Americans of all ages are failing financial literacy

Experience can be the best teacher in other areas of life, but not when it comes to investing in retirement.

In fact, according to a just-published study, experience matters surprisingly little. When it comes to a working knowledge of finance, those with decades more experience are only slightly more literate than those in their twenties. Those with the most experience are still able to answer just half a dozen basic financial literacy questions.

It is the finding of the new study from the TIAA Institute and the Global Financial Literacy Excellence Center (GFLEC) at George Washington University. The authors of the study are Paul Yakoboski, senior economist at the TIAA Institute; Annamaria Lusardi, Professor of Economics and Accounting at GWU and Founder and Director of GFLEC; and Andrea Hasler, professor of financial literacy at GFLEC.

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The survey they conducted this year marks the sixth consecutive year that researchers have measured the financial literacy of American adults. They did this by sending respondents a detailed survey with 28 questions testing their practical knowledge of common financial situations – on issues ranging from saving, investing and borrowing to insurance and understanding risks. The researchers distilled the answers into a single index, which they call the P-Fin index, which reflects the average percentage of questions answered correctly.

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The latest P-Fin index is 50%, which means that on average, American adults were only able to correctly answer 50% of the questions on the index. The P-Fin index has remained remarkably stable since 2017, when it was 49%. It reached 52% in 2020. In an interview, Professor Hasler said that these variations in the annual values ​​of the P-Fin index are not statistically significant, which means that the average level of financial literacy today is indistinguishable from where it stood in 2017.

Is it really true that our financial literacy has not improved over the past six years?

The experience of a bad teacher

While this depressing result hints at the poor work of experience in teaching financial literacy, another of the researchers’ findings further reinforces this conclusion. By calculating the average values ​​of the P-Fin index of each generation, they found that the oldest adults did only slightly better than the youngest.

These results are summarized in the attached table. On average, those in Gen Z had P-Fin index values ​​of 42%. This number increases with each older generation, but for the oldest generation it is still only 54%. Those with the most experience were still unable to answer nearly half of the financial literacy questions.

In other words, a lifetime of learning from financial missteps increases the number of correct test answers by just three, on average, from 12 to 15. And note that even if the oldest generation was able to answer all 28 financial literacy questions, it’s still unclear how much of a difference it would make to their financial security in retirement. It’s because they needed that literacy earlier in their careers.

If experience is such a poor and inadequate teacher, what is the solution?

Professor Hasler says there is ‘no way around financial education‘. Indeed, she and her co-researchers view their findings as a loud and clear “call to action.”

Understanding risk and uncertainty

The need for financial education is particularly acute when it comes to properly assessing risk and uncertainty, she added. Such an understanding is essential to making sound decisions that will affect your lifelong financial security, and especially your retirement. But the researchers found that not only was this the area in which the average American adult had the least financial literacy, but that their literacy had declined in recent years.

In the 2017 P-Fin Index survey, American adults on average correctly answered only 39% of questions related to understanding risk. In this latest survey, it had fallen to 36% – a statistically significant drop, Prof Hasler said.

(The survey questions are proprietary, but at the end of this column I reproduce a question of risk and uncertainty that the authors included in the 2021 survey. I’m sure all readers of this column will get the correct answer.)

Although the researchers did not collect data on what might have caused this drop in already low financial literacy in terms of risk and uncertainty, I suspect that a big culprit was the strength of financial markets following of the COVID-19 pandemic. It would hardly have been surprising if this pandemic and the associated economic lockdowns would send the stock market into a prolonged and punishing bear market. Yet far from causing this, the stock market experienced one of its strongest market rises in history.

No wonder investors are more confused than ever about risk!

The bottom line? Find out. Consult a qualified financial planner if necessary. Suppose you don’t know all the answers, because you probably don’t know them.

Example of a risk and uncertainty question posed by the P-Fin index survey

Which of the following statements indicates the highest probability of contracting a particular disease?

  • There is a one in twenty chance of contracting the disease
  • 2% of the population will contract the disease
  • 25 out of 1,000 people will contract the disease
  • I do not know

The answer, of course, is the first option. Yet, according to the researchers, only 28% of respondents got it right. It’s sobering: if we fail to answer this simple question correctly, it’s hard to imagine how we can make sound, wise financial decisions that impact our lifelong financial security.

Mark Hulbert is a regular MarketWatch contributor. His Hulbert Ratings tracks investment newsletters that pay a fixed fee to be audited. He can be contacted at

Sarah J. Greer