The consequences of divorce for financial living standards in later life

Research Paper No. 38 – February 2007

Summary

As the first generation that experienced high rates of divorce reaches retirement age, the number of older Australians who have experienced divorce at some point in their lives will increase dramatically in coming decades. The effect of the increase in divorce rates in the mid-1970s is compounded by the structural ageing of the Australian population, with the first of the “baby boomers” (those born between 1946 and 1965) turning 60 in 2006. This means that not only will larger numbers of people be entering older age, but also that a much greater proportion of these people will have experienced divorce at some point in their lives.

Divorce is relatively unlikely to occur in older age, with the most common age for divorce being in the late twenties to early forties. Although most divorces occur before people enter later life, this does not mean that these earlier divorces are without consequences for people later in life. One potential impact is financial. There is very little empirical evidence in Australia on the financial consequences of divorce for older people. This report begins to fill this gap by providing some of the first estimates of the financial consequences of divorce for Australians aged 55 to 74 years.

A number of measures of financial living standards are examined, including:

  • annual household income;
  • housing tenure;
  • superannuation;
  • receipt of income support payments;
  • per capita net household assets;
  • perceived prosperity; and
  • experience of financial hardships.

The analysis reveals that, on average, having been divorced has negative consequences for income and financial circumstances in older age. However, the negative financial impacts of divorce are substantially reduced by remarriage. For some measures of financial circumstances, the divorced and remarried are very similar to the married never-divorced.

Home ownership

  • Home ownership rates of both the divorced and remarried and the divorced singles were lower than the rate of those who were married and had never-divorced.
  • Three-quarters of the married never-divorced men owned a home outright, compared to just 40.9 per cent of the divorced single men and 57.8 per cent of the divorced and remarried men.
  • The pattern was similar for women. The main difference between men and women following divorce is that older divorced single women had higher rates of outright home ownership (49.4 per cent) than older divorced single men (40.9 per cent).
  • Divorced and remarried people, especially men, were the most likely to be purchasing a home.
  • Those who were divorced and single were substantially more likely to be renting than the married (ever- and never-divorced). Of the divorced single men, 49.4 per cent were renting, compared to just 20.9 per cent of the divorced and remarried men and 15.0 per cent of the married never-divorced men.

Assets

  • Divorced single men and women had lower median levels of per capita household assets than those who were married and never divorced ($199,900 and $178,300 respectively).
  • For both men and women, per capita assets of the divorced and remarried and the married never-divorced were similar. Taken overall, it appears that remarriage following divorce returned men and women to a similar net asset position as the married never-divorced.

Superannuation

  • Married never-divorced older women were substantially less likely to have had superannuation (37.8 per cent) than divorced and single women (49.3 per cent) and divorced and remarried women (46.4 per cent). However, the divorce history of women makes relatively little difference to their average amount of superannuation.
  • Older divorced single men were less likely than either divorced remarried men or married never-divorced men to have superannuation (43.6 per cent, 57.5 per cent and 57.9 per cent respectively). Divorced singles also had much lower levels of superannuation assets ($44,600) than the other groups. Remarried divorced men had the highest amount of superannuation ($128,300), with the married never-divorced having an average amount of superannuation of $100,000.

Income

  • For older men, the median household equivalent income (household income adjusted for household size and composition) was lowest for divorced single men ($15,500), followed by married never-divorced men ($24,500), and was highest for those who had divorced and remarried ($28,900).
  • For women, there was no relationship between marital history and median incomes (ranging from $22,000 for divorced singles to $22,900 for married never-divorced women).
  • Divorced and single men and women received higher levels of income support payments (including the age pension) than either the divorced and remarried or the married never-divorced.

Perceived prosperity and material hardships

  • Older divorced single Australians are much more likely to experience material hardships than the married never-divorced.
  • For men, the divorced and remarried are more likely to report having experienced financial hardship than the married never-divorced, but less likely than the divorced and single. For women, no difference in the rates of experiencing financial hardship were found between the divorced and remarried and the married never-divorced.
  • For both men and women, the divorced and single reported having a lower level of prosperity than the married never-divorced. The self-reported prosperity of the divorced and remarried and the married never-divorced were similar.

Differences in the educational, employment and other characteristics between the groups did not appear to explain these relationships between marital history and financial circumstances.

The finding that divorced singles were more reliant on the public pension than those who had not divorced has important implications for the financing of retirement incomes in Australia in coming decades and the extent to which the taxpayer will have to bear the costs of providing for retirement incomes.

While the Australian age pension system offsets some of the financial disadvantages faced by divorced older people who are single, the lower level of financial living standards experienced by those who have been divorced could be reduced by encouraging greater levels of labour force participation among divorced women prior to retirement age. Other strategies could involve assisting the divorced to obtain further education or retraining, and delaying retirement. However, increased labour market earnings alone will almost certainly not completely offset the negative financial consequences of divorce in older age.