The Surprising Scope of Financial Stress

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Financial wellness, especially the lack of it — financial stress — and its impact on employee productivity is a topic that has been seriously researched by academic financial planning experts for more than 20 years. But only recently has the news that employees’ financial stress is resulting in significant costs to employers been making headlines in human resources and benefits management publications.

This article presents an overview of the research related to financial stress, how it affects employee productivity, and the documented costs to businesses when financially stressed employees are left to struggle on their own. Absenteeism, presenteeism, turnover, and health-related costs all contribute to reduced employee productivity. These hidden costs seriously impact business profitability.

What is financial stress?

The concept of financial stress and how to measure it has been of interest to academics since the 1980s. While early studies of financial stress focused on easily determined objective measures such as income, assets, and liabilities, researchers soon realized that people with the same objective level of income could experience very different levels of stress, based on the individual perception of the adequacy of one’s current financial situation relative to present needs and future goals. In 2003, Kim and Garman defined financial stress as the subjective assessment of one’s financial condition, including one’s perceived ability to meet expenses, satisfaction with one’s financial condition and one’s level of savings and investment, and worry about debt.

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Financial stress is affecting almost everyone. A lot.

Several recent surveys conducted by different organizations have consistently documented that American workers across all demographic groups are experiencing increased levels of financial stress. In spite of an overall economic recovery following the Great Recession of 2008, workers at all income levels are struggling. The number of employees living paycheck to paycheck has steadily increased and is currently estimated at 78%, which includes those earning more than $100,000 annually. Bankrate found that 63% of Americans are unable to handle a $500 unexpected car repair or $1,000 emergency room bill, a result that has been widely publicized.

According to the 2016 PwC annual Employee Financial Wellness Survey, conducted using a representative sample of 1600 full-time employed US workers, over half of the employees surveyed — 52% — reported experiencing financial stress. Forty-five percent reported that their financial stress had increased over the previous year. Millennials (age 21–34) were the largest group reporting stress over financial matters at 51%, compared to older workers. More recently, the 2017 PwC survey found that 42% of all employees surveyed have difficulty meeting household expenses on time every month, with those in the Millennial (41%) and Gen X (50%) age groups reporting the highest percentages.

Following decreased federal and state support for higher education combined with massive increases in college tuition over the past three decades, many workers of all ages now carry high levels of student loan debt. Nationally, student loan debt exceeded credit card debt in 2010, auto loans in 2011, and passed the $1 trillion mark in 2012. According to financial aid expert Mark Kantrowitz:

“Students who graduate with excessive debt are about 10% more likely to say that it caused delays in major life events, such a buying a home, getting married, or having children. They are also about 20% more likely to say that their debt influenced their employment plans, causing them to take a job outside their field, to work more than they desired, or to work more than one job.”

Similarly, compared to those with manageable debt, workers with high student loan debt are more likely to be stressed about their finances (81% vs. 45%), have difficulty meeting household expenses each month (64% vs. 36%), and use credit cards to pay for monthly necessities they can’t otherwise afford (57% vs. 28%). In addition, they are more likely to withdraw money from their retirement plans (51% vs. 23%) and to be distracted by their finances at work (55% vs. 23%).

Consistent with these findings, the 2017 Mercer LLC survey ‘Inside Employees’ Minds’™ asked 3000 workers questions about the extent to which financial stress affected their work, and found that 62% of those who are already financially challenged list being able to pay monthly expenses as their biggest financial concern, even among people with an annual household income of $100,000 or more. And 59% of those in the 2017 PwC survey regularly carry balances on their credit cards, an increase from 2016.8, 10 Again, Millennials and Gen X report the biggest increase — 70% of Millennials and 63% of Gen Xers consistently carry a credit card balance.

Women carry more financial stress. Compared to men (41%), more women (49%) report that financial matters cause them the most stress. Women as a group also face greater financial challenges overall, but especially in regards to saving for retirement, due to their longer average lifespan, taking time out of the workforce in response to unpaid caretaking responsibilities, working part-time without access to a workplace retirement plan, and wage inequality. According to a Money 2015 survey, one in three Americans have saved $0 for retirement. Women are 27% more likely to be in that group, and 63% more likely to have less than $10,000 saved for retirement.

Speaking of retirement…

While more than two thirds (69%) of employees now recognize that they hold the primary responsibility for funding their retirement, almost half (47%) have saved less than $50,000 for retirement; 44% plan to retire later than they had originally thought they would. Almost a quarter (24%) have borrowed against their retirement plans and 43% anticipate needing to do in the future. In 2017, these numbers increased to 30% and 44%, respectively.

The retirement crisis facing American workers has been well-documented in the popular media. Although some critics believe that the direness of the situation may be exaggerated, even those workers who plan to ‘course correct’ through working longer, reducing expenses, or turning a hobby into an income source may find this more difficult than expected. For example, while 75% of respondents in a recent Bank of America survey said they planned to work at least part-time in retirement, the reality is quite different.

Older employees may face unexpected health issues that make it difficult to find work, become responsible for taking care of a spouse or other family member, or encounter age discrimination despite having kept their skills up to date. According to the 2016 annual report from the Employee Benefit Research Institute, only 27% of retirees are employed, even on a part-time basis. Clearly, when it comes to retirement planning, roughly half of American employees now have a responsibility that many of them are not equipped to bear or that they feel confident about.

So it’s no wonder that workers are stressed about their finances. Wouldn’t it help if people were more financially literate? Financial literacy is necessary for people to make informed financial decisions and be able to act on those decisions. But after many years and multiple studies, researchers at George Washington University’s Global Financial Literacy Center of Excellence concluded in a recent paper that:

“Financial illiteracy is widespread among the general population and particularly acute among specific demographic groups, such as women, the young and the old, and those with low educational attainment. Most individuals in the United States and in other countries cannot perform simple calculations and do not understand basic financial concepts such as interest compounding, the difference between nominal and real values, and risk diversification.”

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How does financial stress impact employees, and why should employers be concerned?

On an individual level, financial stress can take a personal toll of human suffering. Stress related to an individual’s or family’s financial situation may exacerbate a chronic medical condition like back pain or diabetes. It can increase rates of smoking, alcohol use, overeating, or the risk of substance abuse as a means of coping with stress. It can create constant arguing that can end a marriage or result in domestic violence. It might even tempt a desperate employee to steal from an employer. Each of these situations can result in indirect and direct costs to employers.

Employees’ personal financial stress can be a hidden drain on a company’s profitability. A 2014 report by the Consumer Financial Protection Board discusses research on the impact of financial stress at work. A study published in the journal Health Affairs found that average health care costs for highly stressed employees were increased by $413 compared to those with low stress. The CFPB concluded that employers are paying a high cost for employee financial stress, but do not recognize it because a large portion shows up indirectly as a health care expense.

Academic researchers have studied the costs of absenteeism, presenteeism, and employee turnover specifically associated with employee financial stress, and have estimated these costs based on real world data. Absenteeism from work resulting from worry about personal finances and employee turnover in particular represents a problem that has been well documented in the literature, and higher levels of financial stress are associated with higher levels of absenteeism, particularly among blue-collar workers. A recent survey of over 5,000 US workers by the company Willis Towers Watson found that employees who are worried about their finances are absent on average for 3.5 days annually.

One employer who has studied the cost of financial stress in depth is the United States Navy. In 1997, Luther, Leech, and Garman found substantial direct and indirect costs due to servicemembers’ financial worries that amounted to over $200 million annually, or $700 per person adjusted for inflation. For a company of 1,000 employees, that translates into a loss of $700,000 annually. In addition, service members’ personal financial management difficulties caused the Navy to replace 2,919 personnel due to failure to re-enlist or loss of security clearance, costing $22,336 per person for a total of $65.2 million. Just imagine what financial stress is costing the Navy now in 2018.

Financially troubled employees are bringing these concerns to work. The previously mentioned Mercer survey found that 16% of employees reported spending more than 20 working hours each month worrying about money. The average across those surveyed was 13 hours per month. For an individual employee, that is equal to 7.8% of their annual work time spent being distracted as a result of their financial situation. Other estimates are even higher. Garman and colleagues peg financial presenteeism and absenteeism costs at 15–20% of total compensation paid to all employees in the businesses studied. Similarly, a 2007 study by D’Abate and colleagues estimated the cost of presenteeism at $8,875 per employee. The Mercer survey also found that 22 percent of employees report missing at least one day of work to handle financial problems, and a full 20 percent have had to resign from jobs due to financial stress.

The high cost of turnover

When employees do separate from a company, the cost of replacing them can be considerable, particularly for those at mid- and upper-management levels. Recruitment, interviewing, screening, hiring, onboarding, and training all have associated costs that will vary according to each company. Then there is the cost of lost productivity — Josh Bersin at Bersin of Deloitte estimates that a new employee may take from 1–2 years to reach the same level of productivity as an existing employee. According to researchers at the Center for American Progress, a conservative estimate of the replacement costs associated with both hourly and salaried positions are:

  • 16% of annual salary for high-turnover, low-paying jobs (earning under $30,000 a year). For example, the cost to replace a $10/hour retail employee would be $3,328.
  • 20% of annual salary for mid-range positions (earning $30,000 to $50,000 a year). For example, the cost to replace a $40k manager would be $8,000.
  • Up to 213% of annual salary for highly educated executive positions. For example, the cost to replace a $100k CEO is $213,000.

Employees are also starting to recognize that they need help with managing their finances, and are looking to the workplace to provide that help. A 2016 TIAA survey using a representative sample of adults nationally found that 75% of respondents admitted to be more likely to consider a job that offered free financial advice as part of a benefits package. Providing financial wellness can be another way for companies to attract and retain talented employees, particularly Millennials.

Can’t employers just provide education to help employees become more financially literate?

The answer is no. Financial education alone has been demonstrated to be completely inadequate. In a 2015 paper, researchers Daniel Fernandes, John G. Lynch, and Richard G. Netemeyer examined the relationship of financial literacy and financial education to financial behaviors. Conducting a meta-analysis of 168 papers published from 1987 to 2013 and which covered 201 prior studies, they found that interventions to improve financial literacy explain only 0.1% of the variance in financial behaviors studied — a mere one tenth of 1%!

The authors’ conclusions are clear: while financial education is necessary, it is not sufficient, and not at all effective as the sole tool for helping people change their behavior. People who receive financial education do not perform noticeably better when it comes to saving more or avoiding massive credit card debt. Even more depressing, the results of efforts aimed at those with low incomes are especially weak. Those who need help the most seem to benefit the least. Simply providing information with no additional support is not enough to create knowledgeable consumers who can understand today’s wide array (and variable quality) of financial products and services, make informed decisions, and act on those decisions in their own best interest.

The bad news: Financial stress is rampant in the workplace. People bring their financial problems with them to work, and the time they spend being distracted there costs American companies billions of dollars annually. In my next article, I’ll offer some good news as well as some practical advice for employers.


This excerpt is part of a longer white paper originally published here by Questis.