Responses to Financial Stress at Life Transition Points

Abstract

This paper looks at how changes in individuals’ circumstances affect their reported perceptions of their own financial wellbeing or deprivation. The aim is to assess how the experience of key life ‘transition’ points change individuals’ reported financial positions. Examples of such key changes include: forming long-term relationships, starting a family, purchasing a house, leaving full-time education, and entering and leaving the workforce. The research uses the responses of individuals to questions in the first eight waves of the Household, Income and Labour Dynamics in Australia (HILDA) survey to assess the nature of any changes in their year-to-year responses to financial wellbeing assessments and deprivation experiences as their circumstances change. Two indicators of financial wellbeing are used in the research: • The first is based on people’s levels of satisfaction with their financial situation. • The second involves how people characterise their financial situation, from prosperous through to very poor, referred to throughout the paper as their ‘sense of prosperity’. A third indicator used in this paper examines whether people report instances of a set of designated financial stress experiences. The methodology used here involves estimation of fixed effect regressions of indicators of financial wellbeing and the experience of financial stress using HILDA panel data to identify the effects on their financial wellbeing responses as people move in and out of various states or their circumstances change. In general, the effects of changing circumstances are quite consistent across the set of three indicators of financial wellbeing or stress considered here. • In general, age is positively associated with financial wellbeing, even among people aged 65 years or more who are welfare recipients. • Employment and household income are also positively associated with financial wellbeing. • While the income effects on financial wellbeing appear quite modest in size, full-time employment most often has the largest effect on the various indicators of financial wellbeing. • Individuals who develop long-term health conditions report lower levels of financial wellbeing, though the initial effects of these conditions appear to be relatively modest. Various life events also have substantial impacts on financial wellbeing, including retirement (a positive effect), becoming a single parent and separating from a spouse (both negative effects). • Individuals who report major improvements (or worsening) in their financial situation over the previous 12 months also report higher (or lower) levels of financial wellbeing and a lower (or higher) incidence of financial stress events. • Changing jobs, being promoted at work and moving house have positive impacts on a number of indicators of financial wellbeing. • The combination of separating from a spouse and moving house in the same year is associated with lower levels of financial wellbeing. In general, having been retrenched from work did not have a negative impact on the financial wellbeing of individuals, provided they were employed again by the time they were surveyed. Potentially reflecting the time it took to be re-employed, those with a home mortgage who had lost a job reported lower levels of most of the indicators of financial wellbeing. People who relied on welfare, including the Age Pension, for at least part of the preceding financial year, reported lower levels of financial wellbeing and experienced more financial deprivation. Given the magnitudes of the estimated parameters that are smaller for this group than for the rest of the population, marginal increases in payments are likely to do little to change this situation. For example, the income of individuals who went onto welfare would have to more than double to leave their levels of financial satisfaction unchanged, while those who lost a full-time job would need a fivefold increase in equivalised household disposable income to maintain their levels of financial satisfaction. Since employment status tends to have a large observable effect on financial wellbeing and financial deprivation, it seems that policies that promote employment are likely to be effective in reducing the incidence of financial difficulties among the population. Of note in this regard is that the effects associated with full-time employment on financial wellbeing are as large for those with a history of income support receipt as for other members of the population.