Poor financial literacy makes ‘the weak subsidize the rich’

The numbers were stark. Of all bank account holders in Israel, 52 percent went into overdraft last year, half of them remaining in the red on a regular basis. Not counting mortgages, half the public was in debt of one sort or another.

Fully 20% of them were late in their bill payments, and many said they would not be able to deal with an unexpected one-time cost of NIS 8,000.

More than simply a snapshot of poor financial planning, the data paints a picture of a public that lacks basic financial literacy, a problem experts worry can have implications for the broader economy.

“Each and every one of us to have vast personal responsibility, which can affect the entire economy,” said Oded Sarig, the director of capital market, insurance and savings department at the Finance Ministry.

Speaking at a financial literacy forum outside Jerusalem on Sunday, Sarig said that the last financial crisis demonstrated how “lack of financial literacy contributes to global problems, like the real estate bubbles in the US and Europe.” One aspect of the housing bubble that led to the 2008 crises arose from banks giving huge mortgages to “sub-prime” borrowers, many of whom did not realize they could not afford the homes.

Without enough regulation to safeguard those who lack the proper tools to make basic financial decisions, banks and other financial institutions can ultimately misdirect the nation’s resources, lining their pockets instead of putting funds toward prosperity.

“What’s happening today is that the weak ones are subsidizing the rich,” said Zvi Stepak, chairman of Meitav Investments. “There are many that are very happy for the public to remain ignorant.”

Uriel Lederberg, whose nonprofit organization Pa’amonim helps families in financial difficulty achieve economic independence, lays out the challenges.

“A central problem is that people don’t plan anything ahead, either for the short-run or the long-run,” he said. “We see that many of the bad decisions people made in the past, they made because they didn’t know better.”

Many Israelis live beyond their means, he continued, and the deficit of knowledge on how banks, high-interest loans, overdraft rates and mortgages work put people in financially precarious situations.

“Everyone knows the expression ‘preventative medicine,’” he said, drawing an analogy to inexpensive medical measures taken to prevent people from developing more serious – and costly – illnesses. “But we don’t know the expression ‘preventative welfare.’” People don’t need to learn how to make huge profits or play the stock market, but simply how not to make big mistakes by avoiding high-interest debt, spotting predatory lenders, building up moderate savings and keeping their money safe.

Lederberg recommends putting together infrastructure to educate people throughout life about the types of financial decisions they will have to make, starting in school, the army, the work place and extending to newlyweds and new retirees.

On that front, there is some good news. Early financial literacy programs have been put in place in second through fourth grades and in 10th grade, according to Ofra Meisels, who heads pedagogical affairs at the Ministry of Education.

A strategic plan laid out by the Finance Ministry in October seeks to target specific groups it said tend to lack financial literacy, such as low-income earners, the ultra- Orthodox, new immigrants and women. Its strategy includes offering online tools, providing accessible information at financial institutions and creating in-school programs.

Simplifying the tax code to help people take advantage of myriad benefits would also help, added Sarig. But that may not be enough.

MK Faina Kirshenbaum, of Likud-Beytenu, said she wants to see the creation of a government body to promote financial advice. “I want to see two things: more education, and the advent of personal financial advisors,” she said, saying that people would rely on them for financial advice the way they do on doctors for medical advice.

Eugene Kandel, who heads the National Economic Council, said that even if such a organization existed, early education remains key.

Turning the medical metaphor to a dental one, he said: “Every kid knows to brush their teeth and to go see a doctor when something hurts. In the financial field we don’t know these things. If you give everyone a toothbrush but don’t teach them how to use it, we’ll have a population with rotten teeth. Nobody will even produce toothbrushes to sell if the public doesn’t know to buy them.”

In other words, education is necessary to create public demand for financial advisers.

Sarig said educating the public for financial literacy won’t just help families stay out of trouble, but will help boost the overall economy. Research shows that high financial literacy also creates more competitive and deeper financial markets.

“And the deeper financial markets are,” he said, “the more robust the economy is.”