Economists say personal finance is too complex for most Americans — share easy solutions instead
Financial literacy is crucial for planning the future as people reach retirement age. But most Americans lack that, and Harvard University economist John Campbell and Imperial College London economist Tarun Ramadorai suggest that personal finance for most Americans is "broken." Talking to CBS News, the two economists gave a glimpse into their book, "Fixed: Why Personal Finance Is Broken and How to Make It Work for Everyone," sharing insights on the current state of personal finance and how to fix it.
Campbell and Ramadorai shared that despite the recent changes in the U.S. retirement system, it still "appears too complex for many people to understand." In their book, they argue that millions of Americans are unprepared for retirement and the financial strains of old age, and stronger measures are needed to make people think about their retirement planning. "We've learned that people make many mistakes, and particularly, sadly, less educated and poorer people tend to make worse mistakes," Campbell told CBS News.
In their conversation with the publication, they shared that there is a huge gap between financial literacy and the complexity of the products available in the market. They pointed out that people rarely spend time planning their finances and retirement. The economists argue that "shoves" were needed instead of "nudges" to make people plan their retirement. "We've seen lots of good examples of these nudges — for example, auto-enrollment into pension plans [401(k)]. That seems like it's a very well-functioning, effective policy until you start to look a little bit more closely at it. Research is starting to emerge that, in some cases, what happens is that the default contribution rate can actually either be too high or too low, depending on what kind of person you are," the economist said.
However, they stated that putting the onus on individuals wasn't fair and that the responsibility had to be shared across the industry. "There's a kind of characterization or a caricature of academics as, 'All you want is, you just want the government to come in and fix everything.' That's really not what we're about in this book," Ramadorai told the publication. He suggested that they were believers in the power of capitalism to produce great products at affordable prices. "But the energy of capitalism has been perverted," he added.
Campbell explained that their goal is to make personal finance shopping more like buying a painkiller, where the active ingredients and the dosage are regulated, and people don't need to think a lot about a product before picking it up. "We think personal finance, unfortunately, is a long way away from that right now. It's more like the world of unregulated medicine 120 years ago, when people were selling legitimate medicines, but they were also selling snake oil, and it was very hard for individuals to tell the difference," he argued.
When asked if regulation would stifle innovation, Ramadorai cited the example of civil aviation, where innovation at the cost of extra risk isn't encouraged. The other example shared was basic utilities, where government regulation is needed to keep the country running. "Our argument is that there are vast areas of personal finance that are just as important as any of those basic utilities. It is the plumbing that makes our financial system work," he said.
Coming to the solution, Campbell suggested the creation of a universal retirement account with a Roth structure that is opened for people as soon as they start their first job. "That would fix the problem we have at the moment — we have this immense profusion of accounts, and as people change jobs, they very often end up with multiple 401(k)s. But at the same time, people who work for small businesses or who are self-employed — maybe they open an IRA, maybe they don't — but the contribution limits are much lower, and so we have an access problem," he explained.
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