Why Do Chinese Students Know More About Money Than Americans?

A new report shows that U.S. students' fiscal smarts are falling behind—and raises questions about how to improve financial education in schools.

In a new report comparing financial literacy skills among 15-year-olds in 18 countries, U.S. students scored in the middle of the pack on basic questions about savings, bank accounts and credit/debit cards, and weighing risks and rewards in deciding how to spend their dollars.

Why does this matter? With money management the buzz phrase of post-recession America, there’s an increasing push from both the public and private sector to make sure the nation’s young people are taught the fiscal smarts to make wise decisions for themselves on everything from living within a budget to savings accounts to college loans.

This is the first time the Organization for Economic Cooperation and Development (OECD) has tested financial literacy as part of its PISA assessment, which is one of the few international benchmarks for comparing academic achievement among countries. At the lowest level of difficulty, students had to be able to identify the purpose of an invoice. In one of the more complex questions, students were asked to explain how a consumer might benefit from paying off a high-interest loan with money from another lender. (You can find some of the questions and answers here.)

China’s Shanghai province topped the OECD list with a mean score of 602—more than 100 points above the 500 mean score for the OECD countries. The U.S. students’ mean score was 492, which is considered statistically on par with the average.

The percentage of U.S. students falling short of the OECD baseline score for financial proficiency was 17.8 per cent, slightly higher than the average. Only about one in 10 U.S. students was considered a “top performer,” defined by the OECD as being able to “look ahead to solve financial problems or make the kinds of financial decisions that will be only relevant to them in the future.”

The ranking of U.S. students in the new assessment is consistent with the nation’s stagnant performance on the most recent PISA for math and reading—two skills that track closely with financial literacy. And it’s in keeping with prior findings. In a 2008 national survey by the JumpStart Coalition for Personal Financial Literacy, high school seniors gave correct responses to less than half—48.3 per cent—of the questions on the basics of finance.

“We need to improve financial literacy of all young people, and the best approach is going to be a combination of in-school, after-school and at-home learning,” Laura Levine, JumpStart Coalition’s president and CEO told me. “It’s important that we don’t pit these against each other or say it should be one or the other. It’s really about all of the above.”

To be sure, the breadth and depth of financial literacy instruction in the U.S. varies widely among states, districts and schools. And while some states have begun making it a priority, we’re a long way from a common set of comprehensive expectations for what kids should know and how that information should be taught. Twenty-seven states have legislation pending related to financial literacy education. Some states—including Florida, Georgia, and Iowa—are considering making financial literacy classes a requirement for high school graduation, while others have already done so. In Kansas, a proposed bill would offer cash bonuses to teachers who incorporate financial literacy into existing curriculum.

And how effective are such strategies in the long run? In a 2010 literature review for the RAND Corporation, researchers found that efforts to promote financial literacy–by schools, employers, credit counseling agencies or community groups—didn’t typically produce enduring positive effects. But at the same time, there is a case to be made that high-quality initiatives are a worthwhile endeavor, the researchers concluded.

“There’s a lot we don’t know about what works in financial education,” said Reid Cramer, director of the Assets Building Program at New America, a nonpartisan think tank based in Washington, D.C. “We don’t know how information translates to knowledge, and there’s real challenge to teaching people who aren’t connected to financial systems in a basic way.”

In an EWA-hosted call with education reporters on Tuesday, Michael Davidson, head of the OECD division that oversees PISA, said mandating financial literacy instruction might not even be the best answer. It’s possible that focusing on more intensive math instruction could be even more effective—a question that deserves further investigation, Davidson said.

The full OECD report is worth a careful read, although it’s important keep in mind that it’s a snapshot rather than a litmus test. (As always, correlation is not causation.) We can’t determine precisely why some countries do better than others on these assessments, although there is no shortage of food for thought. Here are a few takeaways that caught my attention:

  • U.S. students with at least one parent working in a skilled occupation did significantly better on the assessment–and scored even higher if a parent worked in a finance-related position.  This is an important reminder that familial circumstances can have a significant influence on student achievement. It also bolsters the argument that schools can fill an important gap in a student’s knowledge about financial matters, and help them bring those valuable lessons home with them to share with their families. And given that there’s plenty of evidence many American adults score poorly when it comes to financial literacy—so why should it be surprising that their children aren’t doing much better? 
  • Kids who save are more fiscally savvy. Students with bank accounts had higher financial literacy scores, but those gains disappeared once their socioeconomic status was factored into the equation. And of the 18 countries participating in the assessment, the United States had the distinction of having the widest gap between rich kids with bank accounts (70 per cent of the top quartile) and poorer kids who didn’t (32 per cent of the bottom quartile). “One of the ways to make financial education stick is to connect it to having a savings account or transactions account,” said New America’s Cramer. “Everyone, including young people, should have access to high-quality, low-cost financial products–and we should start that relationship as early as possible.” (For more on students and nest eggs, check out Dana Goldstein’s 2012 piece for Washington Monthly.)
  • Perseverance matters: As in many other countries, U.S. students who agreed with the statement “I like to solve complex problems”—as well as those who described themselves as not giving up easily when prevented with a challenge—were more likely to score well in the PISA financial literacy assessment. While PISA can’t be used to demonstrate causation, “you can definitely say there’s an association,” said the OECD’s Davidson. 

So what’s next? The purpose of PISA isn’t to motivate countries to reshape their education programs in the hopes of a higher score in the next round of assessments. Rather, Davidson said, the best scenario is one where the findings are “a piece of the jigsaw puzzle” in which policymakers scrutinize the priorities of  public education systems, and ask what they want their 15-year-old students to know.

“The name of the game of the game isn’t simply to raise your country up (in the PISA rankings),” Davidson said. “It’s to value the skills, and then see that these skills are taught within the school environment in each country.”

This post also appears at The Educated Reporter, an Atlantic partner site.