What the Poor Don’t Need: Financial Literacy Training

One state's plan to require people kicked off Medicaid to take a course on personal finance addresses a problem that doesn't exist.
March 7, 2018
Chalkboard with "DEBT 101" written on it.
By Matt Darling  |  Contributor
A vice president at the nonprofit behavioral design lab ideas42

Most of us would like to know more about living healthier and managing our finances. But should government require us to bone up on those subjects?

Some policymakers think so. As several states move to take advantage of new Trump administration rules allowing them to impose work requirements for determining Medicaid eligibility, Kentucky has gotten a lot of attention not only for being the first state to move to impose such requirements but also for taking the idea a step further: Residents who lose their Medicaid benefits due to the new requirements will have the chance to reclaim their health insurance more quickly if they complete courses and pass tests on health or financial literacy.

While details of the new requirements are still being worked out, state officials have suggested that the courses could include instruction not only on such health-related matters as management of weight and chronic diseases but also on the basics of personal finance, such as opening a checking account and practicing household budgeting. But at least as far as financial literacy is concerned, mandating these courses won't help Medicaid beneficiaries, or anyone for that matter.

That's mainly because financial education programs, while well-intentioned, don't noticeably improve the financial behaviors of their participants, according to a paper analyzing fully 168 studies of these courses. The few studies that do show an impact demonstrate that simply choosing to take a class is associated with better future behavior -- not that the course itself made a difference. So while we don't yet know what Kentucky's health literacy program will look like, if it's structured anything like traditional financial literacy courses it is unlikely to bolster healthy behaviors.

The rationale for policies like this one is supposedly to ensure that the funds government provides to citizens are used well. However, subsidies for the rich and for middle-class citizens generally don't come with these strings attached. We don't require beneficiaries of an estate-tax exemption or a mortgage-interest tax deduction to pass a financial literacy course, for example.

This contradiction points to an underlying belief that lower-income Americans don't know how to manage their money as well as the rich do -- when the exact opposite is true. The very nature of poverty means that the poor are often the savviest budgeters of us all. This is borne out of necessity. If you have limited income, the daily tradeoffs you face prompt you to watch your finances more closely.

People who are better off financially, on the other hand, have little need to count every penny. Indeed, some of the wealthiest among us don't even know offhand how much commonly purchased goods cost or whether they can actually afford a certain item. As the ultra-rich Lucille Bluth character put it on Arrested Development: "I mean, it's one banana, Michael. What could it cost, ten dollars?"

Sitcom wisdom aside, going through financial literacy programs actually seems to have a weaker impact on low-income participants, many of whom already know how to stick to a budget and are less likely to make financial mistakes. In one pair of studies, for example, people of different incomes were asked if they would travel 20 minutes to save $50 on a $300 tablet computer and if they would travel for the same savings if the tablet costs $1,000. People with lower incomes were consistent no matter what the price was -- they knew the value of a dollar (and the value of 20 minutes). But those with higher incomes were more likely to travel to save on the cheaper tablet than for the more expensive one. This is a financial mistake: If you value 20 minutes of your time at $50 in one case, the total price should be irrelevant.

There's no reason to believe that conditioning Medicaid on financial literacy training will help people manage their money or ensure that government dollars are well spent. The poor already know how to manage their money; perhaps it's time for policymakers in Washington and the states to catch up.