Financial Literacy in Australia:
Insights from HILDA Data
Professor Alison Preston
UWA Business School
March 2020
Australia has a relatively high level of financial literacy when ranked globally.
In the 2014 Standard & Poor’s Ratings Services Global Financial Literacy
Survey of a 140 economies, Australia, for example, ranked in the top 10
countries for financial literacy.
1
Notwithstanding this favourable global
performance there is widespread financial illiteracy within Australia,
particularly amongst young people. There are also large and significant
gender gaps with women, on average, less financially literate than men.
Within Australia 63% of men and 48% of women demonstrate an
understanding of at least three basic financial literacy concepts. If
understanding three basic financial literacy concepts can be considered
financially literate, then these statistics suggests that around 8.5 million (or
45%) adults in Australia are financially illiterate.
Such widespread financial illiteracy is of increasing concern within the
context of highly complex financial markets, high levels of personal and
household indebtedness and easy access to credit opportunities (particularly
from non-traditional sources as Wallet Wizard and Nimble). As a minimum
individuals need to understand the concept of compound interest.
Introduction
Figure 1: Financial literacy rates; adults; Australia
In view of these concerns, this issues paper has been prepared as a way of highlighting
the level of financial literacy within and across Australia. The goal of the paper is to
engender debate amongst academics, practitioners and policy makers on the issues
related to financial illiteracy, identify issues in need of deeper research and contribute to
thought leadership on the ways through which the problems associated with financial
illiteracy may be addressed.
2
The analysis reported in this paper is primarily based on data gathered in
2016 via the Household, Income and Labour Dynamics in Australia (HILDA)
survey. HILDA is a large, nationally representative, longitudinal survey of
households. All individuals aged 15 or more within sample households are
interviewed and detailed information is gathered on a range of
socioeconomic characteristics, including information on wealth and financial
decision making. In 2016 the HILDA survey also included a series of
questions testing knowledge of basic financial literacy concepts. These data
provide important insights into the financial literacy of Australians and are
especially valuable on account of the nationally representative nature of the
survey.
There are a number of ways of measuring financial literacy. A common
approach is to define a person as financially literate if they can correctly
answer three questions (commonly known as the Big-3) testing knowledge
related to three key financial literacy concepts. These include: (a) an
understanding of interest rates, especially compound interest; (b) an
understanding of inflation; and (c) an understanding of diversification.
The HILDA data and the measurement of financial literacy
The actual number and complexity of the financial literacy questions included in various
surveys differs depending on the focus and length of the survey. As HILDA is a large and
detailed survey, time only permitted the inclusion five financial literacy questions. The
questions followed international best practice and were based on questions initially
developed by Annamaria Lusardi and Olivia Mitchell.
2
The five HILDA questions were as
follows:
• Q1: Interest Rate: “Suppose you put $100 into a no-fee savings account with a
guaranteed interest rate of 2% per year. You don’t make any further payments into this
account and you don’t withdraw any money. How much would be in the account at the
end of the first year, once the interest payment is made?”
• Q2: Inflation: “Imagine now that the interest rate on your savings account was 1% per
year and inflation was 2% per year. After one year, would you be able to buy more
than today, exactly the same as today, or less than today with the money in this
account?”
• Q3: Diversification: “Buying shares in a single company usually provides a safer return
than buying shares in a number of different companies.” [True, False]
• Q4: Risk: “An investment with a high return is likely to be high risk.” [True, False]
• Q5: Money Illusion: “Suppose that by the year 2020 your income has doubled, but the
prices of all of the things you buy have also doubled. In 2020, will you be able to buy
more than today, exactly the same as today, or less than today with your income?”
Respondents also had the option of a “don’t know” response or a “refuse to answer”
response.
3
When assessed using the Big-3 (questions 1-3 above) the HILDA estimates
show that just over half of all adult Australians (55%) are financially literate.
When disaggregated by sex it is apparent that there is a large gender gap in
financial literacy. While two-third (63%) of Australian men are financially
literate fewer than one in two (48%) of Australian women are financially
literate (Figure 1).
3
The gender gap is highly significant in a statistical sense.
Figure 2 shows the variation in financial literacy across Australia’s States and
Territories. When benchmarked against the observed financial literacy rates
in New South Wales (NSW) it would appear that the financial literacy rates of
men and women are significantly higher in Western Australia (WA) and in
the Australian Capital Territory (ACT). There are nevertheless, large and
significant gender gaps in financial literacy within all States and Territories
(the exception being the Northern Territory where the observed gender gap
is not statistically significant).
How financially literate are adult Australians?
Figure 2: Financial literacy rates; adults; Australian States and Territories
4
Financial literacy not only varies by sex, it also varies by age and has an inverse U-Shape; i.e. is at
its lowest amongst young people, rises over the life course and then declines in older age (Figure
3). Such a pattern is found in most countries and Australia is no different in this respect. Within
Australia the turning point is around 50 years of age.
3
The declining financial literacy rates in
older ages relates, in part, to cognition effects.
There are also significant differences in financial literacy when disaggregated by socioeconomic
characteristics such as birthplace, marital status, education and employment (see Table 1).
Women, for example, who are migrants from a non-English speaking background country have a
financial literacy rate of 40.5%; this compares to 49.1% for Australian born women. Similarly,
women whose highest level of education was Year12 or less have a financial literacy rate of
38.3% while the rate for tertiary qualified women is 65.2%.
Figure 3: Financial literacy rates by age and sex, Australia
Married
Never
married
Australian
born
Migrant from a
non-English
speaking
background
High
School or
less
Tertiary
qualified
Employed
Not in the
labour
market
Men 69.1% 50.0% 63.5% 55.4% 48.2% 81.8% 65.7% 58.5%
Women 53.8% 34.9% 49.1% 40.5% 38.3% 65.2% 51.9% 42.5%
Difference:
Men-Women (%-point)
15.3 15.0 14.4 15.0 9.9 16.6 13.9 16.0
Table 1: Financial literacy rates by select characteristics
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Source: HILDA.
Empirical research shows that financial literacy is important determinant of,
and correlate with, a range of outcomes including wealth accumulation and
planning for retirement, superannuation savings, and women’s economic
empowerment and domestic violence.
4
Figure 4 and 5 describes select
characteristics of adult men and women in Australia disaggregated by
whether or not they are financially literate. The purpose of the exercise is to
show that financial literacy correlates with important outcomes such as
savings and satisfaction with ones financial situation (an important predictor
of well-being).
The first two columns in Figure 4 shows that around 80% of men and women
who are financially literate are able to easily raise $3,000 in an emergency.
This compares to 60% for men and women who are not financially literate.
The second set of estimates pertain to ‘satisfaction with financial situation’.
Here we can see that around 40% of men and women who are financially
literate consider themselves to be very satisfied with their financial
situation. A significantly smaller share of financially illiterate men and
women consider themselves to be very satisfied with their financial
situation.
Does being financially literate matter?
Figure 4: Financial literacy by select characteristics
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In the third set of estimates in Figure 4 the focus is on the type of superannuation
account that the respondent has. Australia is one of the few countries in the world
that requires employers to make a compulsory contribution into a retirement
savings account (known as a superannuation fund in Australia). The arrangement
has led to widespread superannuation coverage, however, a large portion of those
with superannuation do not understand how superannuation works. The 2018
HILDA survey included a special module on wealth and superannuation savings.
Respondents with a superannuation account were asked about the type of
superannuation account they had (i.e. whether or not they had a defined benefit
(DB) component) and also asked about the balance in their account. An analysis of
the responses for adult non-retirees (aged 20-64) shows that only 79% and 73% of
financially literate males and females, respectively, knew whether or not they had a
DB component. The corresponding shares amongst financially illiterate non-retirees
was 64% and 60%, respectively. Financially illiterate males and females were also
more likely to state that they did not know the balance in their superannuation
account.
Figure 5: Financial literacy and superannuation balances, 2018
Figure 5 summarises the mean superannuation balance (savings) disaggregated by
financial literacy knowledge. As may be seen, men and women who are financially
literate have significantly higher superannuation balances. It is, of course, entirely
possible that having higher superannuation balances incentivises individuals to
become more financially literate. In other words, while there is a correlation,
without deeper analysis we are unable to state whether or not there is a causation
(ie. financial literacy leads to higher superannuation savings).
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7
Figure 6 shows the extent of financial illiteracy amongst teenagers (aged 15-17) in
Australia (comparisons are also made with adults). There are no statistically
significant differences in the financial literacy rates of teenage males and females
across Australia’s States and Territories. In 2016 only 28% of teenage males and
15% of teenage females were able to correctly answer all of the Big-3 financial
literacy questions. This is significantly less than the mean share for adults (the
non-patterned bars). There is also a large gender gap. The low level of financial
literacy amongst young people is particularly concerning given the range of
financial decisions that young people are increasingly required to make, including
decisions about investing in education, saving, credit cards etc.
It is clear from the above that the observed gender gap in financial literacy in
adulthood stems from gender gaps in financial literacy that have emerged during
the teen and pre-teen years. Interventions to increase the financial literacy of
young people could, therefore, be expected to raise the financial literacy of people
in adulthood. Understanding the determinants of financial literacy amongst young
people is, therefore, an important research priority. Studies that have and are
investigating this suggests that there is an important household transmission
effect, particularly between mothers and daughters.
6
How financially literate are teenagers?
Figure 6: Financial literacy rates; teenagers and adults
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Within and across Australia there is widespread financial illiteracy. Nationally one in three
adult men and one in two adult women do not understand key basic financial literacy
concepts such as interest rates, inflation and risk diversification. These are concerning shares,
particularly in the context of rising household debt, increased individual responsibility for
saving for retirement and easy access to credit. The costs of financial illiteracy to the society,
the economy and individuals are substantial. From a macroeconomic perspective it financial
literacy is central to the stability of the financial system
7
and from an individual and societal
perspective it matters for overall wellbeing.
At a national level the Australian Securities and Investment Commission (ASIC) is developing a
roadmap or strategy to develop the financial capabilities of all Austalians.
8
The UWA Public
Policy Institute (PPI) seeks to contribute to the strategy and policy making process and, to this
end, seeks your views and input. Key questions include:
1. What focus areas should be considered / prioritised?
2. What research is needed to better inform strategy and policy making?
3. What policies should we consider / prioritise?
4. What would you see as central to any financial capabilities strategy?
Where to from here?
Endnotes
1. Hasler, A. and Lusardi, A., 2017. The gender gap in financial literacy: a global perspective.
Global Financial Literacy Excellence Centre. The George Washington University School of
Business.
2. Lusardi, A. and Mitchell, O., 2011. ‘Financial literacy around the world: an overview’,
Journal of Pension Economics and Finance, 10(4): 497-508.
3. Preston, A. and Wright, R.E., 2019. ‘Understanding the gender gap in financial literacy:
evidence from Australia’, Economic Record, 95: 1-29.
4. Van Rooij, M., Lusardi, A. and Alessie, R., 2012. ‘Financial literacy, retirement planning and
household wealth’, Economic Journal, 122: 449-478.; Lusardi, A., and Mitchell, O., 2007.
‘Baby boomer retirement security: the roles of planning, financial literacy and household
wealth’, Journal of Monetary Economics 54(1): 205-224; Postmus J. et al., 2013. ‘Financial
literacy: building economic empowerment with survivors of violence’, Journal of Family
Economic Issues, 34: 275-284.
5. For a more detailed analysis of the relationship between financial literacy and the
superannuation savings of men and women see: Preston, A. and Wright, R.E., 2020. ‘The
impact of financial literacy on the superannuation (pension) savings of men and women’,
in Preston, A. (ed) Financial Literacy and Superannuation (Pension) Savings for Retirement:
Submission to the Australian Government Retirement Income Review
https://treasury.gov.au/sites/default/files/2020-02/preston030220.pdf
6. Bottazzi, L. and Lusardi, A. 2016. ‘Gender differences in financial literacy: evidence from
PISA data in Italy’
https://institute.eib.org/wp-content/uploads/2016/10/gender-diff.pdf
7. Hall, K., 2008. ‘The importance of financial literacy’, Reserve Bank of Australia Bulletin,
September: 13-18.
8. ASIC and RMIT, 2019. ‘Research Summit: Building Financial Capabilities Together.
Summary Report.
https://financialcapability.gov.au/files/summary-report-building-
financial-capabilities-together-research-summit.pdf
Disclaimer
Disclaimer: The HILDA Project was initiated and is funded by the Australian Government Department of Social Services (DSS) and is
managed by the Melbourne Institute of Applied Economic and Social Research (Melbourne Institute). The findings and views reported
in this paper, however, are those of the author and should not be attributed to either the DSS or the Melbourne Institute.
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