All in it together?

In the two years prior to the pandemic, overall financial wellbeing increased from an average of 59.4 out of 100 in the March 2018 quarter to an average of 61.7 in the March quarter 2020. This growth was underpinned by increases across all three dimensions of financial wellbeing – ‘meeting (everyday) commitments’, ‘feeling comfortable’ about the current financial situation and ‘financial resilience’ to shocks.

"Why do we see different patterns of financial wellbeing for low income Australians?”

While this seems to be good news, a closer look at the data shows not everyone benefitted. Some vulnerable groups actually went backwards during this period.

The recent Brotherhood of St Laurence report All in it together? Financial wellbeing before COVID-19 examines patterns of financial wellbeing prior to the onset of COVID-19 using data from the ANZ Roy Morgan Financial Wellbeing Indicator.

Single parents started the period with financial wellbeing scores 25 per cent below the Australian average. This gap increased as single parents’ financial wellbeing scores declined by 6 per cent even as all other household types (including couples, couples with kids, and single adults) improved. Disability support pensioners also saw their financial wellbeing decline over the period, driven by a sharp 21 per cent fall in their ability to meet everyday expenses.

Other vulnerable groups fared better but remained a long way behind. Financial wellbeing for unemployed workers was 27 per cent lower than the Australian average in March 2020, despite experiencing a modest 4 per cent increase in financial wellbeing during the two years prior.

Why do we see different patterns of financial wellbeing for low income Australians?

The common factor these groups share is their limited access to (full-time) work and the resulting lower income levels. For those who can’t access work this means relying on inadequate and increasingly conditional social security payments. For others, structural changes within the labour market have brought a decade of low wage growth, rising insecurity, stubbornly high youth unemployment and increasing underemployment. As a result, employment no longer guarantees a secure living wage.

Low or variable incomes impact financial wellbeing in a number of ways. Those with low or variable incomes have more limited financial options and opportunities. This influences financial choices and behaviours, with many on low incomes being forced to make tough choices, like deciding between whether to eat or pay the rent. Low or variable incomes can also increase vulnerability to economic shocks and other risks. Where income only just covers expenses, saving becomes almost impossible. Managing unexpected expenses, like car repairs or school excursions, becomes more challenging with no financial buffer. The type of financial products available are likely to be more limited, increasing reliance on pay day loans or other high interest products.

Short-term financial wellbeing, long-term economic security

Financial wellbeing measures are snapshots rather than longer-term measures of economic security. However, understanding how the different dimensions of financial wellbeing interact with social and economic factors provides useful insights as to where improved financial wellbeing can facilitate longer-term improvements in economic security.

For example, where someone becomes more-able to meet commitments, this can be expected to increase their financial wellbeing. However, over the longer term, where a person’s income is low or variable, saving regularly or being able to acquire assets will remain challenging as very little is likely to be left over after meeting commitments. This limits an individual’s ability to build resilience and make any long-term gains in economic position.

The potentially compounding impact of poor financial wellbeing over the longer-term is illustrated when examining patterns of financial wellbeing over the life course. For many individuals, financial wellbeing increases with age as individuals save and build wealth over their working life.

Average financial wellbeing is 5 per cent higher for those aged 30 to 44 compared to young people (aged 18 to 29), and 22 per cent higher for those aged 65 and older. However, these gains are not attained by all. Homeowners experience the strongest increases in financial wellbeing – close to 30 per cent – by the time they reach retirement age. In contrast, financial wellbeing among renters stagnates, with no real gains over the life course.

Understanding these patterns of financial wellbeing and how they interact with the long-term structural drivers of inequality and insecurity can help identify future challenges. This is illustrated when looking at the youth cohort. While we expect young people (aged 18 to 29) to have lower financial wellbeing scores compared with older groups, for some, labour market barriers may limit longer-term gains in financial wellbeing.

As the availability of full-time work has declined, youth underemployment has increased, with many working part-time and seeking more work. Financial resilience scores for young part-time workers is 18 per cent lower than older part-timers. For youth working full-time, the gap is just 6 per cent. Where barriers to full-time work remain, this group will be less able to save for a rainy day and build future economic security.

Prior to the pandemic, many low-income Australians lacked a financial buffer to cushion any negative financial shocks – shocks that many Australians have now faced as a result of the COVID-19 crisis. The pandemic highlighted the need for reform to remove the structural barriers many Australians face to ensure all Australians have the opportunity to build financial wellbeing.

Dr Emily Porter is the ANZ Tony Nicholson Research Fellow working in the Research and Policy Centre at the Brotherhood of St Laurence.

Dr Porter is a social researcher with a PhD in the effect of recessions on youth employment transitions. All in it together? Financial wellbeing before COVID-19 is the first in a series of reports from the Brotherhood of St Laurence examining the impact of COVID-19 on the financial wellbeing of low income Australians.