese people has doubled since 1980. A corollary of the widening income gap is a widening nutrition gap, with expensive fruits and vegetables for the affluent and cheap but low-nutrition/high-calorie food for the poor. Similarly, the gap has been widening between vastly different financial behaviors: more investment and wealth accumulation by the affluent, but more cheap WalMart goods and easy subprime credit for the poor. Those who deplore lifestyles centered around borrowing and spending rather than saving and investing should see them as more than just a manifestation of personal pathology.
What Olen is trying to do with the whole book is shift the national conversation from personal finance to social financial conditions:
The financial therapists were right. We needed to talk about our money. But they were wrong too, because to speak about our money solely in a personal sense is to miss the nature of the problem. We needed to discuss our money collectively because our financial lives were not falling apart one by one. We were–and are–going down together, but most of us just didn’t realize it.
The book is rather thin on solutions, perhaps because the best solutions would require sweeping economic changes like a new expansion of the middle class. (Some reviewers have said that she should give more personal financial advice of her own, but they seem to have missed the point of the book.) She does mention several social reforms relating directly to personal finance:
- More vigorous consumer protection: Hopefully the new Consumer Financial Protection Bureau will help there.
- Broader application of the fiduciary standard: The requirement that financial recommendations be based on the best interests of the client should apply to those who sell securities and those who manage retirement accounts.
- A national pension system to replace 401(k)s and similar company plans: Benefits could then be guaranteed instead of dependent on individual investment success. Although it seems radical, I would say it’s no more radical than a single-payer system for health insurance, which is more common in the world than this country’s reliance on private insurance.
If the economy continues to have a strong recovery, and if today’s retirement accounts prove sufficient for most people’s economic security, then interest in such reforms may wane. But if Olen is right when she refers to “The Coming Retirement Train Wreck” (Ch. 4’s subtitle), then the book may contribute to a rethinking of the current American approach to financial progress. Maybe in a few years we will look back on recent decades as a time when we went a little crazy with the notion of do-it-yourself financial success.