My favourite things: the relationship between asset classes and satisfaction Marcia Keegan Research Fellow 23 March 2012
Which people are happy? Young (late teens/early 20s) and older people Good health Partnered Employed happier than unemployed Working part-time instead of full-time Living in the country 2
Economic resources and satisfaction Money can t buy happiness, but it can buy a better standard of misery Most international research shows that money can buy happiness that is, people with more money tend to be happier 3
From an international perspective the 2005 Happy Planet Index $70,000 G D P p er cap ita ($U S, PPP) $60,000 $50,000 $40,000 $30,000 $20,000 $10,000 Tanzania Portugal Luxembourg Costa Rica Australia $0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 Average life satisfaction out of 10 4
Income and happiness within countries Numerous international studies show that income has a weak but positive and statistically significant relationship with life satisfaction The economic theory of diminishing marginal utility of income holds true in happiness surveys Higher incomes allow for higher consumption, a better standard of living, more opportunities for careers, life and leisure, greater ability to weather life shocks Social comparison may also have an impact; a person s income in relation to the average of their peer group also has an impact on life satisfaction 5
Life Satisfaction 7.6 7.8 8 8.2 8.4 0 50000 100000 150000 200000 250000 300000 350000 $000s Disposable household income From HILDA 2010. Annual household incomes higher than $350 000 were not included due to topcoding. 6
Wealth and happiness With greater availability of detailed survey data, more research has been conducted on the relationship between happiness and other forms of material wellbeing, including wealth and consumption Previous international research suggests that the relationship between wealth and happiness is stronger than the relationship between income and happiness 7
Data Household, Income and Labour Dynamics in Australia Survey, 2010, Wave 10 Sample for this research included respondents 15 and over 6410 males and 7109 females in a total of 7310 households 8
Individual happiness, household wealth? Satisfaction is measured in individuals, while wealth can be measured at the individual, couple or household level Some forms of household wealth predominantly affect the individual (eg savings accounts, superannuation) while the benefits of other forms of wealth predominantly affect the entire household (eg owner-occupied dwellings This analysis focuses on household wealth and individual happiness 9
Types of wealth considered Real property Owner occupied dwelling Other real property Financial assets Superannuation Savings (bank deposits) Shares Debt Home mortgage Other property mortgage Credit card debt Other personal debt 10
Assets of households, HILDA Wave 10 Family home Bank accounts Equities Superann uation Other real property Mean value ($000s) % owning asset 378.36 38.92 37.35 143.74 125.99 63.80 97.59 34.05 80.84 20.25 Mean value ($000s) (ABS) 364.9 32.9 22.3 115.9 136.4 Reference: Author s calculations based on HILDA survey data, ABS Household Wealth and Wealth Distribution (2011). 11
Debts of households, HILDA Wave 10 Home mortgage Other property mortgage Credit card debt Other personal debt Mean value ($000s) 86.28 34.64 1.84 16.27 % owing debt Mean value ($000s) (ABS) 34.74 9.87 26.85 34.78 68.4 36.6 2.6 10.2 Reference: Author s calculations based on HILDA survey data, ABS Household Wealth and Wealth Distribution (2011). 12
Measures of happiness HILDA asks respondents to state how satisfied they are with a number of aspects of their lives, on a scale of 0 to 10, where 0 = extremely dissatisfied and 10 = extremely satisfied This research focuses on two measures: Satisfaction with life as a whole Satisfaction with one s financial situation These measures are the most relevant to a person s wealth status 13
Most respondents are pretty satisfied with their life Density 0.05.1.15.2 0 2 4 6 8 10 K13 Satisfaction - Your financial situation Density 0.1.2.3.4 0 2 4 6 8 10 K14 How satisfied are you with your life but not so satisfied with their financial situation 14
7.6 Life Satisfaction 7.8 8 8.2 8.4 0 1000000 2000000 3000000 4000000 5000000 6000000 7000000 $000s Gross household wealth From HILDA 2010. Annual gross household wealth higher than $7 million not included due to topcoding. 15
Net wealth, financial satisfaction and life satisfaction 1600 1400 1200 th ($000s) Mean net wealt 1000 800 600 400 Life Financial situation 200 0 0 1 2 3 4 5 6 7 8 9 10 Satisfaction Reference: Author s calculations based on HILDA 2010 survey data. 16
Methdology An ordinal probit model was used to determine the relationship between wealth and satisfaction (dependent variable) Due to the curvilinear relationship between wealth and satisfaction, the log of assets and debt were used as explanatory variables Other variables used were age, sex, partnership status, single parenthood, health, employment and equivalised income 17
Results: assets, debt and satisfaction Overall life satisfaction Satisfaction with financial situation Coefficient Standard error Coefficient Standard error Age ***-0.054 0.005 ***-0.042 0.004 Agesquared/100 ***0.059 0.006 ***0.051 0.004 Female **0.048 0.020 ***0.053 0.018 Diploma/trade 0.050 0.043 ***-0.139 0.031 qualification No post-school ***0.112 0.034 ***-0.122 0.032 Health status ***-0.419 0.034 ***-0.253 0.035 Partnered ***0.261 0.033 ***0.125 0.033 Single parent -0.091 0.066 ***-0.211 0.067 Employed -0.041 0.039 ***0.143 0.038 Unemployed ***-0.178 0.065 ***-0.659 0.092 Equivalised ***0.001 0.000 ***0.005 0.001 income Total assets ***0.032 0.010 ***0.109 0.010 Total debt ***-0.011 0.003 ***-0.039 0.004 18
Effect of assets and debt As we would expect, assets are positively associated with life satisfaction and financial satisfaction, while debts are negatively associated with financial and general satisfaction Wealth and debt has a stronger association with financial satisfaction than overall satisfaction This relationship exists even when income is controlled for Do certain types of assets have a stronger impact on satisfaction than others? 19
Why do we have assets? Potential capital gain Shares, real property, collectibles Income stream (or offsetting expenses) Shares (dividends), real property (rent or offsetting rental expenses), savings (interest) Store of value Collectibles, real property, gold, jewellery Sentimental or use benefits Own home, collectibles, vehicles, jewellery Because different assets have different benefits, some assets may provide more satisfaction than others 20
Overall life satisfaction Satisfaction with financial situation Coefficient Standard error Coefficient Standard error Age ***-0.055 0.005 ***-0.039 0.004 Age-squared/100 ***0.060 0.006 ***0.048 0.005 Female **0.048 0.020 ***0.053 0.019 Diploma/trade 0.063 0.041 **-0.077 0.029 qualification No post-school ***0.121 0.033 *-0.055 0.030 Health status -***0.414 0.034 ***-0.233 0.036 Partnered ***0.256 0.033 ***0.114 0.034 Single parent -0.092 0.068 ***-0.214 0.069 Employed -0.035 0.037 ***0.142 0.036 Unemployed **-0.176 0.067 ***-0.623 0.097 Equivalised ***0.001 0.000 ***0.004 0.001 income Family home ***0.014 0.004 ***0.018 0.004 Superannuation 0.005 0.005 *0.008 0.005 Savings 0.000 0.006 ***0.073 0.007 Shares 0.003 0.002 ***0.011 0.003 Other real 0.004 0.004 ***0.011 0.003 property Home mortgage **-0.009 0.003 ***-0.012 0.003 Other property -0.004 0.005-0.006 0.006 mortgage Credit card debt **-0.009 0.004 ***-0.039 0.004 Other debt -0.004 0.003 ***-0.016 0.003 21
Financial satisfaction Savings had the strongest effect on financial satisfaction, followed by wealth in the family home, shares and other real property were equal third Superannuation wealth, although being the second- largest wealth store, was barely statistically significant Credit card debt had the biggest impact on financial satisfaction, followed by other debt, then the home mortgage. Mortgages over other real property not significant. 22
Life satisfaction All assets had a positive impact, all debt had a negative impact, though not all statistically significant Family home was the only store of wealth that was statistically significant The home mortgage and credit card debt had similar negative and significant impacts on happiness 23
Discussion Family home has a big impact on satisfaction threefold benefits in capital gain, rental offset and sentimental or use benefits Having cash aside for a rainy day people made people very pleased about their finances, but had no impact at all on life in general Superannuation has little to no impact because it is inaccessible for so many, it almost doesn t exist? Shares and other real property had similar impacts 24
Discussion Tax deductible debt has less of an impact than nondeductible debt Credit cards and home mortgages reduce both life and financial satisfaction Mortgages over other property have no impact on either form of satisfaction part of a specific financial strategy? Other debts may be deductible or not, may be secured or not 25
The Paradox of Bliss This research and most existing research shows that there is a positive, small and significant relationship between life satisfaction and financial resources Money does buy happiness! BUT.. In most measures of financial resources vs. happiness, people who give themselves a 10 out of 10 for happiness are worse off than people who give themselves a 9 out of 10 26
From AMP report 26 Median equivalised household income by happiness Difference between own median equivalised HH income and mean of peer group 27
From earlier in the presentation 1600 1400 1200 th ($000s) Mean net wealt 1000 800 600 400 Life Financial situation 200 0 0 1 2 3 4 5 6 7 8 9 10 Satisfaction Reference: Author s calculations based on HILDA 2010 survey data. 28
The Paradox of Bliss why? Used a subsample of HILDA everyone who scored 9 or 10 out of 10 in general life satisfaction Created a dummy variable bliss ; =1 if life satisfaction = 10, else =0 2904 people scored 9, 1536 scored 10 in Wave 10 Results were surprising so surprising that a similar result was estimated for the 2006 HILDA for comparison 29
Results 2010 2006 Coefficient Standard error Coefficient Standard error Age -0.007 0.006 **-0.018 0.008 Age-squared/100 0.009 0.007 **0.023 0.009 Female 0.000 0.054-0.061 0.046 Diploma/trade qualification ***0.321 0.082 ***0.240 0.077 No post-school ***0.420 0.073 ***0.447 0.078 Health status -0.021 0.082-0.063 0.071 Partnered *-0.126 0.074 0.035 0.066 Employed **-0.227 0.099 ***-0.181 0.059 Unemployed 0.096 0.164-0.113 0.126 Equivalised income 0.001 0.001 0.001 0.001 Assets ***-0.060 0.020 ***-0.069 0.018 Debt -0.002 0.007-0.008 0.006 Constant 0.316 0.261 0.611 0.278 30
Why is this? People who live simpler lives are happier? Less intelligent people didn t understand the question? Less wealthy/educated people have less ambition or drive to further themselves?????? 31
Conclusions Asset type and debt type, as well as total assets and debt, have a statistically significant impact on satisfaction Family home and savings have big effects Tax-deductible debt has less of an impact than nondeductible debt Once a person is already pretty well-off, there may be merit in backing off a little and smelling the roses 32
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