Paul Sainsbury

Family budgets are under pressure with the primary carer, typically the mother, losing about 60 per cent of her gross income when returning to work full-time after having children – when factoring in the cost of child care, loss of Government benefits and increase in tax – according to the latest AMP.NATSEM report.

Middle income mothers who work part-time fare a little better, losing about 45 per cent of their pay; but mums already working part-time who decide to increase their hours to full-time, will lose a massive 75 per cent of their pay for these extra hours of work.

Even though it’s more expensive than ever, child care use has jumped by almost 80 per cent since 1996, with almost a quarter of all children in some sort of formal¹ child care, compared to only 13 per cent in 1996.

These are some of the key findings in the AMP.NATSEM Income and Wealth Report: Child care affordability in Australia.

The report finds Long Day Care is the most common form of formal child care, with 630,000 Australian families using this type of care, but it’s also the most expensive, costing up to $170 a day per child, which is more than a full-time wage for many low income women.

But parents are still more likely to use the services of grandparents, friends and other family members when it comes to caring for their child with 60 per cent opting for this type of informal care.

The average cost of child care has increased by 150 per cent in the last decade, jumping from $30 to $75 a day for Long Day Care.

AMP Chief Customer Officer Paul Sainsbury said affordability and accessibility of child care is critical to supporting a sustainable society, particularly from a workplace participation perspective as our population ages.

“While Government subsidies have meant out-of-pocket child care expenses haven’t increased by much more than the CPI, the big concern is recent growth in the price charged by child care centres, which has increased by more than 44 per cent in the past five years,” Mr Sainsbury said.

“The AMP.NATSEM report shows child care prices increased more than all but two of the household expenditure categories monitored by the Australian Bureau of Statistics, rising more than education, petrol and health costs. Only electricity and tobacco were higher.

“When the time comes for parents to decide whether to return to paid work, it’s not only an emotional consideration, but also an important financial one.  For some, the decision to return to the workforce may not be a choice, so it’s crucial that Australian families understand the costs involved and the potential impacts of a return to work,” Mr Sainsbury said.

Other key report findings

Low income and single parents fair the worst

• Mothers from low income families returning to work full-time, may only keep as little as $4.55 an hour, or 28 per cent of their salary, when factoring in the cost of child care, loss of Government benefits and income tax.
• Mothers from low income families going back to work part-time, will lose a little less of their salary, but still a big chunk at about 69 per cent, and can expect to keep about $5.10 of her $16.37 hourly wage.
• Low income single parents working full-time can expect to lose about 62 per cent of their pay, keeping just $6.25 of their $16.37 minimum wage.  They will lose about 45 per cent of their pay if they work part-time, keeping just $9.09 an hour.

Child care today

• Child care is mostly used by children under five years and peaks for three year olds, where almost 60 per cent of children are in approved child care.
• Only around eight per cent of children younger than one year use approved child care, this increases dramatically to 34 per cent by the age of one.
• Overall 887,000 families use formal child care, with nearly 1.3 million children attending around 13,000 approved child care centres.
• Around 630,000 Australian families use Long Day Care and 109,000 families use Family Day Care (home-based care by registered carers).

Lack of child care vacancies in inner cities

• 11 per cent of child care centres don’t have vacancies.
• Finding child care for school-aged children can be tough, with no vacancies at 13 per cent of before and after care school providers and no free spots in over 30 per cent of vacation care.

Typical child care cost after subsidies

• Government covers about 54 per cent of the cost of child care with the average annual gross cost of child care for an Australian family at $9,315.
• So families are on average $4,352 out of pocket from the cost of child care.

Where a person lives has a big impact on their child care costs

• Capital cities tend to offer less affordable child care than regional areas.
• Outside Western Australian mining centres, Sydney’s affluent Mosman has the least affordable child care, with child care making up 9.3 per cent of disposable income, compared to the 6.5 per cent national average for a family with one child in Long Day Care and one in Outside School Hours Care.
• Queensland has the most affordable child care in Australia, making up about seven per cent of disposable income in inner Brisbane and 3.7 per cent in Far North Queensland.

Informal care still most popular

• Even though a lot more children now use formal child care, informal care remains the most popular option with almost 60 per cent of children being looked after by grandparents, relatives or friends. 
• Grandparents are playing an increasingly vital role in caring for our kids – covering almost a quarter of all child care hours.

Most mothers work part-time

• Around 42 per cent of mothers with kids in child care work part-time and 29 per cent work full-time.

More females in the workforce, only moderate by international standards

• Female workforce participation has increased from around 44 per cent to 59 per cent over the past 35 years, but Australia is still well behind the United Kingdom, Canada and Sweden when it comes to the number of women working compared to men.
• Australia also sits in the middle of international rankings for the number of families using child care, with Denmark and the Netherlands well ahead of the pack.

Women who return to work after children are hit with a triple financial whammy

• When women go back to work after having children, they’re not only faced with covering the cost of child care, but as they increase their working hours, they lose child care benefits and pay more income tax.

Mothers can take home next to nothing after paying for child care

• The short-term financial gain of returning to work after having kids can be negligible with a mother from a middle income family only taking home $12.32 of her $30.70 hourly wage when returning to work full-time.
• Middle income mothers will keep slightly more of their pay if they go back to work part-time – about $16.80 an hour.

NATSEM Principal Research Fellow, and author of the report, Ben Phillips said the report shows Government subsidies such as the Child Care Benefit and Child Care Rebate have helped keep a lid on families’ out-of-pockets child care costs.

“Without Government assistance, the gross cost of child care would have doubled compared to incomes and would be 182 per cent above current levels,” Mr Phillips said.

“But it’s likely that – along with higher standards, lack of supply, and Australia’s strong economy – child care subsidies have also helped drive up prices, which means people need more assistance, and so the cycle continues.”

Since 2002, AMP and NATSEM have produced a series of reports that open windows on Australian society, the way we live and work and our financial aspirations.  AMP publishes these reports to help the community make informed financial and lifestyle decisions and to contribute to important social and economic policy debate.

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¹ Formal child care is regulated child care that takes place away from the child’s home

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Australians need to plan for longer retirement.

The Actuaries Institute (the Institute) warns Australians need to be financially prepared for many years of retirement. The warning comes in response to the latest headline life expectancy rates released last week by the Australian Bureau of Statistics (ABS), which projected ‘life expectancy at birth’ age for men of 79.9 and 84.3 for women. (ABS media release can be found here).

According to the Institute, these ‘reported’ life expectancies focus on reported life expectancies at birth, but those that have already reached age 65 can expect to live longer than the population average and allowing for improvements in longevity will increase this further. The Institute’s own calculations suggest that it is, in fact, more likely that the life expectancy of those aged 65 now will be 86 for men and 89 for women.

This means that 65 year old males need to fund on average 21 years of retirement, and 65 year old females will need to fund on average 24 years of retirement.  And, as these are average figures, some people will live much longer.  In fact, the Actuaries estimate that one in three 65 years olds will live past 90 and one in five will live past 95.

“Most people don’t realise how long they might live. Understandably many people base their retirement plans on the published life expectancies. However in reality, with rapid advances in medicine and the dramatic improvement in life expectancy, it is quite conceivable that in the coming years half of all healthy 65 year olds will live past 100,” said Mr John Newman, President of the Actuaries Institute.

It is important that retirees consider whether their savings will fund these lengthy retirement periods.  Those relying purely on ABS averages are likely to run out of money, meaning that they may face a significant portion of their retirement years in an uncomfortable financial situation.

Actuaries making headway in longevity debate but still more work to do

The Institute has been vocal on the issue of longevity risk (the risk of people outliving their retirement savings) for some time. In September 2012 the Institute released the white paper “Australia’s Longevity Tsunami, what should we do?” which emphasised the need for urgent retirement policy reform in the face of Australia’s steep and continuing rise in life expectancies.

Since the launch of the paper and subsequent government consultations, the Institute has welcomed changes announced in the May 2013 federal budget, which removed the inequitable tax treatment of deferred lifetime annuities and allowed them the same tax treatment as current income streams.

“We’ve made an important step in placing the urgent issue of longevity risk firmly on the agenda. We are focused on improving education on this issue, to ensure future generations have a better a chance of planning for their retirement adequately, and we also strongly recommend lifting the pension age, in line with increases in life expectancies” Mr Newman concluded.

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Household wealth

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  Australians getting richer: ABS

  The Bureau of Statistics has released the report “Household Wealth and Wealth Distribution 2011/12”.

• Average wealth. Wealth (assets less liabilities) of the ‘average’ Australian household stood at just over $728,000 in 2011/12. While down around $30,000 on two years earlier, wealth is likely to have rebounded to record highs over the past year in response to rising share prices and home prices.
• Family home dominates. The value of the family home accounts for around 40 per cent of net worth or wealth with superannuation the next largest assets followed by investment homes.
• More millionaires. Just over 20 per cent of all families can be regarded as ‘millionaire’ families. After accounting for inflation, less than 15 per cent of families were ‘millionaire’ families eight years ago.

What does it all mean?

• Most people like to think they are doing it tough. In large part that is because the list of so-called ‘essentials’ is bigger nowadays and in large part includes more ‘discretionary’ items than in the past. But the latest data shows that more families can be regarded as relatively well off. In 2011/12, the proportion of families with net wealth – that is assets exceeding liabilities – of more than $1 million was over 20 per cent. That’s one in five families and the data does take into account inflation over time.
• While net wealth fell over the two years to June 2012 by almost $31,000 or 4 per cent, over the past year home prices lifted by around 4 per cent with total returns on shares up by over 20 per cent. So it more than likely that wealth is back at record highs, shrugging off the Global Financial Crisis and subsequent European Debt Crisis.
• Consumers have been cautious to spend over the past year, but, underpinned by generational low interest rates, it is clear that spending is set to rebound after the election.
• Australians are getting richer. After adjusting for inflation over time, the proportion of people with wealth between zero and $50,000 fell from 14.6 per cent to 12.7 per cent over the eight years to 2011/12 while families with more than $1 million rose from 14.6 per cent to 20.7 per cent.
• Mean (average) net worth (assets less liabilities) stood at $728,139 in 2011/12, down $30,891 or 4.1 per cent over the two years from 2008/09.
• Average household assets stood at $858,200 in 2011/12 with the family home accounting for $369,900 (43 per cent) of the total. The next highest asset was superannuation at $132,300 followed by investment property at $129,100 and home contents (TVs, fridges etc) at $62,600.
• Average household debt in 2011/12 was $130,100 and dominated by outstanding loans (principal) on the family home at $74,700 and other property debt at $42,100.
• Wealth in the bottom 20 per cent of families averaged $31,200 in 2011/12 while wealth in the top 20 per cent averaged $2.2 million.
• In 2011/12, average (mean) wealth was highest in the ACT at $929,800 followed by Western Australia at $768,400, NSW at $756,000, Victoria at $746,400, Northern Territory at $722,000, South Australia at $666,400; Queensland at $663,600 and Tasmania at $601,000.
• In Canberra, wealth was highest at $929,784 in 2011/12, but next highest is Melbourne at $813,417, followed by Sydney, Darwin, Perth, Brisbane, Adelaide and Hobart.
• The state with the highest proportion of households owning their homes outright was Tasmania (35.3 per cent) from South Australia at 33.9 per cent. The lowest proportion of owner occupiers is in the Northern Territory at 16.5 per cent.
• When official interest rates are cut, the state/territory receiving the biggest boost is the ACT (40.4 per cent of households have a mortgage) followed by Western Australia (40 per cent) and South Australia (38.4 per cent).
  • Consumers may not be actively spending at present but that doesn’t mean they are unable to spend. Household wealth is either at or near record highs and with home prices rising, wealth levels will follow suit.
  • There is a raft of data classified by region, income and wealth ranges together with varying household characteristics, giving investors a better understanding about how Aussie families are positioned. The data is useful in understanding ‘“hot button” issues influencing consumer spending.
  • There are key differences in wealth and housing tenure between capital cities and regional areas in states and territories, especially in Victoria
  • While there is plenty of attention paid to household debt, household assets continues to grow at a faster rate, lifting wealth levels to record highs.

What do the figures show?

• Mean (average) net worth (assets less liabilities) stood at $728,139 in 2011/12, down $30,891 or 4.1 per cent over the two years from 2008/09.
• Average household assets stood at $858,200 in 2011/12 with the family home accounting for $369,900 (43 per cent) of the total. The next highest asset was superannuation at $132,300 followed by investment property at $129,100 and home contents (TVs, fridges etc) at $62,600.
• Average household debt in 2011/12 was $130,100 and dominated by outstanding loans (principal) on the family home at $74,700 and other property debt at $42,100.
• Wealth in the bottom 20 per cent of families averaged $31,200 in 2011/12 while wealth in the top 20 per cent averaged $2.2 million.
• In 2011/12, average (mean) wealth was highest in the ACT at $929,800 followed by Western Australia at $768,400, NSW at $756,000, Victoria at $746,400, Northern Territory at $722,000, South Australia at $666,400; Queensland at $663,600 and Tasmania at $601,000.
• In Canberra, wealth was highest at $929,784 in 2011/12, but next highest is Melbourne at $813,417, followed by Sydney, Darwin, Perth, Brisbane, Adelaide and Hobart.
• The state with the highest proportion of households owning their homes outright was Tasmania (35.3 per cent) from South Australia at 33.9 per cent. The lowest proportion of owner occupiers is in the Northern Territory at 16.5 per cent.
• When official interest rates are cut, the state/territory receiving the biggest boost is the ACT (40.4 per cent of households have a mortgage) followed by Western Australia (40 per cent) and South Australia (38.4 per cent).

What are the implications for investors?

• Consumers may not be actively spending at present but that doesn’t mean they are unable to spend. Household wealth is either at or near record highs and with home prices rising, wealth levels will follow suit.
• There is a raft of data classified by region, income and wealth ranges together with varying household characteristics, giving investors a better understanding about how Aussie families are positioned. The data is useful in understanding ‘“hot button” issues influencing consumer spending.
• There are key differences in wealth and housing tenure between capital cities and regional areas in states and territories, especially in Victoria
• While there is plenty of attention paid to household debt, household assets continues to grow at a faster rate, lifting wealth levels to record highs.

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