Uniquely in Peril

Elderly woman posing as a student in a high school hallway

Without Financial Education, U.S. Teens Could Struggle in Retirement

We have known for some time that American teens lag behind many other countries in financial literacy. But researchers have uncovered another pitfall. Other countries with low literacy rates offset citizens’ knowledge gaps by replacing higher rates of income through national pension systems (e.g., Social Security). But where a country like Spain covers 89 percent of a person’s working income in retirement, the American Social Security program only covers about 45 percent. Without the education to fund their own retirements, today’s teens face an uncertain future.

Using data from the 2012 Programme for International Assessment (PISA) study, which was administered to approximately 29,000 15-year-olds in 18 countries, a new NEFE-funded investigation by researchers at George Washington University links financial literacy to how much of one’s working income one can expect to receive from their national pension system (e.g., Social Security in the U.S.). American Social Security payments cover only 45 percent of workers’ former income in retirement on average, compared to countries like Spain, which covers 89 percent, and Italy, which covers 80 percent.

It is up to individuals to cover the gap between what their country provides and what they need to maintain their desired lifestyle in retirement. Workers decide how they will (or will not) cover the shortfall. Some of this gap is covered by employers’ pensions, and some must be supplemented by individual savings and investments. High financial literacy helps savers successfully reach their goals, but without the knowledge, skills and support to start a savings and investment strategy, many Americans will struggle to make up the additional 55 percent of their expenses not covered by Social Security.

A Uniquely American Problem

Researchers analyzed the PISA financial literacy data along¬side pension generosity data compiled by the Organization for Economic Cooperation and Development (OECD), PISA’s oversight agency, and discovered an alarming scenario.

In countries with higher income replacement rates, students had lower financial literacy scores. “Lower financial literacy is definitely a concern,” says Billy Hensley, Ph.D., senior director of education at NEFE, “but this is less of a threat to retirement security, since higher pensions take care of retirees.”

Students had higher financial literacy scores in countries with lower income replacement rates. “Since more of the burden falls to individuals, they have an incentive to boost their financial capability to save and invest successfully for the long term,” says Hensley.

The United States is the only country in the study with both comparatively low income replacement rates and lower financial literacy scores. Without financial education, American teens could struggle to fill that gap in retirement.

“Young Americans have to finance 30-year retirements with 40-year careers, and the math just doesn’t add up unless they have the financial intelligence to meet the shortfall with accumulated assets,” says Ted Beck, NEFE president and CEO. Referring to the United States’ income replacement rate of just 45 percent, he asks, “Could you absorb a 55 percent pay cut without any consequences?”

The Continuing Case for Financial Education

“These findings underscore the importance of financial education, early and repeatedly at school and at home,” Hensley says. “We also need to support the financial education infrastructure, such as improving teacher preparedness and promoting a coherent set of national standards for teaching personal finance in middle and high schools.”

Visit for the executive summary and final paper, Enhancing Retirement Savings with School-Based Financial Education, by research/research-projects/completed-research/defaultAnnamaria Lusardi, Ph.D., academic director of the Global Financial Literacy Excellence Center (GFLEC) and Denit Trust Chair of Economics and Accounting at George Washington University School of Business; and Carlo de Bassa Scheresberg, senior research associate at GFLEC.

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