Refining policies for financial stress

Abstract

Household financial stress is a persistent problem that can be exacerbated by shocks such as the COVID‐19 pandemic. This paper finds that assets are more important than income for explaining financial stress using the Household Expenditure Survey, conducted by the Australian Bureau of Statistics. Households in the bottom quintile for net assets are more likely to experience many dimensions of financial stress, with a magnitude of approximately 3 percentage points in most cases. Total income often has no identifiable impact on financial stress, all else equal, although the component of income based on investments may be a better predictor of financial stress. Further, there is a positive relationship between liabilities and financial stress. In addition, substantial financial stress is observable for recipients of payments for unemployment or disability, with lower impacts suggested for some other welfare groups. Three policy options are refining asset tests to provide higher benefits for low‐wealth households, raising benefits for particular welfare types including for those receiving unemployment and disability payments, and promoting financial literacy to avoid excessive liabilities.

Co‐contribution Opportunities for Superannuation Funds and Policy‐Makers

“…Assets can accumulate over many years, compared to income which is a temporary flow measure. Empirically, there is a stronger link between net wealth (or its asset components) and financial stress, through households being unable to pay for many consumption items (Best 2022). Figure 2 also provides evidence from the 2022 wave of the Household, Income and Labour Dynamics in Australia (HILDA) Survey for a binary variable identifying overdue bills for any of many consumption aspects.…”