Americans typically score poorly in financial literacy tests. Yet they’re on their own when it comes to making major financial decisions, from funding their retirement to buying a home, two economists argue in a new book that critiques the personal finance system.

Take the U.S. retirement system, which has shifted away from corporate-based pensions that guaranteed income in old age toward 401(k) plans, where workers must decide how to invest their savings. 

In theory, taking control of your investment decisions should be empowering, but the current U.S. retirement system “appears too complex for many people to understand,” write Harvard University economist John Campbell and Imperial College London economist Tarun Ramadorai in “Fixed: Why Personal Finance Is Broken and How to Make It Work for Everyone,” published by Princeton University Press. 

Despite some recent changes in how personal finance is practiced in the U.S., such as automatic enrollment in 401(k)s that were inspired by behavioral economist Richard Thaler’s research about “nudges” — small changes that can steer people to make positive financial decisions — millions of Americans remain woefully unprepared to weather the financial strains of old age. 

Stronger medicine is needed, Campbell and Ramadorai say. Rather than a nudge, they call for a combination of regulatory and industry changes designed to overhaul the country’s approach to personal finance — a broader shift they describe as a “shove.”

“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.

Their book proposes a “starter kit” of personal finance options, such as retirement accounts that automatically enroll people when they start their first job and stay with them throughout their careers, along with savings accounts that pay interest at the same rate and carry clear, transparent fees.

CBS News spoke with Campbell and Ramdorai about their new book. It has been edited for length and clarity.

CBS News: You write that most Americans are financially illiterate, according to one basic assessment. Yet you say that introducing personal finance classes in high school isn’t the solution. Why?

Campbell: A simple way to put it is that you have a race between financial literacy and the complexity of the products people are offered, and the decisions they’re asked to make. And complexity has been winning the race. 

Yes, young people in high school do have to make some big decisions — taking on student debt, going to college. They may also get a credit card, and then they have to manage their credit score. But there are a lot of other decisions they won’t make until much later in life. 

It’s as if we were trying to teach people to drive by just having the classroom component of driver’s ed, without putting the kids behind the wheel. 

Ramadorai: All of us are also consumers in the personal finance system, and if you ask me what fraction of my daily time I spend thinking about my own personal finance situation, it’s probably fairly small. But the financial sector is entirely focused — especially those on the personal finance side — on trying to get this right. So there’s a sort of uneven competition between me, however educated I may be, and the financial sector, who is doing this on an industrial scale. 

For us to say, “Oh, well, you know, if only you had taken the time and trouble to be educated, you wouldn’t be in the situation you’re in right now,” that seems a bit glib. We’re proposing not just putting all of the burden of responsibility on individuals.

You advocate for “shoves” instead of “nudges” to ensure people are on the proper financial path. Can you elaborate?

Ramadorai: We’ve seen lots of good examples of these nudges — for example, auto-enrollment into pension plans. 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.

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.

What we’re trying to say is that we believe very strongly in the power of capitalism to produce products that are extremely high quality and are delivered at very low prices. But the energy of capitalism has been perverted.

Campbell: We’d like to make personal finance shopping more like buying a painkiller when you have a headache. You know, you walk into the pharmacy, you go to the shelf. There’s ibuprofen, there’s Advil, there’s the generic — it’s all on the same shelf. The active ingredient is the same, the dosage is the same, and there’s a little label on the shelf that shows you the price per unit.

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.

You’re suggesting that personal finance should be more tightly regulated. Critics of that idea might argue that this would chill innovation in personal finance. What’s your view?

Ramadorai: There are areas where even the most laissez-faire among us would agree that there’s a role for government intervention. Think about civil aviation.

Civil aviation transports very large numbers of people across vast distances at a relatively low cost, and what we don’t necessarily want is for people to come in and innovate in that space in a way that introduces risks, because we’re super averse to the fact that we don’t want these things falling out of the sky. 

The other one, of course, is basic utilities. You want the lights to be on — electricity companies are regulated in a particular way, there’s piping that goes to houses for running water. We think that there’s a strong role for government to play in having regulation in those areas.

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. 

Campbell: We instead propose a forward-looking, design-focused approach to regulation, where we ask the regulators to get very specific about what a basic financial product should look like. We call these “starter kit products.” They can offer a wide range of products. And the starter kit product should be designed so that it is simple, safe, cheap and easy.

If you could redesign how personal finance works in the U.S. from the ground up, what would be the first feature you would build in?

Campbell: Number one, I would create a universal retirement account. I would give it a Roth structure that is open for people, automatically upon the date of first employment, and then you can carry it with you across all jobs that you have subsequently.

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.

Ramadorai: Right now in the United States, there’s a lock-in problem [with mortgages], which is that interest rates have gone up so high that it’s compromising mobility for most people in the U.S. So people are sitting on 2% mortgages, and they’re absolutely reluctant to move, even if there’s a great job opportunity somewhere else, because they would have to refinance into a much higher rate. 

There’s a feature of mortgage markets that exists in other places, which is called portability, where you simply take your old mortgage with you to the new place — you then get the lender to reassess the collateral on the new place, and then you’re able to take your mortgage with you. That increases mobility and keeps the labor market functioning well. 

You could also have a different feature, which is called assumability, where the buyer of your house actually is able to take on your cheap mortgage, assuming that they pass the appropriate credit checks and so on. 

Both of those features, portability and assumability, would be really good additions to the U.S. mortgage market.

Edited by

Alain Sherter

More from CBS News