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COVID-19: The politics of economics and adjustment
COVID-19 and the importance of financial literacy
The economic impacts of the coronavirus pandemic are palpable for all of us. But how we cope with additional financial pressures as individuals depends on how well we understand the dynamics of debt accumulation, risk diversification and other financial concepts. Alison Preston explains how pre-existing low levels of financial literacy among the Australian population exacerbate the risk certain groups are exposed to and what can be done about it.
Financial literacy has been defined as ‘peoples’ ability to process economic information and make informed decisions about financial planning, wealth accumulation, debt and pensions’. It is an essential skill at the best of times and even more important now and in the future. It matters for the stability of the financial system and it matters for the well-being of individuals. Prior to the onset of the coronavirus crisis and the economic recession caused by shutdowns, there were already large domestic vulnerabilities in Australia with regard to financial literacy. Consumer credit and mortgage borrowing, for example, were at dizzy heights. Indeed household debt was almost double that of household income.
In response to the current economic situation the Government has announced a range of measures to ease some of the financial burdens. This includes an additional JobSeeker Payment (coronavirus supplement) and early access to superannuation. In order to alleviate the short-term pressure on those with a mortgage, banks have also made provision for payments to be deferred and state governments such as Western Australia have put a freeze on household expenses such as electricity and water. These are all welcomed measures, particularly for individuals and households already under financial pressure. That said, while many may have no option but to defer mortgage payments and access their superannuation, it is likely that many will do so without a proper understanding of the actual financial costs of making use of these support schemes. At the very least, individuals need to understand the concept of compound interest. A mortgage deferral doesn’t mean that interest payments don’t have to be made. Interest will continue to accumulate during the deferred period adding to the total amount owed.
So who is most at risk in a time of economic crisis? The answer is young people, women and the less educated. This isn’t because of low pay, under-employment, unemployment and pay inequality – although these factors don’t help – but because surveys show that these groups typically have low levels of financial literacy. Data from 17,500 respondents to the 2016 Household, Income and Labour Dynamics in Australia (HILDA) survey show that one in three adult men and one in two adult women struggle with basic financial literacy concepts such as inflation, compound interest and risk diversification. Of those aged between 18 and 24 years, only 44% of men and 24% of women could correctly answer a question-set covering these three concepts.
Share (%) of males and females able to correctly answer three financial literacy questions covering inflation, compound interest and risk diversification
There are also significant differences in financial literacy when disaggregated by socioeconomic characteristics such as birthplace, education and education. Part of this is cultural. Migrants from a non-English-speaking background country have financial literacy rates which are significantly lower than Australian-born persons. Similarly, tertiary qualified persons have higher levels of financial literacy than less qualified individuals. Workers employed on a casual contract have lower financial literacy than those employed on a permanent contract. On the plus side, Australia’s overall level of financial literacy is above that of many countries. Within the OECD, Australia is within the top 10 financially literate countries.
Share (%) of adult males and females able to correctly answer three financial literacy questions by birthplace and socio-economic area
Share (%) of adult males and females able to correctly answer three financial literacy questions by education and employment characteristics
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