Economic Ignorance Fact Of The Day

A display showing the German Stock Market Index DAX is seen at the stock exchange in Frankfurt, Germany, on February 12, 2013. AFP PHOTO / DANIEL ROLAND

Photo by DANIEL ROLAND/AFP/Getty Images

If you want to know why having everyone save for their own retirement through tax-subsidized 401(k) accounts has not left people in a great situation, then read no further:

Here is a test. Suppose you had $100 in a savings account that paid an interest rate of 2% a year. If you leave the money in the account, how much would you have accumulated after five years: more than $102, exactly $102, or less than $102?

This test might seem a little simple for readers of The Economist. But a survey found that only half of Americans aged over 50 gave the correct answer. If so many people are mathematically challenged, it is hardly surprising that they struggle to deal with the small print of mortgage and insurance contracts.

The rest of the column is about the weak evidence that financial literacy courses are all that effective at ameliorating this. But what I think is really scary is that part of the ongoing demographic transition in America is that we’re going to have many more eightysomethings and ninetysomethings around who’ll have somewhat diminished cognitive skills and may be easy marks for horrible financial proposition.