Video: Financial fragility - evidence beyond asset building


Andrea Hasler: Thank you very much. I'm very excited to be here. I'm among the eight percent international, but I don't – I'm not jetlagged, so I'm from DC. But I will be talking today about financial fragility in the US. And how do we specify in financial fragility? It's basically financially fragile – or financial fragility is the inability to cope with emergency expenses such as a car or house repair, medical bill, or small legal expense in a short timeframe. And we actually – we piloted our measure, and we'll be talking about the measure in – in two slides, basically. We piloted it in 2009. And as you can imagine, in 2009, during the financial crisis, 50 percent of US households were classified as financially fragile.

Now, I – I'm using the 2015 National Financial Capability Studies, an online, national representative sample, and we have more than 27,500 respondents. So that really allows us to look and dive in deeper into subgroups of the population. It offers a unique – it offers unique information on financial literacy and capability, and since 2012 our financial fragility measure is included. I restrict the sample to 25- to 60-year-olds, and non-retired. Because I think people who are younger, they might be in college, they might be in school, they have different financial needs; and also people who are older and may be retired have different financial needs. So that's to get a more homogeneous sample, I restrict them to 25 to 60 and call them working-age group.

So what's the question we are asking here? The question is how confident are you that you could come up with $2000 if an unexpected need arose within the next month. So basically, $2000 is a medium-sized chunk. Then we – we are not restricting and saying you need to have it in cash. So we leave basically up to 30 days to cope or come up with the $2000. So it could be that people can think of oh, I can actually sell my car, or I can tap into my network of family and friends, so that's all possible. And we actually assume or think that people, respondents here in our survey, will – will think about that and take that into – into account. And possible answers are: I'm certain I could come up with the full $2000; I could probably come up; I could probably not come up; and, I can certainly not come up with the $2000. And we specify those two groups who say I could probably or certainly not come up as financially fragile.

So now let's look at how the situation was in 2015. In 2015, 36 percent in the US of the working-age population, 25- to 60-year-olds, were financially fragile. And yes, it is lower than the 50 percent in 2009, but still, it says it's 2015, so financial fragility is still prevalent in a recovering economy, and not only a result of the recession.

Now I'd like to look a little bit deeper into the different subgroups what we have here. And first I looked at financial fragility across age. And what we see here, we have different age brackets here; from 25 to 29, which is the youngest bracket; and the oldest are the 55- to 60-year-olds. And what we see is we have a similar fraction of individuals across all age who are financially fragile, but we also see, and especially what comes out in our regression results, when we – when we control for income, for – for education, we see that – that people in the middle age group, between 40- and 49-year-olds, they're slightly more financially fragile than the other age groups. And that could be because they're at the peak of their financial obligations. They have to come up with child care costs, they cope with student loan repayments and mortgage payments.

We also looked into different college – or education levels, so from high school, college, then college with no degree, Bachelor degree, and post-grad, and we see that financial fragility decreases. But this effect is highly significant, even after controlling for income, but we also see that there is this really huge educational divide, so with – between people who have a college degree and those who do not have a college degree. And that holds also in our regression results.

Now, speaking about income, what was really striking and shocking to us was actually, when we looked at financial fragility across household income, yes, financial fragility falls with income, but it is still very high for the middle-income households. If you look here – and these are US dollars – so people with 50 to $75,000 a year, almost 30 percent could not come up with $2000 within – within 30 days. And if you look at the higher income group, 75 to 100K a year, 20 percent were classified as financially fragile. And you have to take into account here that the $2000 is actually the same, whether someone has $75,000 a year or $25,000 a year. So that's why that higher percenta—or that percentage is, relatively speaking, really high.

And that actually led us to the next research, and the research I'm doing right now. So this is – these are preliminary findings. So what are the contrib—contributing fining—factors for middle-income households, so why are they financially fragile? Why – why is the financial fragility rate so high among middle-income households? And what we found first is fam—family size. So family size makes – makes – has an impact. So households with more children are more likely to be financially fragile. And this – this is – this – we – because they have fixed family budgets, so they – they can't really cope with $2000 because they have financial obligations. They have child care costs; they have education to – to take – to take care – care of. But what – what you als—what we also see is financial fra—financial fragility middle- and high-income households are more likely to have more children.

One other aspect – and I'd like to complement here asset-poor and income-poor, the – the discussion we had before with David. Debt and debt management is very important in addition to asset. And what we see is that middle-income households have assets, but those assets are highly leveraged. And what we see as well is that debt does not decrease, but in fact increase, with income. And I'd like to show that here in a couple of – couple of graphs.

So what we hear here – what we see here is home ownership. And I group them into the first – the first three bars on your left side are actually those who earn less than $50,000, and then you have 50 to $75,000, which are my middle income, and then we have more than $75,000 a year. And what we see with the dark blue bars are home owners. So among the middle income families 57 percent are homeowners. But – well, and that increases – asset increases with – with household income. But what we see also with the light blue bar, among those who have a home, among 70 or almost 80 percent has a home mortgage. So they have a home mortgage, they're leveraged on their assets. And if you look at then debt management, which is the green bar, we see that those who have a house, who have a mortgage, one third,—34 percent are late with their mortgage payment in the year prior to the survey. Well, it was – was take in 2014.

You can also quickly look at retirement savings, the same – the same picture, actually: increasing retirement savings with income, but also those – if you look at the light blue bars, those who took out the loan, and the green bar, so those – the percentage of the financially fragile households who did hardship withdrawals. And the—that increases as well with income. And that was actually quite shocking to – or – or surprising to us. So people are really borrowing against themselves, and that – what we see here as well in the last – in the last table among the financially fragile respondents, 41 percent in the middle-income group have unpaid medical bills.

And across, if you look at the next – the next row, those who do experience expensive credit card behaviour, so they're late on – on payments, they – they take cash advances, they – they do – or they take more out than they're – than – they go over the limit, basically. So around 70 percent of financially fragile households in the middle-income groups experience that behaviour. And also, the use of alternative financial services is similar across all income groups, and very high especially also among the middle in—and high-income groups. So 38 percent used, prior to the survey, in the five years prior to the survey, used pawnshops, payday lenders, rent-to-own stores.

This brings me to the third – to the third contributing factor, which actually – financial literacy. Financial literacy is really important, and financial literacy levels are very low, especially among the financially fragile households. What we see here is I have the first three questions. These are very basic questions on interest, inflation, and risk diversification, and I have here, again, within the household income brackets, I look at non-financially fragile and the financially fragile and see – and look at the different percentages who could actually answer the questions correctly, and we see that financial literacy is overall very low. So only a third could actually answer the basic three questions correctly. But there is a significant difference between financially fragile and non-fragile people. And this is really big.

I'd like to quickly summarize. Financial fragility is prevalent in the recovering economy, and not only a result of the regression. It is a broad cross-section of the population is financially fragile. So it's not only a problem of the young, low income, and low education. And what I haven't talked about here, but we also looked at the – the long-term consequences. So we saw that people who are financially fragile are actually less likely to plan for their retirement. So these are the long-term consequences. And our recommendations are basically financial education is important, especially in schools, the workplace, and the community, and targeting to vulnerable subgroups, but also having other tools, like incentivizing precautionary savings like we are doing with – with retirement accounts, so institutionalizing short-term savings in a manner similar to retirement accounts, and then promoting financial planning to help reduce debt levels and improve debt management. Thank you very much.


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