Inflation, Depleted Savings Dent Workers’ Confidence as Financial Literacy Remains Low

Some American workers lack an understanding of retirement plan investment options, according to new data released by the Employee Benefit Research Institute, and many do not consider their plan provider as a “go-to source” for retirement planning information and advice. 

A large portion of workers (40%) are turning to family or friends when seeking information about retirement planning, while only two in 10 turn to their workplace retirement plan provider, according to EBRI’s Retirement Confidence Survey.  

Overall, the EBRI research showed that people are more likely to use their own online research or a personal financial adviser as a source of information for retirement planning than to rely on their employer or plan provider.  

Seven out of 10 workers said they are confident they can choose the right investment options for their situation. Meanwhile, about four in 10 admit they do not understand target-date funds, and three in 10 workers do not understand managed accounts. Half said they do not understand environmental, social and governance investment options, according to EBRI.  

About four in 10 workers and two in 10 retirees also said they do not know who to go to for good financial or retirement planning advice.  

Inflation Triggers Decrease in Retirement Savings 

Additionally, with current high inflation causing people to decrease their retirement savings, the survey found that Americans’ overall confidence that they will have enough money to live comfortably throughout retirement has declined.

After surveying 2,537 Americans from January 5 through February 2—including a nearly even split of workers and retirees—64% of workers said they are confident in their retirement savings, down from 73% last year. Among retirees, 73% said they are confident, down from 77% last year.  

EBRI found that the last time there was a decline in confidence of this magnitude came during the 2008 Global Financial Crisis.  

Among those who do not feel confident, four in 10 workers and one-quarter of retirees said it is due to having little to no savings, while 29% of workers and 42% of retirees identified inflation this as the reason for their lack of confidence.  

In addition, EBRI concluded that workers’ rising debt levels are negatively impacting their ability to save for retirement. More than six in 10 workers reported that their debt is a problem, and 34% of retirees reported the same.  

TIAA’s Personal Finance Index, which serves as an annual barometer of financial literacy, found that 25% of employed adults decreased their retirement savings in 2022 because of inflation’s impact on their finances, and almost half of those who decreased their savings (12% of those employed) stopped saving for retirement completely.  

Paul Yakoboksi, Annamaria Lusardi and Andrea Hasler, authors of the TIAA report, argued that these findings are worrisome because interrupting retirement savings can have long-lasting consequences for retirement security. 

“Employees not only get behind with their regular contributions but also miss out on investment earnings, which can have a substantial impact on the total amount accumulated at retirement age, especially for young workers,” the report stated. 

Research has also shown that inertia is a major factor that prevents retirement savings contributions from being increased, and these lower contributions could persist far beyond the current high-inflationary environment, according to TIAA. 

Decreased retirement savings were most common among Hispanic workers, as 40% of this population decreased their savings, and more than half of that group stopped saving completely in response to inflation. Those figures are approximately double the levels reported by Asian American, Black and white workers. 

These findings are also consistent with research demonstrating that inflation has disproportionately impacted minority racial and ethnic groups. For example, it was found that Hispanics spend a particularly high share of earnings on transportation—specifically used for cars and motor fuel—the consumption category hit hardest by inflation in 2022. 

New data from Voya Financial also found that Black and Hispanic workers have lower plan participation rates, saving rates and average account balances compared with white and Asian American workers. However, this gap closes significantly in plans that offer automatic enrollment, Voya argued. 

Low Financial Literacy 

Low levels of financial literacy also contribute to U.S. workers’ personal finance and financial decisionmaking struggles, according to TIAA. The Personal Finance Index has found consistently that many Americans function with a poor level of financial literacy and, on average, U.S. adults correctly answered only 48% of the index’s survey questions in 2023—a figure that has consistently hovered around the 50% mark since TIAA’s initial survey in 2017. 

There has been almost no change in financial literacy levels over the past seven years, and TIAA’s reported does not expect knowledge levels of the entire adult population to change rapidly.  

U.S. adults struggled the most with comprehending risk. According to TIAA’s findings, on average, 35% of risk-related questions were answered correctly in 2023, down from the 2017 level of 39%.  

“This is problematic since uncertainty is inherent in most aspects of personal finances and financial decision making,” the report stated. “The outcomes associated with most choices are rarely known with certainty when decisions are made, so individuals should ideally be capable of making appropriate decisions in an environment of uncertainty.” 

Financial literacy levels also differ across demographic groups. TIAA found that Asian Americans and whites had roughly equal levels of financial literacy, whereas Black and Hispanic people had lower levels. Results from the survey showed that socioeconomic factors such as household income, age and education were also major factors. 

While financial literacy tends to be low across all age groups, it was found to be particularly low in Generation Z (born between 1995 through 2012), followed by Gen Y (born between 1982 through 1994). According to TIAA, stronger financial literacy among older generations could be attributed to both life cycle, as well as generational characteristics.