Affiliation:
1. School of Business The George Washington University Washington DC USA
2. Global Financial Literacy Excellence Center The George Washington University School of Business Washington DC USA
3. The George Washington University Washington DC USA
4. The Wharton School of the University of Pennsylvania Philadelphia Pennsylvania USA
5. NBER Cambridge Massachusetts USA
Abstract
AbstractThis article analyzes Americans' perceptions of being debt‐constrained. We focus on which population subgroups reported feeling most debt‐constrained, how this perception was impacted by the COVID‐19 pandemic, and how it relates to financial literacy and retirement readiness. To this end, we analyze two datasets, namely the 2020 and 2021 TIAA Institute‐GFLEC Personal Finance Index files (P‐Fin Index). The evidence shows that, prior to and during the pandemic, one in three American adults felt constrained by their debt. The percentage was even higher among vulnerable subgroups such as Black and Hispanic individuals, those lacking a bachelor's degree, those with lower incomes, and those with low levels of financial literacy. Being debt‐constrained also has long‐term financial consequences, as it is negatively linked to planning and saving for retirement. Finally, we show that financial literacy has a strong connection to both debt and retirement money management, confirming that financial knowledge is essential if people are to be able to manage their debt and build financial well‐being.