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Education may be more effective than tax breaks for encouraging Americans to save

Requiring high school students to take a personal finance course leads them to save more later in life, according to a new study led by Stanford economist B. Douglas Bernheim.

The study follows several others in which Bernheim, the Lewis and Virginia Eaton Professor of Economics, and colleagues found evidence that retirement seminars offered by employers also prompt workers to be better savers. Americans have a low savings rate compared to citizens of many other industrialized countries, one reason why researchers are probing the subject of savings inducement.

The latest study is the first to examine the effects of secondary school education on adult financial decisions. It was co-authored by Daniel M. Garrett of Cornerstone Research and Dean M. Maki of the board of governors of the Federal Reserve System and published recently by the Stanford Center for Economic Policy Research and by the National Bureau of Economic Research.

About 2,000 Americans between the ages of 30 and 49 were surveyed by telephone in November 1995 about their savings behavior, assets and income. They were also asked about where they attended high school and if they took a personal finance or consumer education course. Between 1957 and 1985, 29 states adopted legislation mandating some form of consumer education in secondary schools, likely as an outgrowth of the consumer movement closely associated with Ralph Nader, the scholars say. The object of the courses was to equip students with practical financial decision-making skills, and the courses usually included some material on saving.

The researchers did not rely solely on the memory of those surveyed about their high school coursework. They compared the savings rates of those who went to school in states that required some form of financial education at the time to those who went to schools in states that didn't require it. They found that, on average, students who were most likely exposed to required courses had significantly higher savings later in life.

The practical coursework did not seem to increase the later savings rates of those who described their parents as frugal, but it did positively effect the savings of those who indicated they had not learned frugal behavior at home.

"The results contribute to the growing body of evidence that education may be a powerful tool for stimulating personal saving," the researchers concluded.

In an earlier study, Bernheim, Stanford graduate student Patrick Bayer and John Scholz of the University of Wisconsin-Madison found that retirement planning seminars in the workplace also increased employee savings in voluntary savings plans.

Analyzing a survey of 1,100 firms, they found that both the employee participation in and contributions to voluntary savings plans were significantly higher in the firms that offered retirement seminars. The seminars made more difference for non-highly-compensated employees.

(The definition of highly compensated employees that was used applies, roughly, to those in the top fifth of earnings. Employees or owners at the top tend to save about one percentage point more of their income than less well compensated employees.)

More frequent seminars produced more savings than less frequent ones, and the researchers did not find that written materials about savings and retirement plans were similarly effective.

In another study of households, Bernheim and Garrett found 83.5 percent of respondents participated in 401(k) savings plans if workplace education was available, compared to only 70.4 percent of respondents without access to such educational offerings.

Bernheim and his co-authors suggest that education may be more effective than tax incentives in getting Americans to save more. Research on the effects of tax incentives reaches "ambiguous conclusions," they say, while the evidence is mounting that education and promotion campaigns are effective. It has prompted the Department of Labor to launch a "national pension education program aimed at drawing the attention of American workers to the importance of taking personal responsibility for their retirement security."

The survey on the educational effects of high school courses was conducted under Bernheim's supervision as part of his annual household survey on personal saving, which is financed by Merrill Lynch, Inc. The data from employers was collected as part of the KPMG Peat Marwick Retirement Benefits Survey of 1993 and 1994.


By Kathleen O'Toole

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