Upper Class Welfare?

Posted on February 23, 2006 by andrewleigh

According to the ABS’s 2003-04 income distribution survey (Excel file, see Table 5), the ratio of "government pensions and allowances" received by the richest 10 percent is 1.91 times the amount received by the poorest 10 percent.

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6 Responses to Upper Class Welfare?

Christine says:

February 24, 2006 at 1:48 am

I have to admit I’m having trouble figuring out what they mean on that table. Could it be instead that among those whose principal source of income is government pensions and allowances, those with the highest income have 1.91 times the income of those with the lowest income? (Ie take only those whose main source of income is government pensions and allowances, and then do the 80:20 ratio for all income those guys receive?)

These tables don’t seem to be useful in telling me most of the sorts of things I would care about in analysing income distribution. And what’s with the use of the word “equivalised”? Is equivalent not a sufficiently ugly word?

And more importantly, Qld is lumped with TAS as having the lowest incomes in Australia??? Obviously Qld needs larger equalisation payments (good grief, why does the ACT get a +ve relativity for equalisation payments?)
Bruce Bradbury says:

February 24, 2006 at 9:52 am

Table 6 has more relevant numbers. In the top quintile, only 11% of households had more than 1% of their income from govt benefits.

Personally, I’m not too concerned with a modest degree of middle class welfare. Redistribution between households is not the only valid objective for an income transfer system. Without checking directly, I would speculate that these 11% of households probably comprise multi-generational households (eg age pensioners living with their employed children and students living with their parents), and possibly some large families receiving family payments.

There is definitely a case for changing the student means test – the current system is basically a rort designed to ensure that children of self-employed and farmers get income support – but I don’t think many people should argue that the low-income aged should not receive income support in their own right even if they live with their children.

Family payments, it might be argued, provide some form of within-household redistribution (though the evidence for this actually having an impact on consumption patterns is pretty weak).
Andrew Norton says:

February 24, 2006 at 3:03 pm

They may be a more mundane explanation – as the ABS has accepted after badgering from the CIS’s Peter Saunders, the data on the bottom 10% is unreliable, with many people claiming that their income is less than they are entitled to through government benefits and much less than what they are spending.
Peter Whiteford says:

February 24, 2006 at 11:19 pm

This is a strange way of doing a table. I think the crucial thing is that this refers only to households whose principal source of income is government pensions and benefits. (I recollect that principal means the largest single source, so in practice they would have to be getting at least around 40 to 50% of their income from government benefits.) So my interpretation is that among people whose principal income source are pensions – a minority in the total population – the richest 10% have total incomes (including from other sources) that are 1.9 times the total incomes received by the poorest 10%.

This is not a particularly useful number.

As pointed out, Table 6 is a bit more helpful, showing that only 10.8% of the richest quintile get more than 1% of their gross income from government transfers. Indeed, the previous panel in Table 6 shows that in the top income quintile the proportion of people whose main income source is government benefits is effectively zero.

However, Table 7 which is based on quintiles of net worth rather than income shows a different picture. Here close to 35% of people in the top quintile receive more than 1% of thir income from benefits (although only 4.2% of this group receive 90% or more of their income from benefts, and around 11% have benefits as their main income source.

I think this is mainly due to the fact that we exempt family homes from the assets test for pensions.

Comparing table 6 and 7, it also appears that in the highest income quintile there is only on average 0.1 person per household who is above age 65, while in the top net worth quintile there are four times as many, although average household size is larger in the top net worth quintile than in the top income quintile.
Christine says:

February 25, 2006 at 7:44 am

There are a couple of really nice Canadian papers arguing that household surveys miss people at the low end of the income distribution (as opposed to mis-representing the incomes of those at the low end) and at the high end of the income distribution, which you notice if you use Census or tax file data (refs: Emmanuel Saez and Mike Veall; Kevin Milligan and others (sorry others)). These papers suggest that missing these people means measured income inequality is lower than actual.

It’s really surprising how unhelpful those tables are. Finding out anything actually useful seems to require considerable effort. The issue of household wealth and government payments seems an interesting one – is the wealth of the top quintile really all housing, though? So many questions those tables can’t answer, but that the underlying data should be quite capable of picking up on.
Andrew Leigh says:

February 26, 2006 at 2:57 pm

Christine, Peter, thanks for the posts. The 90:10 ratio for people whose main source of income is government benefits is a weird number to be providing, but yours sounds a reasonable explanation.