Workers are increasingly responsible for meeting distant financial needs, for accumulating enough savings to support themselves in increasingly long retirements without DB pensions, for saving enough to send their children to increasingly expensive colleges, and for paying off increasingly large student loans — as well as the traditional goals of acquiring a home and paying off the mortgage before they retire.

But, workers are largely oblivious to deficits distant from day-to-day financial concerns, a study released this week by the Center for Retirement Research at Boston College shows.

The study used data collected by the FINRA Investor Education Foundation’s 2012 Financial Capability Survey. The Survey asked 25,000 Americans, “Overall, thinking of your assets, debts, and savings, how satisfied are you with your current personal financial condition?” It then collected data on household financial conditions, which the study used to assess the relationship between these financial assessments and the household’s financial conditions.

Even though the survey explicitly asked workers to assess their current financial condition, “thinking of your assets, debts, and savings,” their assessments largely reflect day-to-day conditions. Thus, significant difficulty in covering day-to-day expenses reduced satisfaction by 2.1 points on the scale from 1 to 10; heavy current debt burdens reduced satisfaction by 1.4 points; and lacking access to $2,000 by 0.7 points.

Deficits in distant concerns, by contrast, had little or no effect. Lacking medical insurance and renting reduced financial assessments 0.4 point reductions; not saving for college and having an inactive retirement plan — having 401(k) savings but not currently contributing — reduced satisfaction by 0.3 points. No other distant concern had a noticeable effect. This included having no retirement plan, having a mortgage greater than the value of one’s house, lacking life insurance and concern about repaying student loans.  

The retirement saving findings highlights the importance of salience. Workers with an inactive plan, who have retirement savings but are not currently saving, are better off than workers with no plan at all. But while an inactive plan reduces satisfaction, no plan does not. Workers with an inactive plan are aware of having a deficit. Those without a plan are not.

A lack of salience contributes to the weak relationship between distant concerns and financial assessments. Day-to-day concerns are salient. Workers are continually reminded of difficulty in covering current expenses, in making current debt payments, or the financial fragility that the inability to access to $2,000 entails. Distant concerns are largely out-of-mind.

The study found that distant concerns remain out-of-mind even when a worker’s day-to-day finances are in reasonably good shape. It found that financially literacy increases awareness of two distant deficits — not having a retirement plan and having a mortgage greater than the value of one’s house. But it found no other significant differences in the awareness of distant deficits between financially literate and non-literate workers.

The problem of present-mindedness

Given the intense and stubborn present-mindedness of subjective financial assessments, workers cannot be expected to devote much effort to addressing distant needs.

This could explain why distant needs are rarely addressed by workers acting independently. Retirement saving is largely done in employer plans where saving is easy, automatic, and incented by tax-deferrals and matching employer contributions. The same is true for medical insurance and basic life and disability insurance. Student loans and mortgages are also paid down according to contractual schedules.

But workers today face a larger and more challenging set of distant needs. Thus, the findings support the expansion of employer initiatives that raise awareness, or compensate for the lack of awareness, of distant deficits. Such initiatives range from broadcasting simple rules-of-thumb, providing quick financial check-ups with easy access to automatic saving programs, to giving all workers a retirement or even college or house down payment savings account with an adequate default contribution.

Not all employers will see this broader engagement in personal finance as their responsibility. But they are uniquely positioned to provide the initiatives employees need to secure their financial well-being.

Sass is program director, Financial Security Project at the Center for Retirement Research at Boston College. Reach him at steven.sass@bc.edu.

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