The research, “Are Americans of All Ages and Income Levels Shortsighted
about their Finances?” was penned by researchers Steven A. Sass and Jorge D.
Ramos-Mercado, and is based on extensive data from the FINRA Investor Education Foundation’s 2012 State-by-State
Financial Capability Survey, which compiles the financial experiences and
outlooks of some 25,500 American adults from households at all income
and age levels.
To test whether Americans are shortsighted about their
finances, researchers measured the strength of the relationships between
households’ financial satisfaction and their day-to-day or distant financial
problems.
The analysis concludes that Americans at all ages and income
levels are shortsighted about their finances, substantially favoring short-term
measures of financial fitness over longer-term measures. The researchers even
suggest, based on the results, that Americans “on their own cannot be expected
to devote much effort to addressing distant financial problems.”
Given the significantly expanded reliance on household
saving via the defined contribution (DC) plan paradigm, the findings suggest a
need to “make it easy and automatic for households of all ages and income
levels to save enough to secure a basic level of financial well-being in
retirement,” the researchers say.
For the underlying FINRA survey, researchers asked Americans
to rate the impact of certain day-to-day problems and long-term problems on
their current feelings of financial wellness. Examples of near-term challenges
included “difficulty covering expenses,” “heavy current debt burden,” “unemployment,”
and “inability to access $2,000.” Long term problems included “no medical
insurance,” “no life insurance,” “no retirement plan access,” “no college
savings,” and “mortgage underwater.”
In all three age groups examined by the Center for Retirement Research at
Boston College, all four day-to-day problems are associated with large,
statistically significant reductions in current financial satisfaction. The
reductions are generally 1-point or more on the scale from 1 to 10, with only
one less than 0.5. Reductions associated with distant problems, by contrast,
are never greater than 1 and are greater than 0.5 in only three cases, the
research shows.
The results were similar across age groups but not totally uniform by age. For example,
among day-to-day problems, the inability to access $2,000 is associated with
much larger reductions in satisfaction at younger ages, and heavy debt burdens
are related to a greater reduction at older ages.
Among distant problems, the research finds only “not saving
for college” and “not having medical insurance” are associated with statistically
significant reductions in current satisfaction among all three age groups.
Among young workers, such reductions are also associated with concern about
repaying student loans; among middle-age workers, with not having life
insurance and having a mortgage greater than the value of one’s house; and
among workers approaching retirement, with concern about repaying student loans
and having a mortgage greater than the value of one’s house.
Boston College researchers note one surprising result is
that having no retirement plan—whether a defined benefit pension or 401(k) or individual
savings plan—has no statistically significant effect on the financial
assessments of workers in any age group, even those approaching retirement.
“While the relationship between worker assessments and
specific financial problems varies significantly by age, the incidence of
problems is much more similar across age groups,” the research concludes. “This
similarity is especially true for day-to-day problems, which are associated
with the largest reductions in financial satisfaction.”
The lack of attention to distant needs “does not mean
that people will resist efforts to nudge them in the right direction,” the research
concludes. “As evidenced by the success of auto-enrollment in dramatically
raising 401(k) participation rates, especially among young and low-income
workers, a lack of salience, rather than hyperbolic discounting, would
seem to underlie the muted relationships between [current] financial
assessments and distant deficiencies.”
The full analysis is available for download here.