Structure and Distribution of Household Wealth in Australia: Cohort Differences and Retirement Issues
FaHCSIA Social Policy Research Paper No. 33
48 Pages Posted: 7 Nov 2010
Date Written: March 1, 2008
In the context of an ageing population, it is helpful to build a better understanding of the dynamics of wealth, particularly for those in the retirement and pre-retirement cohorts. This involves measuring household wealth and assessing the causes and consequences of change more frequently than in the past.
Background: In 2002, the first large-scale survey of household wealth in Australia since World War I was undertaken as part of Wave 2 of the Household, Income and Labour Dynamics in Australia (HILDA) survey. The wealth data obtained in the survey (from 7,245 households) covered all the main components of asset portfolios and debts. The data were found to match satisfactorily with national aggregate statistics available from the Australian Bureau of Statistics and the Reserve Bank of Australia.
Aim of the paper: This paper analyses the 2002 HILDA wealth module data to derive the following information: * the structure and composition of household wealth and debt and whether this has changed in recent years * the distribution of wealth, including among and within age cohorts and between the most and least wealthy cohorts * retirement issues, focusing on the capacity of pre and post-retirement cohorts for self-funding during retirement * the wealth and debt levels of vulnerable groups in society; especially income support recipients and lone parents * the main factors (demographic, educational, income related) that determine levels of wealth and debt.
Key findings: The report has three main findings. Firstly, asset holdings are heavily concentrated in the hands of older households—those within 20 years of retirement and those 10 to 15 years post retirement. This distribution is mainly due to the fact that asset levels depend on the length of time spent saving and benefiting from the effects of compound interest. It is also a consequence of government policy and initiatives such as the Superannuation Guarantee and generous tax concessions to encourage investment and superannuation savings.
Second, superannuation holdings are increasing rapidly and are now more widely distributed than in the past. However, the evidence in this report shows that most households within 20 years of retirement are likely to be partly reliant on the Age Pension for their retirement income. Tackling this problem involves changing incentives for both the age at which people choose to retire and their likelihood of doing some paid work during retirement. However, most Australians desire to retire before age 65 and a serious underlying issue is that most working-age people continue to underestimate the savings they will need to maintain their current lifestyle in retirement.
Third, it is often assumed that the stock of household wealth, unlike household income flows, is fairly stable and usually just increases gradually over time. However, the main assets types of Australian households are housing, equities and superannuation and, given the volatility in the value of these assets in the short to medium term, it is probably mistaken to believe that household wealth is fairly stable.
The rationale for focusing on household wealth: In the context of this report, a key aspect of wealth is that it can provide security and comfort in one’s retirement years. In economic or accounting terms wealth is a ‘stock’, whereas income is ‘flow’. When households act rationally, they think about building up their wealth over members’ working life. Then, in retirement, they use their accumulated savings to enjoy a satisfying standard and quality of life. Wealth confers economic security and enables a household to tide over bad times, for example unemployment or ill-health, when the normal flow of earned income is reduced or cut off entirely. Wealth also allows a household to gain access to credit, which can be borrowed either to tide over bad times or to make investments for the future, for example by paying for education or buying property, shares or a business.
Wealth can directly generate income both in cash and in kind. For example, shares and superannuation holdings directly generate cash income. Equally valuably, owner occupied housing and collectibles in the home, such as paintings, provide benefits in kind. These tangible items contribute to a household’s quality of life and standard of living. Individuals and households usually think about their wealth in the long term, rather than the short term.
Debts and assets: A corollary of the long term nature of wealth planning is that it is sometimes sensible for households to incur debts with the aim of investing for the future. In the short term, a household might choose to reduce its net worth (assets minus debts) in order to achieve long term gains. A household approaching retirement may, for example, borrow against the equity in its home in order to buy shares or managed funds and, for some years to come, the household will have both high asset levels and high debts. Throughout this report, high assets and high debts are linked: the more assets a household has, the better their credit rating and the more they are likely to borrow. Debts and investments are often the same thing.
A range of wealth measures: The report uses a range of wealth measures rather than a single summary measure. Net worth is consistently used as a summary measure and, in addition, household assets and debts are separately presented in most tables with details about the components of financial assets and non-financial assets, where available. Financial assets include superannuation, investments in shares and other equities, cash-type investments and bank accounts. Non-financial assets include housing, businesses and vehicles.
Further background to HILDA survey on household wealth; The main data series currently available from the ABS do not deal with distributive issues. While they provide quarterly estimates of national aggregate household wealth (ABS, cat. no. 5232.0), the ABS data has some unavoidable limitations. For example, only financial assets and liabilities are given. The value of some non-financial assets, principally housing but not unincorporated businesses, are estimated in the National Accounts (ABS, cat. no. 5204.0). In general terms, government agencies do not measure household sector assets directly; instead they treat them as residuals after subtracting business sector assets (which are well known) from national estimates of wealth. While these existing sources provide a reasonable estimate of changes in household wealth over time, they do not provide information about distributive issues.
Most previous estimates of the distribution of household wealth were based on inferring stocks (assets) from flows (income). For example, income from business ownership and income from share dividends had to be declared on tax returns and could be used to estimate asset values. The National Centre for Economic Modelling (NATSEM) used this approach to provide household estimates (Baekgaard 1998; Kelly 2001, 2003), as did the ABS (Robertson et al. 2000; Northwood et al. 2002). Apart from the 1915 Census, there was just one small scale survey of household wealth conducted in 1967 (Podder and Kakwani 1976). This was valuable but omitted farmers and, partly due to this omission, it may have understated the inequality of net worth in the Australian population (Kelly 2001).
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By Ian Watson