THE CHANGING INCOMES OF THE AGED IN AUSTRALIA* DAVID MURRAY University of New England INTRODUCTION Approximately eight per cent of the Australian population are aged 65 and over. It is well known that this group have relatively low incomes and it is believed that the inci- dence of poverty is relatively high in this group. In recent years there have been changes in the structure and value of the age pension which would be expected to result in in- creases in real incomes for some of the aged. However many of the aged are dependent on incomes which are fmed in money terms and the effect of continuing inflation must be to reduce those incomes. In this paper an attempt is made to examine the changes in the pre-tax incomes of the aged in real terms and relative to the rest of the community. It is concluded that while the poorest of the aged have benefitted from changes in the age pension there remains a significant portion of the aged population for whom increases in the consumer price index probably meant declining real incomes. THE AGED AND THEIR INCOMES In this paper the aged are defined as persons aged 65 and over.' Table I summarizes information on pre-tax incomes and income sources for this group relative to the whole population. In 1968-69 the median income of the aged was about 40 per cent and the mean income approximately 60 per cent of that of the whole population. In 1968-69, 65 per cent of the aged had government social service benefits2 as their principal source of income, and a further 18 per cent had superannuation or annuity, or interest, rent, dividends (i.e. income from past savings) as their principal source of income. The rela- tively low mean and median incomes for the aged as a single group reflect the fact that a *I am grateful to Professor Peter Drake and Dr Paul Luey for their comments on an early version of this paper. Anonymous referees of this journal are also to be thanked for their comments which led to substantial revision of the early version. In 1975 this group constituted more than eight per cent of the Australian population, see e.g., 2Australian Bureau of Statistics 111 ,Table V. The major element of social service benefits for the aged is the age pension, which is available (sub- ject to age, wealth and income criteria) to all Australians. The term age pension used in this paper refers to this social security payment, it does not refer to pensions which are derived from past employment. 81
Transcript
THE CHANGING INCOMES OF THE AGED
IN AUSTRALIA*
DAVID MURRAY
University of New England
INTRODUCTION
Approximately eight per cent of the Australian population are aged 65 and over. It is well known that this group have relatively low incomes and it is believed that the inci- dence of poverty is relatively high in this group. In recent years there have been changes in the structure and value of the age pension which would be expected to result in in- creases in real incomes for some of the aged. However many of the aged are dependent on incomes which are fmed in money terms and the effect of continuing inflation must be to reduce those incomes.
In this paper an attempt is made to examine the changes in the pre-tax incomes of the aged in real terms and relative to the rest of the community. It is concluded that while the poorest of the aged have benefitted from changes in the age pension there remains a significant portion of the aged population for whom increases in the consumer price index probably meant declining real incomes.
THE AGED AND THEIR INCOMES
In this paper the aged are defined as persons aged 65 and over.' Table I summarizes information on pre-tax incomes and income sources for this group relative to the whole population. In 1968-69 the median income of the aged was about 40 per cent and the mean income approximately 60 per cent of that of the whole population. In 1968-69, 65 per cent of the aged had government social service benefits2 as their principal source of income, and a further 18 per cent had superannuation or annuity, or interest, rent, dividends (i.e. income from past savings) as their principal source of income. The rela- tively low mean and median incomes for the aged as a single group reflect the fact that a
*I am grateful to Professor Peter Drake and Dr Paul Luey for their comments on an early version of this paper. Anonymous referees of this journal are also to be thanked for their comments which led to substantial revision of the early version. In 1975 this group constituted more than eight per cent of the Australian population, see e.g.,
2Australian Bureau of Statistics 111 ,Table V. The major element of social service benefits for the aged is the age pension, which is available (sub- ject to age, wealth and income criteria) t o al l Australians. The term age pension used in this paper refers to this social security payment, it does not refer to pensions which are derived from past employment.
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large proportion of them derive their income principally from a low income source, Le. social service benefits. The incomes of the aged (Table 11) below the median are very highly concentrated-the tenth percentile income is very close to the median income. The distribution above the median is much more unequal.
TABLE I Total Incomes o f t h e Aged (By Principal Source of Income)
The Aged All Agedas income per cent
income Receivers
Receivers of all Own Share Government Super- Interest wty business, in Social annuation Rent,
salary Rofession ship Benefits An:& D%?ds Other Total Tradeor Partner- Service
Sources and Notes: Original data extracted from Australian Bureau of Statistics [2], Table 44 and [3] ,Table 13. Per- centile values are estimated by linear interpolation within income brackets.
Between 1968-69 and 1973-74 there were a number of changes in the incomes of the aged. The main changes were an increase from 65 to 75 per cent in the proportion of the aged having social service benefits as their principal income source, and a fall in the mean income of the aged from approximately 60 to 55 per cent of that of the whole population. The median income of the aged remained at approximately 40 per cent of that of the population as a whole. In addition there was apparently a marked change in
1979 THE CHANGING INCOMES OF THE AGED 83
the distribution of income amongst the aged. Table I1 shows estimated percentile values3 of income for the two years and the percentage increase in these values over the period. Apparently the distribution of income amongst the aged has become more concentrated in the sense that incomes below the median have increased more rapidly than those above the median.
While this paper is not directly concerned with poverty it should be emphasized that there is evidence of a high incidence of poverty amongst the aged? In 1975 the Com- mission of Inquiry into Poverty suggested that approximately half the aged single male and female income units, some 250,000 persons, were poor; below or less than 20% above the poverty line. By contrast only 18 per cent of all income units were classified as poor. One of the main conclusions of the Poverty Commission was that pension rates were in- adequate to keep these people out of poverty. The importance of the level of age pension in determining the income of the poorest of the aged will be seen in the subsequent analysis.
The evidence presented above suggests that the aged are a relatively low income group and include a relatively large proportion of the poor. There were fairly major changes in the sources, levels and distribution of incomes of the aged in the five-year period from 1968-69. In this paper we explore the reasons for and effects of these changes.
There have been major changes in the value of and accessibility to the age pension in recent years as documented in Table III.’ The age pension rose in real terms by approxi- mately 70 per cent between 1967 and 1976, and increased from one fifth to one quarter of average earnings. Entitlement to the age pension is dependent on age, income from other sources and ownership of property with the level of pension being inversely related to the latter two factors. Major changes in the system occurred in 1969, 1973, 1974 and 1975 (as documented in Table 111) and indirect liberalization also occurred whenever the pension rate increased since the upper levels of property and income at which entitlement ceases increased automatically through the operation of the taper.
The number of age pensioners generally increased by more than the pension-aged population. This was most marked in the four years in which major changes occurred. Changes to the age pension and the growth of the aged population apparently only ex- plain a part of this increase. It is suggested that the residual increase is due to the money value of the age pension increasing more rapidly than other income.
The major impact of these changes was on the persons who had incomes principally from social security benefits. The median income for this group rose from $710 to $1280, the value of a full age pension in the two years was $714 and $1216.6 But the benefits of
3The estimated percentiles below the median are to be treated with caution as large proportions of the aged fall into the income ranges containing, and immediately below, the median. In 1968-69 the two ranges covering $400-$800 contained the 6th to 57th percentile, in 1973-74 the 5th to 60th
4percentile were included in the range $1000-$1400. The figures presented above are extracted from Commission of Inquiry into Poverty [ 4 ] , pp.6 and 7. For a detailed discussion of poverty amongst the aged the reader should consult R. I. Downing, “The Aged”, Ch. 5 in Henderson, Harcourt and Harper [ 8 1. For a dissenting view see J . P. Cox [5] ,
Calculated from information in Department of Social Security [6 J ,Table 57.
Jparti~~larly pp. 431-2. 6For a more detailed description of these changes see Department of Social Security [6 J , pp. 7-8.
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TABLE 111
Value of the Age Pension and Number ofAge Pensioners
Standard Rate Real Value Relative Number of Age Increasepn Revious Year Age Pension of Age, Value of Pensioners. Year' ('000) Ended ($! Pension Age Pension' 65 and over. June fortnlght) (1967 S) 30th Pensioners Population
Sources and Notes: All information is extracted, directly or indirectly, from Department of Social Security [ 7 ] , Table 1 and Appendices I11 and IV. A detailed discussion of A, B, C and D below is contained in Department of Social Security [6 ] , pp. 7-8. 1. The Standard Rate Age Pension as a percentage of the Capital Cities' Consumer Price Index, with June 1967 = 100.0 2. The Standard Rate &e Pension as a percentage of the scisonally adjusted June quarter average fortnightly earnings
per employed male unit. 3. The figures here include males aged 65 and over and females aged 60 and over. A. Tapered means test introduced in this year. B. Doubling of free area introduced in this year. C. Abolition of means test for persons aged 75 or more in this year. D. Abolition of means test for persons aged 70-74 in this year.
the changes were not confined to this group. In the 65 plus age group the number of persons with social security benefits as principal income source rose from 613,000 to 775,000, but the number of age pension recipients at the ends of the years rose from 621,000 to 884,000. A much larger proportion of the groups with other principal income sources apparently received some income from the age pension.
CHANGES IN INCOMES PRINCIPALLY FROM SOURCES OTHER THAN THE AGE PENSION
At one extreme it can be argued that with the rise in the consumer price index over the period under consideration individuals on fvted incomes would have had declining real incomes. But there are few income sources which are truly fixed and in addition we know that the proportion of persons with other principal sources who received some income from the age pension increased substantially. Thus it is not possible to make unambiguous statements about the changes in incomes principally from these other sources. Mean and median incomes of the aged deriving income principally from sources other than the age pension increased in real terms, relative to average weekly earnings and relative to the population as a whole. However as there were major changes in the proportions of the aged in these groups this does not imply increasing real and relative incomes for the indi- viduals in these groups.
A similar problem arises when we examine the distribution of income amongst the aged. Table I1 shows income values for selected percentiles of the aged population in the
1979 THE CHANGING INCOMES OF THE AGED 85
two periods. The fifth and tenth percentile and median incomes all increased very sub- stantially, by amounts in excess of the increase in the consumer price index (38 per cent) or average earnings (68 per cent). By contrast the sixth to ninth decile incomes increased in real terms but by less than average earnings. Again these do not imply increasing real and relative incomes for individuals in these groups.
The proportion of the aged having social security benefits as their principal income source increased markedly between 1968-69 and 1973-74. The full value of the age pension in the year 1973-74 was $1216 per annum and for this to have been the prin- cipal income source income from any other single source would have had to be less than this amount. For individuals to have had some other principal income source in 1968-69 and to be reclassified into the social security benefit group in 1973-74 they would have had to have incomes not markedly different from, or below, median incomes in those groups in 1968-69. Since in 1973-74 they would still possibly have incomes from sources other than the age pension they would then have had incomes above the median ($1280) in that group. The transfer of individuals from other groups to the social security benefit class is therefore likely to have been one of individuals with initially relatively low incomes in a high income group to a relatively low income group in which they would have relatively high incomes. The effect of such a transfer mechanism is in itself to raise the mean and the median incomes in both the high income groups and the low income group. Thus it seems fair to state that an examination of income changes in the various principal income source groups overstates the changes which would have occurred if the same individuals had been in the same groups in both periods.
Incomes from sources other than the age pension are also likely to be inversely related to the age of individuals. Income derived from past earnings (interest, rent, dividends, and superannuation or annuity) is probably related to lifetime earnings which are likely to have been higher for the relatively younger amongst the aged. The expectation therefore is that as aged individuals get older they move down the ranking of aged individuals by income. This is not true for persons receiving the age pension, but it does imply that a comparison of percentile income values for relatively high income receivers will overstate the income changes of individuals.
DECLINING REAL INCOMES FOR SOME INDIVIDUALS?
The preceding analysis provides a basis for commenting on real income changes for individual aged persons. First it is apparent that any individual who derived income solely from the age pension over the period had a substantial increase in real income. Where income was also derived from other sources the effect on real income is less immediately apparent, but if individuals had social security benefits as their principal income source in both periods the increase in the real value of the age pension over the period (some 35 per cent) may well have offset the decline in the real value of other income. The majority of those among the aged who had social security benefits in 1968-69 as their principal source, and they constituted 65 per cent of the aged, are likely to have had increasing real incomes during the period.
For individuals who had incomes principally from sources other than the age pension
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in one or both periods the discussion is less clear cut. It is possible using the available information and some plausible assumptions to estimate mean incomes in both periods of persons who derived income principally from sources other than the age pension in both periods. These estimates support the suggestion of declining real incomes for some of the aged.
Table IV shows such a calculation for two groups-those deriving income principally from (i) superannuation or annuity and (ii) interest, rent or dividends. The objective of the calculations is to isolate individuals who were in these groups in both periods, to estimate their mean money incomes and to calculate the implied change in real income. In the superannuation or annuity class there were 55,000 individuals in 1968-69, with mean income of $2220. In 1973-74 there were 40,000 individuals in this class. If the re- classification (filtering) process discussed above had not occurred we would have expec- ted slightly more than 55,000 individuals in this class in 1973-74. This suggests that at least 15,000 individuals were reclassified during the period. In 1968-69 there were 420,000 income receivers in the age group 60-64, all of whom (if we assume survival) would have been classified in the 65 and over group in 1973-74. If the 1968-69 pro- portion of the aged in the superannuation or annuity class (approximately 6 per cent) had been maintained this would have implied some 25,000 new entrants to the class. In turn, to keep numbers stable in the group, this implies 25,000 individuals leaving the group due to death. This suggests that there were 15,000 survivors, individuals who were in this group in both periods.
To estimate the mean incomes of the survivors in 1968-69 we suggest that the mean income of the departees was below the overall average. The reasons, as discussed earlier, are that reclassification to the age pension as principal source in 1973-74 would imply a relatively low income and that persons leaving due to natural causes would tend to be older and lower income individuals. The mean income of these departees in 1968-69 is taken as $1900, i.e., some 15 per cent below the mean income of the group as a whole.
TABLE IV Possible Mean Incomes in 1968-69 of the Aged By Principal Income Source)
Who “Survived”to 197 I -74
Pension or Superannuation
(‘000) ($1 (’000) ($1
Interest, Rent, Dividends, etc. Number Mean Income Number Mean Income
All, 1968-69 Departees - death
Survivors Actual money income
Increase in money income
- pension
in 1913-14, all
of survivors
55 2220 115 1920
251 15 1900 50) 35 1600
15 3100 30 2800
4030 3490
30% 25%
1979 THE CHANGING INCOMES OF THE AGED 81
This in turn implies a mean income for survivors in 1968-69 of $3100. The same assump- tions are applied to the interest, rent, dividends, etc., class to suggest a 1968-69 mean income for survivors of $2800.
The 1968-69 mean incomes of survivors in these classes must be compared with their 1973-74 mean incomes. In Table IV we compare them with the 1973-74 mean incomes of all individuals in these classes, which are likely (because the survivors are relatively old) to be an overestimate of the mean incomes of survivors, and note that the increase is of the order of 25-30 per cent. This is less than the increase in the consumer price index (38 per cent) over the period and suggests a decline in the real incomes of survivors over the period. The conclusion can of course be extended to persons who were in this cate- gory for only some part of the period; this suggests that during that period they too suffered real income declines.
CHANGES SINCE 1973-74
Data on incomes are not available for the period since 1974 so that it is not possible to present a detailed discussion of changes in the incomes of the aged since then. We do however know that the age pension has continued to increase in real terms and relative to average earnings in Australia. We also know that the consumer price index has in- creased more rapidly since 1974 than in the period 1969-1974. Additionally the number of age pensioners continued to increase by more than the pension-aged population.
These changes are a continuation of trends which were occurring prior to 1974 which, it has been suggested, underlie the changes in incomes and income distributions observed in the 1969 to 1974 period. It would seem likely therefore that the trends observed in that period have continued since then.
SUMMARY AND CONCLUSION
Two factors, the changing levels and conditions of entitlement to the age pension and the rise in the consumer price index, have apparently caused fairly major changes in the incomes of the aged in Australia over the last decade. Data on the distribution of incomes amongst the aged and on the incomes of the aged by principal source provide strong evidence that the lower 50 per cent of aged income receivers have had real income in- creases, and additionally had income increases greater than the increase in average earn- ings. Since this group has low incomes, and probably includes many of the aged living in poverty, the implied redistribution is almost certainly to be regarded as socially desirable.
The position of the aged with relatively high incomes is more complex. The available data suggests that some at least of these people may have suffered declining real incomes. This is demonstrated using an arithmetical example for two aged income groups. These individuals have incomes which are high relative to the rest of the aged, but which are low relative to all income receivers. It would seem therefore that there has been a redistribu- tion of income away from a relatively low income group, which presumably is not to be regarded as socially desirable. The conclusions in this paragraph are more tenuous than those in the preceding paragraph.
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Finally we should note that an increasing proportion of the aged have come to depend on the age pension as their principal income source. This appears to have been due to both the increasing real value of the age pension (as a result of government actions) and the declining real value of primarily fixed incomes from other sources (as a result of price inflation in the economy). The economic welfare of this relatively low income group of the population has come to depend increasingly upon government policy.
REFERENCES
1. Australian Bureau of Statistics, Estimated Age Distribution of the Population: States and Tern.- tones of Australia, Canberra, 1976.
2. Australian Bureau of Statistics, Income Dism‘bution 1968-69. Consolidated and Revised Edition, Canberra, 1975.
3. Australian Bureau of Statistics, Income Dishibution 1973-74, Part 1, Canberra 1976. 4. Commission of Inquiry into Poverty (Henderson Commission), Poverty in Australia. An Outline,
Canberra, 1975. 5. J. P. Cox, “The National Survey of Income, Income Distribution and Temporary Poverty”, Eco-
nomic Record, vol. 52,1976. 6. Department of Social Security, Annual Report 1975-76, Canberra, 1976. 7. Department of Social Security, Ten-Year Statistical Summary, 1968- 77, Canberra, undated. 8. R. F. Henderson, A. Harcourt and R. J. A. Harper,People in Poverty (Melbourne: Cheshire, 1970).
