Research from 16,652 individuals shows that divorce affects not only children’s ability to earn but reduces their wealth by 46% on average.

People in Australia who experience the divorce or separation of their parents during childhood accumulate 46% less net wealth, on average, than do people whose parents do not separate when they are children.

Wealth is defined as the net difference of all assets and debts. Assets include real estate, business assets, financial assets, savings, life insurances, private pension savings, cash, vehicles and other durables, and collectibles such as art. Debts include mortgages, loans, business debts, credit card debt and overdue bills.

Other studies have found links between experiencing parental separation during childhood and adult earning, but earnings are only a part of wealth. Wealth brings real and psychological safety nets in a way that income alone does not. Wealth, like health, represents the cumulative impact of many factors over time.

The research used data on 16,652 individuals from the Household, Income and Labour Dynamics in Australia survey (HILDA, 2001-2014).

The timing of the parental separation – whether it occurred when the child was zero to five years old or six to 14 years old – made little difference to later wealth.

The researchers went on to examine what pathways may explain the association between childhood experience of parental separation and lower adult wealth.

They found that 21% of the link can be attributed to something rarely measured before in research on the impact of parental separation on children: a shorter ‘financial planning horizon’, which is how far into the future the individuals plan for their financial savings. A possible explanation of this link is that parental separation increases uncertainty for children, leading them to put higher value on the present and near future than on the far future. Other research has shown that people who think longer-term tend to save more money.

Another 20% of the link can be attributed to lower educational achievement, measured by the number of years of education completed. There are multiple ways that parental separation may disrupt education. It can reduce economic resources for the family; having less wealth means parents taking less risk with educational options for their children; and less consistent parenting may disrupt education as well.

A further 10% of the link can be attributed to more unstable family structures in adulthood for those who have experienced the separation of their parents in childhood. The measures used in this research were ‘how many years in a first marriage?’ and ‘how many co-residential and married partners?’ A strong link between family stability in adulthood and experience of parental separation in childhood has been found in other research. Family instability hampers wealth accumulationy. Also, children who have experienced the divorce of their parents are less likely to get married in the first place, and wealth accumulation is lower in cohabiting families than in married ones.

One thing the researchers predicted, but which did not show up in the statistics, was a link between less wealth and reduced wealth transfers from separated parents compared to married parents. Separation reduces parents’ wealth, leaving them less wealth to pass on to their children. Separation may lead to weaker parent-child bonds, particularly with fathers, which may also lead to less transfer of wealth, as well as less financial advice. But this pathway was not demonstrated in the research. It could be that when children move into blended families, new wealth transfers take place from nonbiological parents.

Unsurprisingly, the researchers found a link between reduced wealth and less income, accounting for 17% of the link between childhood experience of separation and adult wealth.

In Australia, about one-third of marriages end in divorce. Separations between cohabiting parents are more frequent.

Another study from the USA, in 2019, found an even bigger differential in wealth between adults who had experienced parental separation in childhood and those who had not. Perhaps the bigger difference in the USA is explained by the fact that less support is available for separating families than in Australia.

Header photo: Donnie Ray Jones. Creative Commons. 

References

 Lersch PM & Baxter J (2020), Parental separation during childhood and adult children’s wealth, Social Forces