19 Apr 2018
A country with high financial wellbeing levels is one where a population has the freedom and ability to fully participate all aspects of society, including socially and economically.
ANZ’s study Financial Wellbeing: a survey of adults in Australia/New Zealand, the sixth and latest such report from the bank, has found more than third of Australians and New Zealanders are considered ‘just getting by’ financially – or worse.
The survey is informed by the work of Professor Elaine Kempson, Professor Emeritus of Personal Finance and Social Policy Research at the University of Bristol and Associate Professor at Oslo Metropolitan University.
Kempson is an internationally acknowledged expert on personal financial services policy and research, particularly in the areas of financial capability, financial inclusion, debt and consumer protection. Much of her recent work has been at an international level and focuses on the drivers of financial wellbeing.
bluenotes sat down with Kempson to discuss the findings and implications of the report, as well as financial wellbeing as a whole. We started by asking about the most-vital things she hopes people understand about financial wellbeing.
EK: One: we need to be focusing on how people use their money, not how they manage it.
Two: in order to shape how they use their money, we need to tackle their personality, not their knowledge and that calls for a wider range of financial capability interventions.
"If you focus on the differences you can really see where specific countries can do so much better.” - Kempson
Three: while we have to recognise behavior change is really important, it will always be moderated by income. In all these discussions, we must never forget income is important. It enables people to save, avoid the need to borrow for daily expenses. That is the backdrop.
ER: How are Australians and New Zealanders faring in terms of financial wellbeing?
EK: If we look at overall financial wellbeing in the report the score in both countries is 59 which would put the Australian and New Zealand public within the financially exposed (“doing OK”) category in the report.
ER: How do they compare with other countries you have researched?
EK: In Norway, the average score is 77 which makes them borderline average/well.
Wellbeing, however you measure it, is an awful lot higher in Norway than Australia and New Zealand and by a very large margin. Even Ireland, (where Kempson has also been conducting research not yet in the public domain), their score is [estimated to be] higher than Australia and New Zealand despite the fact Ireland was really badly hit by the financial crisis.
ER. Where are the biggest differences?
EK: There are three component scores of financial wellbeing in the survey: meeting commitments; being comfortable financially and having resilience for the future.
The biggest differences between Australia and NZ in comparison to Norway are around meeting financial commitments and having resilience for the future. There is a 21-percentage point difference between the scores in Australia and Norway for meeting financial commitments.
In Norway the score is 91 which means just about everybody is totally on top of their finances and only a very small tail aren’t. In Australia the score is 70 which is very low.
If we look at resilience for the future, the Norwegians do much less well, with only a score of 73, but in Australia it is worse, only 53. In terms of resilience, the Australian and New Zealand populations as a whole are really quite unstable.
ER: Why is a consistent, global model for measurement of financial wellbeing important?
EK: It is important because it gives you a much clearer understanding of what is going on. There are a lot of similarities between the countries, which is encouraging, but of equal interest are the differences.
If you focus on the differences you can really see where specific countries can do so much better. That is where we should be putting our efforts.
ER: Can you discuss some key insights from the data which have really sparked your interest?
EK: Active saving and not borrowing for daily expenses are two of the biggest predictors of financial wellbeing in Norway and in Ireland as well as in Australia and New Zealand.
In Australia there was a much lower level of active saving than in other countries. The score for active saving is 63 compared with a 75 mean in Norway. Moreover, Australia had a lower score than Ireland despite the fact the Irish population has lower incomes.
Australians also have got a much greater propensity to borrow to meet everyday expenses so the score there is 82 compared with 93 in Norway. Hardly anyone borrows for daily expenses in Norway.
Those are the two big behaviours your research shows drive financial wellbeing and on both those measures Australians and New Zealanders are much worse than Norwegians who are probably about as good as it gets. It might be aspirational for you.
What I love about Australia is your laid back attitude to life. And that resonates with, the research, which shows Australian respondents had a more external financial locus of control, which is a measure of extent to which you believe you are in charge of events or events just happen, you can’t control things.
It is all to do with a more happy-go-lucky approach, ‘take-what-life-throws-at-me’ attitude of Australians. Scores there are 10 percentage points difference (the score is 61 versus 71 in Norway) and that, along with patterns of saving and borrowing really does drive financial wellbeing.
ER: Do you think the financial wellbeing model is in the right shape now?
EK: On the whole it is. The key drivers are behaviours – albeit a more limited range than we expected. And we have found knowledge has much-less of an effect on these behaviours than personality which is in line with our conceptual model.
We didn’t, however, expect financial locus of control or informed decision-making to have a direct effect on financial wellbeing but our research has shown that they both do.
Taking responsibility, taking control both seem to have a direct effect on financial wellbeing so we have slightly modified the financial wellbeing model in the latest Norwegian report.
And all the while what we call environmental factors, things like income and changes in financial circumstance (as opposed to behaviours and knowledge and personality) are having a direct influence as well.
Financial wellbeing outcomes are the result of an interplay between the resources at someone’s disposal and how they use those resources.
ER: Who are the thinkers in areas of behavioural economics, for example, you have been influenced by?
EK: Nobel Prizewinner Richard Thaler who proposed the theory of ‘nudge’ to overcome the inertia which influences a lot of behaviours. Thaler has certainly been very influential.
Although I believe there are limits to the extent to which one can rely on nudge techniques, pensions auto-enrolment, KiwiSaver for example and NEST in the UK have played an important part in increasing the proportion of people with a personal pension.
You can educate people until the cows come home about the need to have a pension but auto-enrolment into a pension and harnessing the inertia so people don’t opt out is a far better way to help people to save for a pension. That was a big change in thinking.
ER: If a big change in thinking came out of this report, what would you hope it would be?
EK: If we are really interested in changing wellbeing then we have to focus on how people use their money and to do that we have to grapple with the fact there are some quite fundamental personality traits which lead people to manage their money in the way that they do.
The personality traits we have looked at are pretty fundamental and, in addition to inertia, include things such as: time orientation – do people live for today or plan for tomorrow? Can they exercise self control? Are they impulsive? Are they concerned about social status?
All these things are quite fundamental to behaviours. We need to sit back and think about how best to deal with these. Should we, can we, modify these traits? Do we find ways of working around them? Or even harnessing them to promote behaviours which increase financial wellbeing?
Unless we address these issues in the design and delivery of financial education and other policy interventions we shall continue to hit a brick wall because if people are not inclined to do something they won’t do it.
Emily Ross is an author, journalist and editor
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
19 Apr 2018