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Fear & Greed, Fear and Greed

It may come as a shock to you, as it certainly surprised us: one third of Australian adults are considered financially illiterate.

Diana Mousina, Deputy Chief Economist at AMP, talks to Jennifer Duke about the startling new research, and explains the long-term impacts of a lack of financial knowledge.

Find out more: https://fearandgreed.com.au

See omnystudio.com/listener for privacy information.

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Jennifer Duke: Welcome to the Fear and Greed Business Interview. I’m Jennifer Duke.

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Jennifer Duke: Recently I read a statistic that frankly should make us

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Jennifer Duke: all a little nervous. A third of adults in Australia

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Jennifer Duke: are financially illiterate. That’s according to a new piece of

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Jennifer Duke: research published in The Economic Record. Those with lower financial

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Jennifer Duke: literacy are likely to end up worse off later in life.

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Jennifer Duke: It’s a pretty startling number, and here to discuss what

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Jennifer Duke: it means and what needs to be done is Diana Mousina,

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Jennifer Duke: Deputy Chief Economist at AMP Capital. Diana, welcome to Fear

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Jennifer Duke: and Greed.

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Diana Mousina: Thank you for having me, Jen.

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Jennifer Duke: Can you break down that number a little bit for

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Jennifer Duke: us? What does it mean to be financially illiterate?

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Diana Mousina: Sure. Well, first, let’s talk about what is financial literacy.

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Diana Mousina: Ultimately, it’s the understanding of financial and economic concepts, but

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Diana Mousina: then applying those to your personal finances. So this ranges

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Diana Mousina: from topics around things like savings accounts, credit cards, mortgages,

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Diana Mousina: shares, and superannuation. Usually what you tend to see is

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Diana Mousina: that as you get older, your financial literacy increases, as

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Diana Mousina: you would expect, it peaks around middle age and then

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Diana Mousina: it declines into the older years. So there have been

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Diana Mousina: a number of studies to try and measure literacy in

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Diana Mousina: adults. And the way that they do that is by asking

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Diana Mousina: questions around numeracy, compound interest, inflation, and risk diversification. And they

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Diana Mousina: think that those are the best ways to measure financial

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Diana Mousina: literacy.
And what they found was that in most developed

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Diana Mousina: countries, as we know in Australia, a large share of

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Diana Mousina: adults are financially literate, which means that they can answer

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Diana Mousina: all those questions correctly. But the more important issue that

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Diana Mousina: I noticed in this research was that there is quite a

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Diana Mousina: significant gap between the literacy in males versus females. And

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Diana Mousina: in Australia, females actually are more financially illiterate compared to

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Diana Mousina: some of our global peers. So we have worse outcomes

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Diana Mousina: for female financial literacy here compared to countries like Italy,

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Diana Mousina: Germany, the US, Denmark, Switzerland, the UK. Which took me

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Diana Mousina: by surprise a little bit, I guess, because it doesn’t

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Diana Mousina: really make much sense to me as to why that

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Diana Mousina: should be the case.

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Jennifer Duke: Do you have any pet theories as to what’s going

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Jennifer Duke: on there?

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Diana Mousina: Well, when I think about the elements that drive financial

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Diana Mousina: literacy, it’s really to me about education. And that starts

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Diana Mousina: from a young age, that would start in primary school

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Diana Mousina: and then into the high school years. Now, I haven’t

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Diana Mousina: lived in all those other countries, so I don’t know

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Diana Mousina: what kind of curriculums they teach their students, but I

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Diana Mousina: assume that there is some education gap here in Australia

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Diana Mousina: that is causing this issue. And the problem is that

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Diana Mousina: when you have this financial literacy gender gap, it does

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Diana Mousina: lead to worse outcomes for women in terms of wealth

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Diana Mousina: accumulation and investment decisions. Because if you don’t have that

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Diana Mousina: sense of what to do with your finances, then you’re

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Diana Mousina: going to make worse investment decisions.
And we already know

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Diana Mousina: the issues around the gender pay gap and also around

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Diana Mousina: that females retire on lower superannuation compared to males. So

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Diana Mousina: the financial literacy gap makes these issues even worse.

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Jennifer Duke: It’s a pretty worrying thing to think about, particularly through

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Jennifer Duke: that gender lens. Are there things that you think the

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Jennifer Duke: government and businesses need to be doing to sort of

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Jennifer Duke: close that gap and to fix things on the childhood

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Jennifer Duke: end as well?

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Diana Mousina: I think that there’s plenty of things that can be done,

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Diana Mousina: and it can come from a number of sources. The

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Diana Mousina: government is definitely the centerpiece, I suppose, of this. So

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Diana Mousina: I think that there really does need to be some

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Diana Mousina: sort of personal finance, financial literacy topic that’s started to

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Diana Mousina: be taught to primary school kids, and then go into

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Diana Mousina: the high school years as well. Because from what I understand,

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Diana Mousina: there’s no sort of basic finance type of course that

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Diana Mousina: is taught to students. Some students go on to study

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Diana Mousina: commerce and economics, which I think is quite positive in

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Diana Mousina: this and trying to get kids exposed to these types

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Diana Mousina: of concepts. But it can start even earlier than that,

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Diana Mousina: and you shouldn’t just be reliant on being a commerce

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Diana Mousina: or economics student to learn some of these issues. The

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Diana Mousina: other interesting thing is that in Australia, the share of

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Diana Mousina: males who study economics in HSC has consistently been much

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Diana Mousina: higher than females. So males account for about 60% of HSC enrollments

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Diana Mousina: in Australia, and that’s been the case for a number

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Diana Mousina: of decades now. As an economist, I think I have

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Diana Mousina: to say that the study of economics is extremely important,

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Diana Mousina: but I do think that the government can do more

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Diana Mousina: to encourage further females into the study of economics and

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Diana Mousina: then into those roles. And then of course, there is

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Diana Mousina: also some onus on organisations. So for financial service organisations,

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Diana Mousina: banks and superannuation providers, they could be making educational resources

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Diana Mousina: available to customers or some kind of financial wellbeing checks

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Diana Mousina: for businesses, staff incentives like salary packaging, childcare fees. I mean,

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Diana Mousina: that also helps working parents. I mean, if we’re talking

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Diana Mousina: about generally trying to assist wealth positions for females versus males,

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Diana Mousina: these types of things need to be thought about as

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Diana Mousina: well for the future.

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Jennifer Duke: Stay with me, Diana, we’ll be back in a minute.

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Jennifer Duke: I’m speaking to Diana Mousina, Deputy Chief Economist at AMP Capital.

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Jennifer Duke: I imagine there’s a lot of people who are, as

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Jennifer Duke: you’ve raised, quite concerned about their children’s financial literacy, who

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Jennifer Duke: won’t be willing to wait for the government to step

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Jennifer Duke: in here and do something. You’ve obviously got young kids

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Jennifer Duke: at home yourself. How do you go about teaching some

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Jennifer Duke: of those things to your children? Do you have any

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Jennifer Duke: tips for other families who might be listening?

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Diana Mousina: It can definitely start from a young age. My kids

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Diana Mousina: are five and two, and they both have piggy banks,

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Diana Mousina: which they put money from. Well, my daughter just started losing

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Diana Mousina: her child teeth, so been putting that money into the

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Diana Mousina: money box, and the more teeth that she loses, I

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Diana Mousina: feel like the more money that I end up giving

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Diana Mousina: her. So I’m trying to teach her about that through

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Diana Mousina: that sort of way. And as they get older, I

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Diana Mousina: hope that I can teach them about basic things like

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Diana Mousina: credit cards and credit card interest, the way that interest

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Diana Mousina: rates work, why it’s really important to know what the

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Diana Mousina: Reserve Bank is doing, what happens with prices and inflation.

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Diana Mousina: Concepts that can seem kind of tricky and hard, but

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Diana Mousina: if you break it down, actually economics affects you in

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Diana Mousina: your everyday life.
You might just not even realize it,

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Diana Mousina: but the economic forces are driving your everyday decisions and

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Diana Mousina: the balances that you have in your bank accounts. And

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Diana Mousina: personally, I’m really interested in this topic and I think

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Diana Mousina: it’s extremely important. And AMP has a simplifying investing podcast,

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Diana Mousina: which I’m now going to be joining as well, to

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Diana Mousina: try and educate listeners on some of these more basic

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Diana Mousina: economic type of questions and problems around things like inflation,

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Diana Mousina: interest rates, employment, and why you should be focusing on

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Diana Mousina: these things to try and break it down and what

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Diana Mousina: it actually means for you and your personal finances. Because

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Diana Mousina: that’s ultimately what people care about is to grow their

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Diana Mousina: own wealth.

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Jennifer Duke: Definitely. I think that’s a great thing for businesses to

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Jennifer Duke: be doing. Is there a view, I mean, obviously in

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Jennifer Duke: the longer term for people that aren’t able to close

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Jennifer Duke: that gap and improve their financial literacy, there are significant

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Jennifer Duke: outcomes. Could you run us through what those risks are

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Jennifer Duke: if we don’t tackle this problem?

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Diana Mousina: Sure. Well, when the studies looked at what happens when

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Diana Mousina: you have lower levels of financial literacy, they found that

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Diana Mousina: the impact is quite broad. So it ultimately results in

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Diana Mousina: worse investment decisions, which makes sense, because if you don’t

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Diana Mousina: know the types of products that are available to you

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Diana Mousina: when you have additional savings, or you don’t know that

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Diana Mousina: the savings rates go up when interest rates go up.

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Diana Mousina: Or that you should shop around for term deposits, then

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Diana Mousina: you would be making poor investment decisions. They also found

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Diana Mousina: that lower financial literacy results in lower wealth accumulation throughout

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Diana Mousina: time. And obviously this impact gets worse as you get

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Diana Mousina: older because when you have a superannuation balance, don’t forget

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Diana Mousina: that there is a huge power of compound interest that

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Diana Mousina: works.
So even if you grow your savings by say, $

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Diana Mousina: 50 a month, that actually has quite a significant impact

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Diana Mousina: in your retirement years because the impact of compound interest,

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Diana Mousina: even if you have a large fall in shares. So

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Diana Mousina: lower financial literacy means ultimately poor investment decisions, low wealth

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Diana Mousina: accumulation, and smaller savings in retirement, which could mean that

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Diana Mousina: you might be relying on the government pension, which is

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Diana Mousina: difficult. I think it will be harder and harder for

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Diana Mousina: the government to keep on providing those generous pensions at

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Diana Mousina: the moment because that is an extremely large and growing

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Diana Mousina: share of their spending, and they’re trying to put the onus

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Diana Mousina: back on individuals to grow their own retirement savings. So

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Diana Mousina: we should not be reliant on the government to provide large

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Diana Mousina: pensions. I think that that’s a risk for the future.

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Jennifer Duke: Sounds to me like this is definitely an issue we

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Jennifer Duke: should all be quite worried about. Diana, thank you very

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Jennifer Duke: much for talking to Fear and Greed.

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Diana Mousina: Thank you. It was a pleasure, Jen.

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Jennifer Duke: That was Diana Mousina, Deputy Chief Economist at AMP Capital.

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Jennifer Duke: This is the Fear and Greed Business Interview. Join us

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Jennifer Duke: every morning for the full episode of Fear and Greed,

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Jennifer Duke: Australia’s best business podcast. I’m Jennifer Duke, Economics Correspondent for

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Jennifer Duke: Capital Brief in the chair for Sean Aylmer. Enjoy your day.