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Who Doesn't Have a Bank Account? - bank accounts and social security privatization
Challenge, Nov, 2000 by Thomas Hungerford
Implications for Social Security Privatization
Many observers think privatization of social security will result in a large proportion of the elderly having far fewer benefits than they would have had under the current system. The reason is that mismanagement of private investments is to some degree inevitable. The author believes that whether a family has a bank account suggests how competently they can manage their retirement. He presents his results.
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THE social security program faces a long-term financing problem because of changing demographics and the upcoming retirement of the baby boom generation. Several social security solvency proposals have been offered to deal with this problem, and many would partially or fully privatize social security by establishing individual accounts (IAs). These IAs would be set up in much the same way as IRAs or 401(k) pension accounts are, and individuals would be responsible for directing the investment of their IA assets. Some proposals would allow for several investment options, while others would limit the number of these options to a handful. Opponents of individual accounts generally cite the low levels of stock ownership as evidence that many workers are not experienced in making informed investment decisions. Proponents point to 401(k) participants as an example of how people can learn to make these decisions, and they also argue that investor education will take care of any problems.
On the one hand, Douglas Bernheim (1996) argues that "most Americans are not making prudent financial decisions." But he does present evidence that economic and financial education encourages greater savings among 401(k) plan participants. On the other hand, Zvi Bodie and Dwight Crane (1997), in an analysis of TIAA-CREF participants, find that participants' allocation of pension assets among investment choices is consistent with recommendations of expert practitioners. In other words, they are making prudent financial decisions. However, the U.S. General Accounting Office (1996) finds that 401(k) participants (and TIAA-CREF participants) tend to have more education and earn higher wages than the average worker. Consequently, pension plan participants may be in a better position to comprehend and act on financial education than the general population. Since several social security solvency proposals include establishing individual social security accounts, it would be useful to know if families are prepared t o make informed investment decisions with the money that will form the foundation of their retirement income security.
One way to judge whether or not families will be prepared to manage social security individual accounts is by examining their experiences with financial institutions. The financial institution that most people use is a bank for a checking or savings account. Therefore, the most basic proxy for experience with financial institutions is whether the family has a checking or savings account. It is difficult to believe that someone who does not have a bank account [1] would be prepared to direct the investment of his or her individual account assets without much assistance. One could imagine that the lessons from even the most basic investment primer would be lost on someone with little or no contact with a financial institution. And one important question to ask is, how much assistance could the federal government provide to 148 million workers?
Few studies have examined the prevalence of bank accounts in the United States. Two that have are papers by Arthur Kennickell, Martha Starr-McCluer, and Annika Sunden (1997) and by Erik Hurst, Ming Ching Luoh, and Frank Stafford (1998). The study by Kennickell et al. finds that in 1995 about 13 percent of U.S. families did not have a checking account. The most common reasons survey respondents gave for not having a checking account are not writing enough checks to make it worthwhile (27 percent), not liking to deal with banks (23 percent), and not having enough money (21 percent). The authors also find in their tabular analysis that the likelihood of having a checking account varies with income, age, and race, with higher-income people, older people, and whites more likely to have a bank account than others. The study by Hurst et al., which examines the dynamics or changes in wealth of American families between 1984 and 1994, notes that about 20 percent of all families do not have a checking account. They fu rther show that of those that do, those with less education and lower income, or who are black, are more likely not to have a checking account five years later.
This article differs from previous research in an important respect--the focus is on families headed by a prime-aged (thirty to sixty-four years) working person. [2] This is the group that pays into social security and would have an individual account if social security were privatized. While the vast majority of families have a bank account, a substantial proportion of economically vulnerable families do not.
