Want a Brighter Future? Teach Financial Literacy
by Brian Goebel

If we want social mobility and effective government, we need our kids to be financially literate.

Wayne’s World playing out in your house — your kids living in your basement after they have graduated from college while they try to make it big with podcasts, vote for politicians who promise more “free stuff,” and ignore their student loan payments as your taxes rise to cover their defaults — you should start advocating for additional high school curriculum reform now. Thanks to the Boomers and, to a lesser extent, Generation X, our kids are drowning in debt before they cast their first votes. In many cases, their personal financial choices as young adults will only make matters worse. Under these circumstances, focusing solely on implementing Common Core – an important curriculum reform – is a bit like throwing our drowning kids life preservers but leaving them in the water. If we really want to help them, we also need to teach them personal and public finance.">Unless you are excited by the prospect of a 21st Century Wayne’s World playing out in your house — your kids living in your basement after they have graduated from college while they try to make it big with podcasts, vote for politicians who promise more “free stuff,” and ignore their student loan payments as your taxes rise to cover their defaults — you should start advocating for additional high school curriculum reform now. Thanks to the Boomers and, to a lesser extent, Generation X, our kids are drowning in debt before they cast their first votes. In many cases, their personal financial choices as young adults will only make matters worse. Under these circumstances, focusing solely on implementing Common Core – an important curriculum reform – is a bit like throwing our drowning kids life preservers but leaving them in the water. If we really want to help them, we also need to teach them personal and public finance.

Financial Illiteracy is a huge problem. “No way,” you say, as you charge another $6 coffee and add it to the credit card balance you carried over from last booksmonth. “Way!” Consider, for example, the increasing evidence that parents and students lack the skills required to assess the likely return on investment of post-secondary education versus other career paths or one college degree versus another. This task requires the ability to reliably estimate future earnings in different fields, student loan repayment obligations, and savings behavior. It requires familiarity with inflation, interest rates, investment returns, and “present value.”

Where is any of this taught? Not in most high schools. According to Council for Economic Education, a mere 20 states require students to take a high school economics course to graduate, and only 17 require a course in financial literacy. As a result, just 43% of 12th grade students tested at or above proficient on the most recent National Assessment of Educational Progress (NAEP) economics assessment. Is it a surprise that many people who leave the workforce to obtain an associate’s or bachelor’s degree at a for-profit college “experience a decline in earnings after attendance, relative to their own earnings in years prior to attendance?” Is it any wonder that 43% of current borrowers have defaulted or are unable to make regularly scheduled payments on their student loans? Kids may not love school, but experience is a cruel teacher.

With so many people ill-equipped to make important financial decisions, it should come as no surprise that our elected officials make equally poor choices with virtually no accountability. Today, the federal government is racing toward a $20 trillion debt with an annual deficit exceeding $530 billion. We must borrow billions every year to pay the interest on our debt. This is the functional equivalent of using a new credit card to pay the interest charges on another credit card (which would be a more effective illustration of financial lunacy if we weren’t financially illiterate). Every dollar we spend servicing our debt, moreover, is one less dollar we have to spend on critical “discretionary” programs like national defense, law enforcement, environmental protection, infrastructure, and R&D. When interest rates eventually return to their historical averages, the increased cost of servicing the debt could eliminate most of the funding for these discretionary programs. Our “mandatory” programs, by contrast, are growing rapidly. Today, Social Security and Medicare – our two largest mandatory programs — account for 39% of all federal spending, and this percentage will continue to grow. Unfortunately, by 2034, Social Security will not be able to pay promised benefits.

Where is any of this taught? Not in most schools. You can take AP Government in high school, major in Government in college, and earn your JD – all with virtually no exposure to these issues. You can obtain an advanced degree in public policy and still be quite surprised when much of your end-of-year bonus is withheld and sent to the IRS. Essentially, the only way to learn about public finances is to research the issues independently and read about them in the handful of dying newspapers that still cover them.

Is it any surprise, then, that Americans do not understand public finances? In an online survey sponsored by Business Insider, only 10% of respondents correctly characterized our annual deficit as “hundreds of billions.” A majority of Americans believe the siren song that we can solve most of our spending and deficit problems by taxing the rich. However, we could double the taxes on the top 1% and not close our current budget deficit, let alone pay for new spending. The same would be true if we increased taxes on the top 5% (many of whom consider themselves middle class) by 75%. With regard to cutting spending, a majority of Americans incorrectly believe that we spend more on two discretionary programs (military spending and foreign aid) than we do on Social Security and Medicare, when the ratio is actually quite the opposite (1:2.2). And many Americans mistakenly believe that our payroll taxes are saved by the government to fund our future retirements, when the truth is that they are used to pay the benefits of today’s retirees. These polls paint a bleak picture for those who believe an informed citizenry must hold Congress and the President accountable for their taxing and spending decisions.

Thankfully, there are reform groups pressing the case for teaching economics and financial literacy, including The Council for Economic Education and JumpStart. But more must be done if we do not want to “weep for the future.” At the grassroots level, parents need to press their schools and their local school boards to teach economics and personal finance in high school. And at the State and national levels, we need leading education reform groups, such as The 74 and Students First, to press for financial literacy to become a core component of high school curricula. Otherwise, to paraphrase Wayne and Garth singing Queen’s Bohemian Rhapsody, we may soon have too many poor boys from too many poor families. That would not be “excellent!”

Brian C. Goebel is the President of Reason in Government (an organization dedicated to more reasoned, effective, and efficient government in California), Editor-in-Chief of www.2040matters.com (a public policy blog focused on repairing the American Dream for younger Americans), and President of Sentinel Holdings, LLC (a company that owns and operates professional services firms with homeland security expertise). He received his B.A. from the College of William and Mary and his J.D. from the William and Mary Law School.

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  • dduck

    Too true, and these uneducated (in finance) get to be our new leaders.
    No, Virginia, there is no free lunch, despite what Bernie says, so look into local state colleges and start saving; mom and dad won’t be there forever. 🙂

  • Kenneth Almquist

    Fact check: Goebel claims that, “we could double the taxes on the top 1% and not close our current budget deficit.”

    The most recently completed federal fiscal year is 2015, which ended on September 30, 2015. For 2015, personal income taxes raised $1,540,802 million. Goebel links to an analysis showing that in 2012, the top 1% paid 38.1% of all personal income taxes. Assuming that the ratio hasn’t changed too much, that would mean that the top 1% paid about $587,046 million. Goebel doesn’t specify whether he’s talking about the on budget deficit ($465,701 million), or the total deficit ($438,406 million), but both deficit measures are significantly smaller than our estimate of the taxes paid by the top 1%. So doubling the taxes on the top 1% actually would have resulted in a surplus in 2015.

  • Kenneth Almquist

    Brian Goebel lumps personal and public finance together, and they really should be approached separately. It is important to teach personal finance because bad financial decisions can be costly.

    The justification for teaching public finance and economics is completely different. It is to help people understand the government and let them make more informed choices in the voting booth. Goebel ignores the possibility that if schools spend more time on public finance and economics, they might end up spending less time on other topics that are even more important for voters to understand.

  • US debt makes the world go round. Personal finance really should be taught in high school. I totally agree. That being said…the debt of the US federal government is not the same game…not the same sport…barely on the same planet.