BNZ Wellbeing Report September 2019 – The role of money and finance

There is growing recognition of the need to go beyond average income and to use measures of wellbeing to better understand how New Zealanders and the communities we live in are progressing. Wellbeing means different things to different people. But broadly speaking, in addition to our material standard of living, our wellbeing reflects the social, environmental and societal context in which we live.

Reflecting this growing recognition, BNZ has developed a wellbeing indicator that captures New Zealanders’ self-perceptions of life satisfaction, life worth, happiness and anxiety. This note outlines the results of estimating this indicator for the second time. Results are based on a survey conducted in June 2019 of just over one thousand people. This update provides some early insights into the impact that money and finance have on the wellbeing of New Zealanders. Future updates will further explore and build on these insights.

HIGHLIGHTS

BNZ’s Wellbeing Index shows that peoples’ wellbeing increases with their age and income. Our sense of wellbeing improves as we get older and people living in higher-income households report relatively high wellbeing. Men generally have higher wellbeing than women and owning the dwelling we live in is also associated with higher wellbeing. Based on a like-for-like comparison, self-reported wellbeing in New Zealand continues to be higher than in Australia.

Stress about money and finance is widespread and detracts from wellbeing. Proxy measures of financial hardship and stress (defined below) are correlated with reported wellbeing, implying that money and finances impact on our overall quality of life. Unfortunately, financial hardship and stress of one form or another are all to common in New Zealand, especially among women, young people and people living in low-income households.

Insufficient savings and wealth underpin financial hardship and stress. Not having enough money for an emergency was the most common form of financial hardship experienced by Kiwis in the three months prior to the survey. Longer term, having insufficient wealth to fund a desirable lifestyle in retirement is the most common form of financial stress, with 60% of New Zealanders fearing they will not have enough. This is especially the case for women and people living in low-income households.

Lifting productivity and improving financial capability are important keys to higher wellbeing. Achieving the Government’s ambition of creating a “productive, sustainable and inclusive” economy would generate higher incomes across the population, alleviating financial stress and lifting wellbeing. For BNZ, encouraging Kiwis to “be good with money” and providing support to people in financial hardship – including an alternative to high-interest short-term lenders – can contribute to improved financial capability and wellbeing.

MAIN REPORT

The wellbeing of New Zealanders

BNZ’s Wellbeing Index is based on survey responses to questions on life satisfaction, life worth, sense of happiness and level of anxiety.1 According to the Index, New Zealanders rated “Life worth” as contributing the most to their overall wellbeing while “Anxiety” made the biggest negative contribution. Since our first wellbeing survey at the end of 2018, all four components of BNZ’s Wellbeing Index have fallen slightly, but these falls are not statistically significant.

Although income is an important driver of wellbeing, New Zealanders tend to report higher wellbeing than our incomes would suggest. For example, the National Australia Bank use an identical methodology to assess the wellbeing of Australians, allowing for a like-for-like trans-Tasman comparison. This shows that New Zealanders rate all four aspects of wellbeing more highly than Australians, even though our average incomes are significantly lower.

This pattern of relatively high wellbeing despite comparatively low average incomes can be seen in other indicators of the quality of life in New Zealand. For example, the OECD’s Better Life Indicator shows that New Zealand outperforms many OECD countries on most aspects of wellbeing, including the quality of the environment, civic engagement and social connection. Where we don’t do so well is on average incomes per capita and on work-life balance.

The key takeaway from these results is that there is a lot to like about New Zealand life. On average, however, Kiwis work hard for a living but earn relatively modest incomes. If sustained into the future, New Zealand’s mediocre income performance risks dragging down broader aspects of our wellbeing.

Wellbeing across different groups of New Zealanders

Wellbeing varies widely across different groups of New Zealanders. BNZ’s Wellbeing Index shows a strong relationship between wellbeing and age, with people aged 50 years and over enjoying much higher wellbeing in comparison to younger cohorts. Across income groups, reported wellbeing was highest for people living in households earning over $75 000 per year but very low for those living in households earning less than $35 000 annually.

1 BNZ’s Wellbeing Index is constructed using a methodology developed by National Australia Bank (NAB). In turn, NAB’s approach is based on a methodology developed by the Office of National Statistics in 2010 to measure wellbeing in the United Kingdom.

Wellbeing also differs across gender, with men scoring all five aspects of BNZ’s Wellbeing Index more highly than women. Young New Zealand women reported particularly low levels of wellbeing. Married people reported higher wellbeing then single people while people with children report lower wellbeing than people without children. The benefits of home ownership are also apparent, with people living in their own house or apartment reporting higher wellbeing than renters.

The impact of money and finance

To explore the impact of money and finances on wellbeing, we asked New Zealanders a range of questions about their finances. We adopted a definition of financial hardship used by the Ministry of Social Development: “having insufficient resources to meet basic needs, and thus being excluded from a minimum acceptable way of life in one’s own society”.

Based on this definition, we developed a measure of “financial hardship” that captures whether survey respondents were unable to meet a basic need – such as not having enough money to pay a bill – in the three months prior to completing the survey. We also built an indicator of “financial stress” based on the overall level of concern respondents felt about their current financial position.

The results show that both financial hardship and financial stress are correlated with wellbeing. While money may not be able to buy love, it is certainly the case that having our finances under control and saving regularly are beneficial for our personal wellbeing. This tells us that although the reported wellbeing of New Zealanders is higher than our average incomes would imply, money and financial issues still have a significant impact on our overall quality of life.

Financial stress and hardship are all too common

Unfortunately, many New Zealanders report experiencing financial hardship or stress. Around 35% of respondents report being “extremely concerned” about their finances while 36% of respondents experienced a specific incidence of financial hardship in the three months prior to the survey. Not surprisingly, there is considerable overlap across these two groups, with about 60% of people that experienced financial hardship also being extremely concerned about their financial situation.

Highlighting the link between finances and wellbeing, the incidence of financial hardship and stress across different groups of New Zealanders looks a lot like the pattern for overall wellbeing. As people get older, they tend to experience less financial hardship and stress. For example, well over half of 18-29-year olds reported experiencing financial hardship in the three months prior to filling in

the survey, compared to less than 20% of 50+ year olds. Across all age groups, and consistent with lower reported overall wellbeing, women were more likely to experience financial hardship and stress compared to men. Previous work by the Ministry of Social Development has partly attributed greater financial hardship for women to the fact that they are more likely to lead sole-parent families.2

Low household income is also associated with greater financial hardship and stress. For example, well over half the people living in households with incomes of $35 000 or less reported an incidence of financial hardship in the three months prior to the survey. However, while high incomes clearly help, they do not guarantee immunity from financial stress, with around 25% of people living in households with incomes of $100 000 or more experiencing some form of hardship.

2 For example, according to the General Social Survey, in 2013 there were 201 804 sole-parent families in New Zealand, 84.2% of which were headed by a female.

Not being prepared for an emergency is a common form of financial hardship

The most common type of financial hardship was not having enough money to deal with an emergency, which accounted for nearly one quarter of all financial hardship events. To some extent, this is anticipatory in that an emergency may or may not have occurred. However, this result indicates that insufficient savings leaves many New Zealanders feeling uncomfortably exposed to possible future negative events. This is consistent with international literature showing that having support in times of trouble is an important key to higher wellbeing. By far the most common response to financial hardship was to follow a stricter budget and cut out unnecessary expenses.

Tellingly, less than five percent of financial hardship events resulted in the person involved talking over their financial situation with a bank or a financial advisor. More generally, results from BNZ’s Wellbeing Survey indicate that the support networks for people experiencing financial difficulties are relatively undeveloped. On average, respondents said they could count on 3.8 people in an emotional crisis, but only 2.4 people in times of financial hardship. Despite being relatively more exposed to financial hardship and stress, financial support networks are particularly sparse for women and people living in low-income households.

Financial hardship can have a big negative impact on wellbeing for many New Zealanders and it is important that support networks exist for people to call on during times of financial stress. Indeed, accessing the right support, knowledge and tools at the right time can help people in hardship to get on the right path.

Insufficient wealth for retirement is the most common cause of financial stress

While not having enough money for an emergency is the most common form of financial hardship, having insufficient wealth to fund a desirable life style in retirement is the biggest cause of ongoing financial stress among New Zealanders. This fear is pervasive across Kiwis, with 60% of people believing they will have “not quite enough” or “not nearly enough” savings on retirement.

By gender, women are more pessimistic about their ability to fund retirement – only 25% expect to have “more than enough” or “sufficient” wealth on retirement compared to 37% for men. At the other end of the spectrum, one in three women expect that they will have “not nearly enough” to finance a comfortable retirement. Uncertainty about retirement planning is also more apparent across women, with 12% saying they “don’t know” whether their wealth on retirement will be enough to fund their desired standard of living (compared to 5% for men).

Not surprisingly, higher incomes are associated with brighter prospects for a desirable standard of living in retirement. Around 55% of people living in households with incomes of $100 000 or more expect to be able to finance their desired lifestyle in retirement compared to less than 20% of people living in households with incomes of $35 000 or less. People living in low-income households are also prone to significant uncertainty, with 15% replying that they don’t know if they will have enough wealth on retirement.

Income, savings and debt

The concerns many New Zealanders’ have about their finances in general and their ability to fund a desirable retirement ultimately reflect insufficient incomes and savings and excess debt accumulation over their working lives. So we took the opportunity to ask Kiwis how their income, savings and debt have changed over the three months prior to the survey and about their expectations for the year ahead.

Results from this part of the BNZ Wellbeing survey need to be considered in the context of New Zealand’s long-run economic challenges. While aspects of our economic performance have improved recently, there are still important areas of weakness that require a great deal of ongoing effort to improve. Most obviously, growth in the average income of New Zealanders has been low in international comparison for decades. In turn, this reflects New Zealand’s longstanding Achilles heel of weak productivity growth. Another area of persistent economic weakness is that we collectively don’t save much and that the debt held by households and firms is relatively high.

In the three months prior to the survey

In the three months prior to taking the survey, a net eight percent of respondents reported increased incomes – 25% reported higher incomes while 17% recorded income falls. However, 40% of people reported that their savings went backwards over the three months, as incomes fell short of expenditures. More optimistically, about 30% of people reported higher savings while a net 17% managed to reduce their debt.

Looking into the distribution of these changes across different groups of New Zealanders highlights some important concerns. Compared to men, women were less likely to report income gains in the previous three months and more likely to report incomes falls, resulting in significantly lower net income gains. Although there are many different reasons for income changes across men and women, these results suggest limited progress in addressing New Zealand’s gender pay gap. By income, people living in households earning $100 000 or more were much more likely to have lifted their incomes, suggestive of increases in income inequality.

The dynamics of savings and debt across different groups in the three months prior to doing the survey highlight the same distributional concerns. One in five female respondents reported that their savings fell substantially over this period, which is almost twice the rate of men. Among people earning $35 000 or less, almost 50% reported that their savings went backwards in the previous three months. Net reductions in debt were also smaller for women than for men, while younger people and high-income earners reported relatively solid debt reductions.

Of course, as well as highlighting the gender pay gap and income inequality, these dynamics are also consistent with lower reported wellbeing and greater financial hardship and stress across women and people living in low-income households.

Expectation for the year ahead

Expectations over the coming year are in some ways more optimistic. A net 27% of New Zealanders expect higher incomes (40% anticipate higher incomes while 13% anticipate cuts). However, the distribution of these net income gains again highlight the gender pay gap and income inequality, with men and people living in high-income households relatively more upbeat. Presumably reflecting career peaks and retirement effects, people aged 50 years and over are relatively pessimistic about future income growth while young people are more positive.

Almost 50% of survey respondents expect to lift their savings over the next 12 months, while 24% expect their savings to fall. Consistent with higher expected future incomes, young people are

relatively upbeat with the prospect of higher savings whereas people closer to retirement age are more likely to expect their savings to diminish. Expectations of greater savings also rise with household income, with people living in low-income households the least optimistic.

Almost one in two (46%) survey respondents expect their debt to fall in the next 12 months while a little more than 10% expect it to increase. Slightly more women (48%) expect to lower their debt compared to men (44%) while young people are relatively positive about future debt reductions (50%). By income, 55% of people with household incomes over $100 000 expect their debts to fall, compared to just 36% in the lowest household income group.

Note: net changes are calculated as the share of survey respondents expecting income, savings or debt to “increase substantially” or “increase slightly” minus the share that expect them to “decrease substantially” or “decrease slightly”.

Some forms of debt are more stressful than others

Irrespective of the fact that a net 35% of survey respondents expect to reduce their debt in the coming year, New Zealand is still a relatively indebted nation. The structure of the household balance sheet and its impact on wellbeing will be a topic for future updates of the BNZ Wellbeing Index. For this current release, we simply assess the prevalence of different types of debt and the associated level of stress.

Credit card debt is the most common form of debt held by New Zealanders and is used by almost one in two people, particularly older people and people living in mid to high-income households. Home loans were the next most widely-held form of debt, especially for 30 to 49-year olds and people living in high-income households. Men are more likely to use these types of debt compared to women.

Around one in five people have a personal loan whereas loans from family and friends are used by roughly one in ten New Zealanders. Both these types of debt and more prevalent among younger people. Only around five percent of people resorted to “payday loans” as a form of debt. A similar share of respondents had investment loans, with people living in high-income households leading the way.

Net changes in income, savings & debt N

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Past 3 months: Income 8.1 4.5 11.9 8 9.8 6 -6.1 2.3 11.2 4.5 24

Savings -8.4 -13.7 -2.7 -9.4 -1.1 -16.5 -33.8 -22.1 -18.5 -2.4 16.6

Debt 17.1 12.9 21.6 16.3 18.8 15.7 1.2 22.5 10.3 12.7 32.9

Next 12 months: Income 26.7 23.5 30 38.4 34.6 5.3 2.8 12.9 36.9 33.6 40.1

Savings 22.7 22.9 22.3 43 27.8 -3.6 -1.4 6.6 22.7 28.3 43

Debt 34.5 37.6 31.2 39 38.8 24.8 23.4 39.1 35 41.6 40.1

Overall, Kiwis that resorted to using “payday lenders” reported that this type of debt is highly stressful – 61 points out of a possible 100. While women and young people report relatively high levels of concern over payday loans, people living in low-income households that use this form of debt are extremely stressed by the experience. In contrast, credit card debt and home loans are relatively low-stress forms of credit while investment loans are particularly stressful for young people and people living in low-income households.

Reducing financial stress and improving wellbeing

Although New Zealanders tend to report higher wellbeing than their incomes would suggest, it is important to confront the reality that financial stresses and strains are a serious concern. For many Kiwis, these concerns detract from their overall sense of personal wellbeing and life satisfaction.

A key underlying cause of financial stress is low incomes compared to other OECD countries. In turn, this reflects New Zealand’s poor productivity performance, which has been a cause of concern for many years now. Unfortunately, it is simply the case that the “value add” created from an hour of work in New Zealand is currently insufficient to support significantly higher incomes and a more robust financial situation for all Kiwis. While the way in which income is spread across different groups also clearly matters, these distributional concerns become much easier to address when average per capita incomes are growing strongly.

Tackling New Zealand’s poor productivity performance and ensuring the gains are well spread across the population requires a well-considered strategy aimed at making the most of new opportunities and avoiding the risks from widespread changes in technology and in the global trading environment. The Government’s focus on creating a “productive, sustainable and inclusive economy” and using wellbeing as a basis for fiscal decisions are welcome steps in this direction. However, much remains to be done within the public and private sectors and across workers to tackle these challenges.

As well as improving productivity, financial hardship and stress can also be reduced by improving the capability of New Zealanders to make informed judgements and effective decisions about the use and management of money. This is the aspiration behind BNZ’s purpose of encouraging customers to “be good with money so they can do great things with it”.

Type of debt currently held

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Credit card debt 48 43.4 55.8 35.2 57.6 48.5 34 53.6 56.2 49.7 52.2

Home Loan 35.8 33.8 38 25.8 50.8 27 17.6 27 37.9 46.9 47.6

Personal loan 19.6 19.8 19.5 27.4 20 11.7 16.6 21.2 26.1 19.9 18.7

Loan from family or friend 12.8 13.6 12 21.1 12.5 5.1 15.2 15.2 15.2 2.2 10.1

Investment loan 4.9 4.2 5.7 6.2 5.9 2.5 3.1 3.8 3.1 7.7 6.1

Payday loan 4.8 4.9 4.7 7.5 6.1 0.6 6.2 4.5 5.5 7.1 3.8

Level of concern over debt held

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Credit card debt 43.4 47.7 39.5 56.5 43.9 33.3 51.5 48.4 45.6 46.2 39.4

Home Loan 43.5 45.1 41.9 48.7 43.9 37.6 42.7 49.3 41.6 44 40.1

Personal loan 54 54.9 53 59.4 54.1 41.2 60.4 62.9 51.6 52.7 50.8

Loan from family or friend 53.5 54.9 51.9 55.2 49.8 58 58.9 61.5 47.3 59.1 47.1

Investment loan 49.7 46.2 52.3 73.1 35.1 33.6 70 48.1 44.8 60.9 42.3

Payday loan 60.9 66.5 54.7 66 58.7 29.4 83.1 56.6 31.9 72.7 57.9

CONTACTS For questions or media enquiries on this report, please contact: Sam Durbin External Communications Consultant sam_durbin@bnz.co.nz 027 529 4342 To contact the author, please get in touch with: Paul Conway Economist paul_conway@bnz.co.nz 021 1499 452 Disclaimer: The information, opinions and conclusions contained in this document (“Information”) is provided by Bank of New Zealand for general information and discussion purposes only. None of the Information is to be used for any other purpose, reproduced or altered. Bank of New Zealand does not warrant or represent that the Information is accurate, reliable, complete, or current. Although every effort has been made to ensure this document is accurate, the contents should not be relied upon and anyone proposing to use the Information should independently verify and check its accuracy, completeness, reliability, and suitability. To the extent that any such Information constitutes financial advice, it does not take into account any person's particular financial situation or goals. Bank of New Zealand recommends that you seek advice specific to your circumstances from your financial and other professional advisers. Subject to any terms implied by law and which cannot be excluded, Bank of New Zealand nor any person involved in this document accepts any liability for any loss or damage whatsoever that may result from any errors, omissions, defects or misrepresentations in the Information (including by reasons of negligence, negligent misstatement or otherwise) or for any loss or damage (whether direct or indirect) suffered by persons who use or rely on the Information. The Information is governed by, and is to be construed in accordance with, the laws in force in New Zealand. National Australia Bank Limited is not a registered bank in New Zealand.