How can we measure income adequacy?

We have heard a lot in recent years about the income of people in retirement. How adequate is NZ Superannuation to support a decent standard of living? How many older people are living in poverty? The statements of politicians are predictable. Government sources will say superannuitants are doing well. Opposition parties will tend to disagree. What are the facts – if indeed there are any?

There is a definition of confidence – “How you feel before you really understand the situation.” This is certainly true when looking at data on incomes.

“Budget standards” is the technical term for methods to assess what levels of income are adequate to support particular standards of living (whether “basic” or “comfortable”). How can this be done?

We can look at patterns of spending from large-scale surveys. What do older people actually spend their money on? The Household Economic Survey (HES), carried out by Statistics New Zealand every three years, is the main source of expenditure data in New Zealand. It is a sample survey of 4,700 households and asks the participants to complete an expenditure diary listing all their purchases for two weeks. I used this information in work I did for the Retirement Commission, to produce “model” budgets for older people, but only as the basis for focus group discussions.

The problems with this source is firstly that it is only a sample and the number of people aged 65 and over who are included is not sufficient to provide reliable figures. If you try to break down the information by age, gender, location or household type the “sample error” increases. Secondly, the figures are averages. What people spend on housing, for example will vary hugely, between people who own outright, people paying mortgages, and renters. Figures for spending on transport include car owners, bus users and people who rarely go out at all. Does an average mean anything? Thirdly, what people actually spend may not reflect an adequate income. We hear a lot about older people economising and risking their health, for example by not having adequately heated houses, or not eating healthily.

A second approach is for experts to produce a list of goods and services considered necessary to reach defined living standards. These can be costed to produce figures for necessary incomes – say, for individuals and for couples. Who are the experts, I hear you ask?

The Measuring Poverty in New Zealand project, carried out in the 1990s, used a wide range of focus groups (including Maori and Pacific people), who discussed what would be required to support an adequate lifestyle for a family with children . This was a good idea, as the information came from people who were actually managing household budgets. But there were no estimates for older people.

There are examples where the experts work out meal plans to provide good nutrition for older people – the NZ Ministry of Health did this recently. I costed these meal plans for Age Concern. The data were collected in a middle range supermarket in a Wellington suburb in November 2010. This gave a weekly food cost of $120.05 for a man and $105.42 for a woman.

In Britain, experts went beyond dietary requirements to work out a minimum income for healthy living for older people. This has recently been done for NZ using the same approach.

There are problems with this approach too as it does not take into account differing circumstances, needs and choices. A dietician may include meat in a healthy diet, but what about people who choose to be vegetarian? Exercise is essential for good health, but many older people are not physically capable of a gym work-out. The main value of this approach is to compare the “ideal” budgets with actual incomes, say levels of NZS, and to use any shortfalls in lobbying governments.

A similar approach is to use ownership of key items, which are seen as essential to an adequate standard of living, as indicators. For example, you could say that if over 80% of households in a particular group own an item, then it is a necessity. This seems fair enough for a telephone, hot water supply and heaters. Yes, for washing machines. Perhaps, for cars? But what about dishwashers, lap top computers, and pay TV? Many will remember when colour TV was the height of novelty, when having your own printer/copier would have been well-nigh unthinkable. These lists will soon be dated, and anyhow, what about choice? Is a person deprived if they choose to have a jet ski rather than a car? Some people think that dishwashers deprive families of precious discussion time over the washing up. Are pets an unjustified luxury?

I remember other surveys which try to identify poverty and deprivation levels among older people by asking questions such as:

“Do you go to bed early to avoid having to heat your house?”
(Personally I can’t think of anything better on a cold evening than a warm bed and a good book.)

“Do you make your own clothes because you cannot afford new ones?”
(Who makes clothes these days? Haven’t they heard of op shops?)

“Do you turn down the thermostat on your heater to save money?”
(Heaters with thermostats are much more expensive than those without.)

A third approach to assessing incomes is through “replacement rates”. These compare incomes before and after retirement. What income do we need once we are retired to keep up earlier living standards? Would it be 70%, 80% or 100%? We may save on travel to work, bought lunches and business clothes. But we may spend more on leisure, holidays, heating bills and medical care. Retirement lifestyles can allow economies to be made, by, for example, providing time to shop around and compare prices. This approach is often used to give people an idea of what incomes they will need in retirement and to exhort them to save, threatening them with an impoverished life otherwise.

The point I am trying to make is that value judgements are going to come in, whatever the method used. There is no “one-size fits all” when it comes to income adequacy. But this is not to say it is not an important subject, especially for older people who have limited opportunities to increase their incomes and whose retirement savings are at the mercy of financial ups and downs, not to mention crashes.