Financial comfort gap widens between younger, older Australians: ME's Jeff Oughton

GUEST OBSERVER

ME’s ninth biannual Household Financial Comfort Report shows the gap in financial comfort between younger and older generations has widened significantly since the first survey in 2011.

While the comfort of ‘builders’ (aged 75+) and ‘baby boomers’ (aged 50-74) has improved by 16% to 6.38 and 14% to 5.85, respectively since October 2011, the comfort of ‘Gen Y’ (aged 18-34) and ‘Gen X’ (aged 35-49) has remained broadly unchanged over the same period, up only 2% to 5.56 and 3% to 5.16, respectively.

Digging deeper, the Report indicates ownership of assets including property, superannuation, shares and managed funds, is largely fuelling the divergence.

The recent gains in the macroeconomic and financial environment including significant rises in property and equity values, has disproportionately lifted the financial comfort of older generations who tend to have higher levels of asset ownership or investments.

The findings add to recent policy debates around housing ownership and affordability, and the generosity of superannuation tax concessions for wealthier Australians..

They highlight the importance of housing and superannuation as important wealth generators with both contributing to higher levels of financial comfort. They suggest that wealthier Australians may be better able to manage any windback to super tax concessions, while remaining at a relatively high level of financial comfort.

The disparity in financial comfort between generations is largely due to older generations enjoying substantial improvements in their investments and income primarily through real estate and superannuation.

Gen X and Y have smaller investments and continue to struggle with property ownership, so have benefited to a much lesser extent.

Younger generations are more likely to rent, reflecting the increased difficulty when it comes to getting on the property ladder. He said the issue is exacerbated for the younger generations as prices and rents have grown faster than incomes, particularly in capital cities.

Overall ME’s Household Financial Comfort Index rose 3% to 5.59 out of 10 in the 6 months to December 2015, equivalent to about 65% of Australian households reporting mid-to-high financial comfort. This result reverses half of the fall from the previous 6 months and is the second highest financial comfort result recorded since ME started the survey in late 2011 (about 3% above the historical average of 5.45).

The overall rise in the Household Financial Comfort Index was largely driven by an 8% increase in comfort with ‘ability to cope with a financial emergency (loss of income for 3 months)’, arguably boosted by the strengthening of the labour market and in particular, strong job gains and a significant fall in unemployed persons over the past year or so.

Those stating ‘it would be easy to get a job within two months’ increased 2 points to 40% of the workforce during the six months to December 2015, while those reporting ‘it would be difficult’ decreased 3 points to 53%. J

ob security increased 2 points to 73% and insecurity fell 1 point to 25% (see Report pages 20-21). Modest increases in income also contributed to the improvements in ‘ability to cope with a financial emergency (loss of income for 3 months)’.

The proportion of households reporting annual income gains, increased by 4 points in the past six months to 38%, compared to the proportion who reported lower income, fell 2 points to 24%, with a further 38% reported unchanged household income.

Improved employment and income also contributed to increases in both comfort with cash savings (up 3% to 5.06) and across a range of savings indicators including an increase in the proportion of households saving each month, up 3 points to 50% in December 2015, versus spending all of their income and no more, down 3 points to 41% (see Report pages 25, 27).

Stand-out states:

The effects of a weakening mining industry are showing in WA, the only state where financial comfort deteriorated (down a further 2%) to a record low of 5.11 in December 2015 – the lowest household financial comfort by far across Australia. In contrast, South Australia/Northern Territory recorded the greatest gains in household financial comfort (up 14% to 5.57).

A regional/metro divide remained prevalent, with households living in metropolitan areas reporting higher levels of financial comfort (up 4% to 5.72) in December 2015, compared to households living in regional areas (up 2% to 5.29) in December 2015. Melbourne is the stand-out city, with the highest level of financial comfort (up 4% to 5.92), followed by Sydney (up 3% to 5.81).

On the other hand, Perth fell 8% to 5.12 – the lowest of all capital cities.

Self-employed:

After a very big rise of 18%, self-employed persons (typically, sole proprietors and small business owners) are the most comfortable segment of the workforce reporting financial comfort of 5.91 in December 2015. Recent policy announcements may be a contributing factor – in addition to labour market improvements and some signs of a pick up in business conditions (see Report page 15).

Household differences:

Couples with children – both older and younger in age – reported significant improvements – up 7% to 5.85 and up 6% to 5.55, respectively. In contrast, singles and couples with no children reported the biggest drop. Households were most comfortable with their ability to ‘manage their current living expenses’ (6.52 out of 10) and ‘level of debt’ (6.29 out of 10).

Jeff Oughton is ME’s consulting economist and can be contacted here.