Financial security and financial well-being are critical pillars of successful ageing and have not gotten enough attention so far. Financial insecurity is highly correlated to poor physical and mental health. It is not just a low-income bottom-of-the-pyramid problem in developing economies. It has been democratized with growing income inequalities in developed economies too, and now is an issue for nearly half the American population, as shown in the data below. People across age groups are more afraid of running out of money than death.
Financial well-being is a new area of research. A person’s financial well-being comes from their sense of financial security and freedom of choice—both in the present and when considering the future. It is not just about avoiding financial problems but also about having the ability to recover from them. Financial well-being includes retirement adequacy and healthcare financing.
Financial well-being is about individual behavior, and also about the policies and systems shaping people’s financial lives. Promoting financial well-being requires a concerted effort from key stakeholders including governments and policymakers, corporates, and multilateral organizations – in their role as employers, academics and researchers, startups, venture capitalists, and other entities.
The definitions and measures of financial well-being have evolved in the last decade. Many different metrics are being used, and surveys include measuring income stability, savings for small unexpected expenses, savings for larger shocks like a job loss, and savings for retirement. Two of the most comprehensive sources are the CFPB’s Report on Financial Well-Being in America and the US Federal Reserve’s annual Survey of Household Economics and Decisionmaking (SHED).
It would be beneficial and illuminating for other countries to follow suit with similar detailed data gathering and reporting over long periods to understand the issues and challenges, and respond by initiating policy changes accordingly.
CFPB’s Report on Financial Well-Being in America
In 2017, the Consumer Financial Protection Bureau (CFPB) published its first report on Financial Well-Being in America. CFPB developed and tested a scale in 2015 that contains 10 questions to capture how people feel about their financial security and freedom of choice. Responses are converted into an overall financial well-being “score” between 0 and 100.
The CFPB survey dataset includes respondents’ scores on that scale, as well as measures of individual and household characteristics that research suggests may influence adults’ financial well-being, including:
- Income and employment
- Savings and safety nets
- Past financial experiences
- Financial behaviors, skills, and attitudes
Financial well-being is determined by the extent to which the individuals feel that they:
- Have control over day-to-day, month-to-month finances
- Have the capacity to absorb a financial shock
- Are on track to meet their financial goals
- Have the financial freedom to make the choices that allow one to enjoy life
From 2017 to 2020, the average score for American adults increased from 54 to 55. As shown in the Figure below, the percentage of adults with high or very high scores improved from 38 to 42 percent, while the proportion with low or very low financial well-being improved from 13 to 10 percent.
This improvement aligns with prior CFPB research examining the finances of Americans before and during the early months of the pandemic and suggests that the robust government response to the pandemic − including stimulus payments, expanded unemployment benefits, and mortgage and student loan forbearance − may have prevented financial difficulties for many families, despite widespread economic uncertainty and a spike in unemployment.
At the same time, 10 percent of adults still reported having low or very low levels of financial well-being. These are the individuals who experience the most severe financial and material hardships, including housing and food insecurity.
CFPB also publishes a report on the Financial Well-Being of Older Americans. The report describes the distribution of financial well-being scores for adults ages 62 and above, and the relationship between financial well-being and age. It shows that financial well-being generally increases with age, but declines again at later ages. In addition, the report examines and quantifies the association of financial well-being with a range of topics, including employment and retirement; housing situation; debt; family and living arrangements; health-related experience; and financial knowledge, skill, and behavior.
US Federal Reserve’s Annual SHED Survey
The US Federal Reserve has been conducting a yearly survey on the ‘Economic Well-being of US Households’ since 2013. The Survey of Household Economics and Decisionmaking (SHED) evaluates the economic well-being of US households and identifies potential risks to their financial stability, taking into consideration age, occupation, duration of occupation, education, and more. The survey covers a range of topics of current relevance to financial well-being, including credit access and behaviors, savings, retirement, economic fragility, and education and student loans.
The latest report was published in May 2023 and covers the Economic Well-Being of US Households in 2022. Key findings are
- Overall financial well-being declined markedly over the prior year. Seventy-three percent of adults were doing at least okay financially in 2022, down five percentage points from 2021. Thirty-five percent of adults said they were worse off financially than a year earlier, the highest level since the question was first asked in 2014.
- Income variability: The mismatches between income and expenses due to income volatility can lead to financial challenges. Seventy percent of the families in the US had roughly the same income from month to month in 2022. However, it varied occasionally for 20 percent and varied quite often for just under 10 percent. Some families can easily manage this income variability, but for others, this may cause financial hardship. Income volatility also varies by industry, and workers in the hospitality and leisure industries were the most likely to have variable income. Also, many adults engage in “gig work,” or informal paid activities, often a source of volatility. In 2022, 10 percent of American adults reported they struggled to pay their bills in the past 12 months because their income varied.
- Bills and regular expenses: Eighteen percent of US households said they were unable to cover their current monthly expenses fully in 2022 and had to defer some of their housing-related bills (water, gas, electricity, rent, or mortgage) or non-housing related bills (credit cards, phone or cable bill, student loan, car or other payments). This indicates they are a modest financial setback away from hardship.
- Dealing with small, unexpected expenses: It is measured in SHED surveys as the ability to cover a hypothetical emergency expense of $400 exclusively from cash, savings, or a credit card paid off at the next statement (i.e., without borrowing or selling something). Sixty-three percent of adults said they would be able to cover the expense without borrowing or selling something. Another 24 percent said they could cover this by borrowing from someone, selling something, or revolving on a credit card, while 13 percent indicated they had no ability to find $400 in case of an emergency. This suggests that many adults in the US are living from paycheck to paycheck, unable to meet their monthly financial obligations, and any expectation of their ability to save for retirement is unrealistic.
- Financial resilience (preparedness for larger shocks): It is measured based on whether people have savings sufficient to cover ‘three months of expenses’ if they lose their primary source of income. 54 percent said they had set aside dedicated emergency savings, while 16 percent said they could cover three months of expenses by borrowing or selling assets. In total, 70 percent could tap savings or borrow or sell assets if faced with a financial setback of this magnitude, while 30 percent of adults indicated they could not cover three months of expenses by any means.