Predicting Financial Literacy in Australia
Worthington, Andrew C., Financial Services Review
Logit models are used to predict financial literacy using the 2003 ANZ Survey of Adult Financial Literacy in Australia. Financial literacy is defined in terms of mathematical ability and the understanding of financial terms. Factors examined include gender, age, ethnicity, occupation, education, income, savings, and debt. Financial literacy is found to be highest for persons aged between 50 and 60 years, professionals, business and farm owners, and university/college graduates. Literacy is lowest for the unemployed, females, and those from a non-English speaking background with a low level of education.
© 2006 Academy of Financial Services. All rights reserved.
Keywords: Financial literacy; Ordered logit; Demographic; Socioeconomic; Financial characteristics
In the last few decades, numerous factors have come together in Australia to create financial services markets that require consumers to be more knowledgeable if they are to manage their finances effectively. Financial deregulation and the ensuing boost in competition and access to credit, the proliferation in financial products, innovation in marketing, and technological change have led to consumers being faced with a bewildering array of intricate financing and investment opportunities (Consumer & Financial Literacy Taskforce, 2004). Consumers' responsibilities for retirement investment have also grown, with the government encouraging citizens to move from public pensions into private pensions. Employers are also persuading employees to shift from defined-benefit plans into defined-contribution plans and responsibility for their own investment strategies, including choice of managed fund provider (Brown, Gallery & Gallery, 2004). And there is now allowance in Australia's system of compulsory privately funded retirement income (superannuation) for self-managed superannuation funds (Australian securities & Investments Commission, 2005b).
Problematically, the profile of consumers requiring knowledge to deal with these markets has also changed. Changes in Australia's demography with aging and ethnically diverse populations has seen language, educational and cultural barriers arise that may hinder the access of some of these populations to new financial opportunities, and expose others less knowledgeable to questionable marketing practices and the possibility of devastating borrowing and investment exposures. In the last few years, mortgage debt and consumer credit as a share of disposable income in Australia has grown to record highs with allied concerns raised over the financial knowledge of demand-side market participants (Worthington, 2006). This is because when combined with low levels of emergency funds, high debts have exposed many households to adverse financial outcomes, including debt repayment problems, delinquencies, and bankruptcy (Worthington, 2004). In response, financial literacy has risen on the agenda for educators, community, business and consumer groups, and government agencies and policy makers.
Interest in financial literacy is, of course, not confined to Australia. In the United States, the Federal Reserve Board-founded Jumpstart Coalition for Personal Financial Literacy [see, e.g., Jumpstart Coalition for Personal Financial Literacy (2005)] biannually surveys the financial literacy of high school students and the response, at least in part, has been a proliferation of state legislation mandating personal finance in school curricula (CBA Reports, 2003). More recently, the U.S. Senate Committee on Banking, Housing and Urban Affairs (2002) has conducted hearings into the state of financial literacy and education and the U.S. Department of Treasury (2002) has created the Office of Financial Education with a specific focus on improving financial literacy. Recent applications concerning the key role of financial knowledge in personal financial decision-making include Montalto, Gutter and Fox (1999), Lin and Lee (2004), and Jacobs-Lawson and Hershey (2005). …