By Matt Wade
July 4, 2005

Belonging to a household is becoming riskier.

It’s not the sort of thing economic ministers like to talk about but the trajectory of economic change over the past 20 years has increased the financial risk borne by families.

Since Australia set out on the path of deregulation in the mid-1980s, the financial system has become far more efficient and Australians much wealthier, especially due to rising house prices. But one of the spin-offs is a more exposed household sector.

The International Monetary Fund let the cat out of the bag in its recent review of global economic stability. It bluntly warned the household sector "has increasingly and more directly become the shock absorbers of last resort in the financial system".

Households have always been subject to the fortunes of the economy but their financial exposure is far more direct than in the past. The IMF says the "risk transfer" to households is common in industrialised countries with ageing populations such as Australia.

Superannuation is a case in point. Previously, about one in five Australian workers were entitled to a "defined benefit" pension, where employers guaranteed payments regardless of what happened to financial markets. But now workers rely on their own accumulated super for retirement and that means individual employees carry the risk of asset price falls, especially on share markets. This has seen a net transfer of risk from corporations to households.

The decade-long debt binge, fuelled by low interest rates and the house price boom, has also made the household sector much more exposed to economic shocks.

Increased competition resulting from deregulation has forced financial institutions to slash their costs. The outcome has been a reduction in interest rate margins (therefore lower interest rates), easier access to credit and a wide range of attractive new credit products. Consumers have responded by borrowing up big, pushing the ratio of household debt to income above 150 per cent compared with just 55 per cent in 1992. But as the level of household debt has grown, so have the risks. Households are now much more sensitive to higher interest rates, and increases in unemployment, than ever before.

Now John Howard is about to shift more risk to households with his industrial relations overhaul. The elimination of unfair dismissal laws for firms with fewer than 100 employees – one of the main changes – will make it much easier for bosses to shed workers to protect profits in the event of weak demand. The impact of an economic downturn is likely to be transmitted to workers much more quickly as a result. The rapid growth in non-standard forms of employment, especially casualisation and self-employment, is another trend shifting risk to households.

Australia has not yet fully road-tested this new financial scenario, where households are more responsible for retirement incomes, have an unprecedented burden of debt and fewer employment protections. Because the financial risk borne by households has risen sharply since the last recession in 1990-91, we have moved into uncharted financial waters. No one really knows how households, and the whole economy, will cope when the next big financial crisis arrives.

The household sector has taken advantage from the potential benefits of financial liberalisation. But has it taken steps to manage the associated risk carefully? For many, if not most, households the answer is probably no.

"The financial landscape is changing and, in certain respects, households may not appreciate or be adequately prepared for such changes," the IMF warns. It says households are more exposed to vagaries of financial markets, inflation risk and longevity risk as we live longer and rely more on our own savings in retirement.

One possible indicator of households’ preparedness to take on more risk is the level of financial literacy in the community. But the Australian Consumers’ Association warns there are "alarming deficiencies" in Australians’ understanding of a range of financial issues, including superannuation.

Research on financial literacy by ANZ revealed only 37 per cent of those surveyed had done any planning for retirement and almost 40 per cent of people with superannuation could not or did not read their regular super statements. Those on low incomes were the least prepared. Another study found 44 per cent of households on incomes of less than $50,000 a year did not have the skills to make sound financial decisions. It is unlikely these households have much idea about the increasing financial risks to families or how they might be managed.

The ageing population will put significant pressure on government budgets meaning more of the burden for funding retirement and other basic social services, especially health, will be shifted to households.

The IMF says governments have a responsibility to prepare households so they can understand and manage their financial risks.

"There is a need for more communication by authorities of the challenges ahead and for greater financial education for most individuals," it says.

"These new recipients of financial risk must learn how to manage the newly acquired risks."

The Australian Government has made a modest start. A month ago, the politician in charge of promoting the financial knowledge in Australia, the Minister for Revenue and Assistant Treasurer, Mal Brough, launched a Financial Literacy Foundation to promote greater financial understanding in the community.

Mr Brough says the new foundation will run an information and awareness-raising campaign, including financial literacy training in schools and workplaces, and set up a website to serve as a portal for financial literacy education and information. The media release announcing the new foundation says nothing about the increased risk to households but emphasises the need to "improve their financial decision-making skills".

But if the IMF is right, the Government’s message needs to be much stronger. It should also be more blunt about how economic change – promoted by the successive governments – has exposed households to more risk.

Mr Brough has only been allocated $26 million over the next five years to improve financial literacy, which doesn’t seem very much, considering what is at stake.

It may be that many households will eventually look back and wonder why more wasn’t spent now to help them understand and manage financial hazards they knew nothing about.

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