The level of debt among Swiss private households is high. From car leasing to small loans for holiday expenses: teenagers and young adults are particularly likely to get into debt. More financial education and a rethink in consumer behavior are needed.
The step into the debt trap: Many young people finance their consumption with loans.
Stefan Wermuth / Bloomberg
Interestingly, in the land of renters, when people think of private debt, they immediately think of mortgage debt – and rightly so. When it comes to mortgages, Switzerland is one of the leaders among OECD countries. The ratio of domestic mortgage debt to economic output is 150 percent, and it has risen sharply over the last twenty years.
Since the real estate crisis of the 1990s, it should be clear that mortgage debt represents an economic risk. The mortgage business is a concentration risk for Swiss banks, as it accounts for by far the largest part of their lending business. However, the recent Investigation by the International Monetary Fund (IMF) concluded that the previous house price increases were steady and did not correspond to a sudden boom. In addition, various industry regulations and measures have been taken by the federal government to minimize systemic risk.
Of course, banks also bear a clear responsibility when granting mortgages. As long as mortgage loans are granted to people who can manage their payments even if interest rates rise sharply, this type of private debt is not a problem. On the contrary: it can even make financial sense for Mr and Mrs Swiss in terms of tax burdens, because the interest payments are tax deductible.
High levels of indebtedness among young people
Other types of private debt, which receive far less attention in public discourse, are to be judged much more critically. Almost 40 percent of households in this country have at least one loan, an overdraft or an unpaid credit card bill. What is particularly striking is that almost every second person under the age of 25 is affected.
Young people most often go into debt to buy a vehicle for which their savings are insufficient. In summer, however, the temptation to take out a loan to finance a dream trip abroad also increases. Young people also have a significantly higher rate of taking out loans to buy personal items such as clothing or consumer electronics than older age groups.
From an economic perspective, it can be argued that a certain smoothing of consumption over the life cycle is rational. People spend more money when they are young because they expect to earn more later in life. However, it becomes problematic when young adults consistently live beyond their means and get into a debt spiral. In fact, around four percent of young adults take out a loan to pay off existing debts or bills.
In addition, the theory of consumption smoothing assumes that individuals act in an informed and rational manner. Here, the data paint a bleak picture: when adolescents and young adults are asked to estimate the interest rate on such loans, around half of those surveyed do not know how high the interest rate is or assume that it is zero. Another quarter underestimate the effective interest rate. Young people therefore not only tend to take on more private debt, but are also less informed about its consequences than older age groups.
Financial education is lacking
This makes the first part of the solution to reducing young people’s private debt obvious: better financial education, known as financial literacy, is needed. Young adults should learn how to handle money at an early age and become familiar with household budgeting. If someone consciously decides to lease a car instead of buying it and knows the advantages and disadvantages, that’s fine as long as they keep an eye on the costs.
However, financial education alone is not enough. Secondly, we need to rethink consumer behavior. A life on credit cannot work in the long term – not even in a wealthy society like ours. Our social contract can only be maintained if everyone adjusts their consumption to their own household budget. It is worrying that almost 15 percent of 16- to 17-year-olds agree with the statement “Sometimes I really want something and buy it even if I can’t really afford it.” Going without is not cool, but it is promising in the long term – for the young people themselves and for society as a whole.
Melanie Häner-Müller heads the social policy department at the Institute for Swiss Economic Policy (IWP) at the University of Lucerne.
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