Video: Financial capability and well-being: an international comparison

Elaine Kempson: I won’t dwell too long on this slide because it repeats quite a lot of what Becky has already said. This presents the wellbeing scores across the five countries where the questionnaires were filled in. What I will do is pause and explain what these scores mean. Some of you will be more technical than others I imagine.

There were 11 questions measuring financial wellbeing and we put them through a principal component analysis that identified that we could return a single measure which is our overall measure of financial wellbeing but equally one could disaggregate it into three sub-measures which are the ones you see below – meeting commitments, comfortable financially and financial resilience.

We then created a score using the coefficients and anchored it at zero and 100. I can go into the technicalities of how we anchored it but sufficient to say we have the least capable replies and the most capable replies and anchored it. This score is out of 100 just so we can compare. Coefficients are quite difficult to explain to policy makers.

We can see that Norway has the highest level as we’ve been hearing and Norwegians were delighted because in the financial literacy, financial capability debate they’ve not even got off the starting blocks. I think that’s a lesson for all of us. This is a country that’s done very little. Quite a lot is done in schools but there’s not much underpinning to it and there is no national debate on any of this.

We’re trying to kick start it. I hope I can explain why I think Norway does so well as we go on. The lowest levels are found sadly in Australia and in New Zealand across all the measures at 20 index points below Norway which is quite significant. Canada and Ireland do relatively well. That said you are 10 points behind Norway although Ireland does very badly on financial resilience, no better than Australia and New Zealand.

That’s a very quick overview of the scores but then in the other four countries, not yet in Canada, we’ve segmented the population data a different way. We segmented the populations according to scores on the overall financial wellbeing, so financially secure are people who score 80 or above. Doing okay but little put by, 52 to 79.99, just getting by is 30 to 49.99, struggling financially is 30 or below.

You can see the differences become even more stark. What is notable is that Norway has more than twice the population who are financially secure compared to the other three countries. The largest proportions of the population who are struggling are to be found in Australia and New Zealand where it’s four times the proportion in Norway which I might say is quite disproportionate to the amount of money that Norway spends on research into payment problems.

It doesn’t do much in financial capability but it’s obsessed with people who have payment problems and yet there’s such a small number and a very particular group of people as I will explain. Australia and New Zealand double even the level in Ireland, despite the fact that Ireland was really badly hit in the financial crisis. I think that’s quite interesting.

Countries differ in the extent of the analysis that’s been done. The most detailed analysis has been done on the Norwegian data with two very lengthy technical reports exploring absolutely every box in that conceptual model and what drives it. I can only give you very high level but there is now a depth of understanding of how all these different factors interrelate.

What we can do across Norway, Ireland, Australia and New Zealand is look at regression models, models that will predict levels of overall financial wellbeing and these started out with a very general model with everything that was in the conceptual diagram that I put up earlier.

It had knowledge, skills and all the other things in it and then tested down until we got a pretty efficient model. What you see here, the numbers in this table are the standardized coefficients from those models. In all those countries we can see that financial wellbeing is determined by a combination of economic circumstances – income and substantial drops in income.

But it’s not just what money you’ve got but how you use that money is also very important. The size of the coefficient will indicate the size of the effect and reinforces what others were saying before me that in fact two behaviours really do drive across all countries, drive overall financial wellbeing and they are active saving and not borrowing for daily expenses.

We did have other behaviours in the original model like budgeting, informed decision making, active product choice, monitoring your finances. Those were either not significant or I won’t go into in detail now in the case of budgeting and monitoring had a negative correlation, in other words the higher your wellbeing the less likely you are to be budgeting.

That I can explain later in questions but it’s not a straightforward relationship at all. We see the two other factors also very important, financial locus of control. This is the extent to which you take responsibility for your own outcomes and decisions as opposed to feeling it’s nothing to do with you, it’s forces outside. I spend because I live in a consumer society and I have to spend to keep with all my friends versus what I spend is down to me and I should be monitoring it.

Financial confidence is a bit ambiguous which way this causality runs. You could be confident because your wellbeing is high or your wellbeing could be high because you’re a confident person and make confident decisions. In reality I think it’s both. These capabilities we know from the Irish and Norwegian data are largely driven by personality. Knowledge and experience are much less important.

Indeed when we test in a stepwise regression model for those of you who are more technical we can test knowledge and it has a big effect. You put in personality and the effects of knowledge get drastically reduced by the introduction of personality. In other words, personality overrides your knowledge. That I think doesn’t come as a surprise.

Also interesting on this slide is parents discussing money with you as a child has an effect which is quite remarkable. This was a population between 18 and 80 and still we’re picking up that positive effect. Not all surveys asked about financial education but that’s similar. If you had financial education in school you still see an effect in adults.

How countries compare on the key financial capabilities, Norway had the highest scores on all behaviours except spending restraint where they were slightly lower and that is one of the Achilles heels in Norway as I will explain. Canadians had the joint highest score for financial confidence and did relatively well on other measures.

The Irish were the least likely to be exercising spending restraint, something I noticed when I was going over. I was an advisor to the Central Bank of Ireland after the financial crisis. I was going over regularly to revise all their consumer protection legislation. I was shocked by how people were still spending when the country was in terrible crisis. I couldn’t believe it and the Irish confirm that they are actually a nation of big spenders.

They had the lowest level of financial confidence. Australians and New Zealanders, this finding met with great mirth when I was out in Australia for the launch, not only were they least likely to be active savers but they had the lowest level of financial control. Anybody who has been out to Australia and New Zealand will know what is lovely about both countries is their wonderful laid back attitude.

Oh, she’ll be right. Everything will come right. But it’s their Achilles heel and it caused great laughter but people recognize that actually it can be damaging as you were saying Celestina. Very quickly, the other part of the equation is income. This is where I think we get the explanation for Norway. There does seem to be a link between financial wellbeing and income inequality, not income levels.

That makes sense. If you’ve got a lot of poor people there are many more people likely to have their wellbeing damaged. You can see that Norway not only has a high average income but it has an incredibly low Gini coefficient. This is something that measures income inequality. Zero means everybody has identical incomes, 100 means it’s an absolutely incredibly unequal country.

Norway has one of the lowest in the world matched by a handful of other Scandinavian countries and a few very poor countries where everybody is equally poor. They have the highest incomes. They have the lowest income inequality but as well as the highest level of financial wellbeing.

I think what’s interesting is we compare Canada with Ireland, very similar levels of financial wellbeing and very similar levels of income inequality but average incomes are very different. We can’t test this empirically. We only have five countries but it’s pretty clear to me that income inequality is playing quite a big part.

Just quickly to sum up, I’m down to zero minutes so I’ll do it quickly, across all countries financial wellbeing is determined by a combination of the money people have and how they use that money. Active saving, not borrowing for everyday expenses have the biggest effect but taking responsibility for one’s one financial decisions and the outcomes is also important.

However, there is a limit to what we can achieve by trying to change those propensities if income inequality is high. Where in the US where we have a very high Gini coefficient for a developed economy, until they tackle income inequality their efforts to improve wellbeing through behavioural change will always be held back.

There are however remarkable similarities across countries. I’m sure you must have been struck by how similar all the findings are. For me that’s quite gratifying. It means the survey instrument is working and working in meaningful ways. You wouldn’t expect the findings to be fundamentally different.

But it does mean that because there are so many similarities we can learn a lot from one another. We’re quite right to transfer learnings from one country to another. But equally and I think this is important, there are some interesting differences. They indicate where individual countries might want to focus their efforts. Thank you very much indeed.

(Applause)