Older Aussies tap windfall savings to while younger generations face loans to cope

Young and middle-income families are bracing for increased reliance on loans to weather the cost of living crunch, while older Aussies are dipping into savings to maintain their lifestyles.

Young and middle-income families are bracing for an increased reliance on loans to weather the cost-of-living crunch, and older Australians are dipping into pandemic savings to maintain life­styles, economists and analysts say.

On average, the nation has been resilient to the highest inflation in decades and the resulting aggressive string of interest rate hikes by the Reserve Bank, with economists at Jarden estimating $213bn in pandemic savings is still cushioning the impact.

But the effects are being felt unevenly as nearly $9 out of every $10 in extra deposits since June 2020 has been accumulated by people 55 years old or older.

“There’s a really big split between age cohorts in the economy, and how they’re feeling the impact of cost of living, inflation and interest rates,” Jarden chief economist Carlos Cacho said.

Young families have borne the brunt of the cost-of-living crisis.

“Your older cohorts, your 55-plus and 65-plus households, have a lot of excess savings, they’re spending quite a bit and they’re maintaining their spending at a much higher level because generally they don’t have much debt.”

“Your younger cohorts, particularly the 30 to 40-year-old group, who might have a relatively new mortgage, are facing the full impact of rate hikes. They might have childcare or other kinds of expenses for children and are in an expensive stage of life and pulling back on spending much more.

“The youngest cohorts, down to 30-year-olds, are facing a very tight and challenging rental market, which is also putting pressure on their finances. There’s a big difference in the behaviours and the outcomes across age lines.”

Excess savings accumulated during the pandemic worth $280bn at the peak in 2022 have come down 24 per cent and will continue to decrease to about $85bn by the end of 2025, Mr Cacho estimates.

The young will have less access to those extra savings and a spending survey by UBS this month shows consumers are increasingly planning to fund purchases with debt rather than savings, with the shift most prominent among ­middle-income earners.

“Older people (who) don’t necessarily have the debt burden (of a mortgage) have been huge beneficiaries of a higher interest rate environment. Ironically, their savings buffers have actually gone up as rates have increased,” said John Storey, head of bank research in Australia at UBS.

Unlike in the US, credit card use is at subdued levels in Australia, but the UBS survey, which polled 1000 consumers, suggests this could change in coming months. “Savings balances are being drawn down but you haven’t seen unsecured loans and debt levels increase yet,” Mr Storey said.

“As consumer households come under liquidity pressure, one of the sources they ultimately tap into is credit cards.”

APRA data shows credit card balances of $30bn at the end of November were 2.4 per cent higher than a year ago but this remained about 20 per cent below the $37bn balance in February 2020 at the onset of the pandemic.

Banking data shows a divergence between business deposit growth, which has slowed, and household deposits, which continue to accelerate because of tight labour markets and high migration.

“SMEs and the smaller businesses particularly are having to draw down some of their savings to fund their working capital cycle and fund their operating costs,” said Mr Storey.

“Household deposit numbers don’t reflect that level of strain from interest rate increases into the household sector.”