With inflation hitting a 40-year high in 2022, American workers of all ages cut their retirement savings, struggled with debt and found it difficult to make ends meet—but the findings were even more troubling for those with low levels of financial literacy.
This is according to the 7th annual Personal Finance (P-Fin) Index, a joint initiative of the TIAA Institute and the Global Financial Literacy Excellence Center (GFLEC) at the George Washington University School of Business. The P-Fin Index is an annual barometer of financial literacy and wellbeing based on a 28-question survey. In addition to the core set of questions, the 2023 survey also included a question regarding the impact of inflation on U.S. adults’ retirement saving behavior.
It found that 25% of workers cut their retirement savings because of financial pressures created by inflation—and almost half of those respondents (12%) stopped saving entirely. Hispanic Americans were impacted the most. According to the findings, they were twice as likely (24%) to stop saving altogether and 40% saved less.
“This steep of a drop—on top of a crisis where 40% of Americans already don't have enough saved for retirement—means many families will have to work even harder to achieve a secure retirement,” said Surya Kolluri, head of the TIAA Institute. “There are no simple solutions to this challenge, but we need to take a holistic approach, because health and wealth are two sides of the same coin.”
Larger Financial Challenges
The cuts in retirement savings mirror a larger financial challenge, the researchers further note. In this case, the P-Fin Index also found that:
- 30% of those surveyed often found it difficult to make ends meet in 2022, up from 24% in 2021.
- 26% were debt constrained, up from 20%.
- 39% lacked nonretirement savings sufficient to cover one month of living expenses, up from 32%.
These problems are particularly pronounced among some groups. Approximately 40% of Blacks, Hispanics, and Gen Z typically find it difficult to make ends meet and about 50% of each lack enough nonretirement savings to cover one month of living expenses. What’s more, roughly a third of Blacks, Hispanics, Gen X and Gen Y are debt constrained.
Literacy Lacking
The results also show a gender gap in financial literacy. Men correctly answered about 25% more questions than women, on average (53% compared with 43%).
And while U.S. adults correctly answered about half of the questions, which has been the norm since the project began, the share of adults who cannot correctly answer even seven of the questions has increased. Currently, one in four people cannot correctly answer more than a quarter of the questions.
The questions that have always been the most difficult for people to answer are the ones about comprehending risk. This year, slightly more than a third (35%) answered those correctly, according to the findings.
Why this matters? American workers with a very low level of financial literacy are twice as likely to have decreased their retirement savings and more than four times as likely to have stopped saving for retirement compared to their peers with very high levels of financial literacy.
Further, compared to those with a very high level of financial literacy, those with a very low level of financial literacy are:
- More than four times as likely to typically have difficulty making ends meet (44% versus 10%).
- Nearly three times as likely to be debt constrained (34% versus 12%).
- More than four times as likely to lack emergency savings sufficient to cover one month of living expenses (56% versus 13%).
- More than three times as likely to spend at least 10 hours a week coping with issues related to personal finances (32% vs 10%).
“Every year we say the findings are troubling, but this year, more than ever, we see how low levels of financial literacy in a volatile economy can lead to problems,” observed Annamaria Lusardi, University Professor at GW and GFLEC's Academic Director. “It's important we focus on helping people of all ages, races and genders, especially the ones who are the most vulnerable.”
This year’s P-Fin Index survey was completed in January 2023 by a sample of 3,503 U.S. adults. Asian, Black and Hispanic Americans were quota-sampled to ensure at least 500 respondents each, as was Gen Z.
