Asset-Related Measures of Poverty and Economic Stress

Transcription

1 Asset-Related Measures of Poverty and Economic Stress Andrea Brandolini Banca d Italia, Department for Structural Economic Analysis Silvia Magri Banca d Italia, Department for Structural Economic Analysis Timothy M. Smeeding Institute for Research on Poverty and University of Wisconsin Parallel session 5: From Poverty to Power Third OECD World Forum on Statistics, Knowledge and Policy October 2009, Busan, Korea

2 The problem (1) 50,000 Per capita GNI and net worth (US$, PPP, 2005) Per capita GNI Per capita net worth 300,000 40, ,000 30, ,000 20, ,000 10,000 60,000 0 Italy France Germany Japan United Kingdom Canada United States 0

3 The problem (1) 50,000 Per capita GNI and net worth (US$, PPP, 2005) Per capita GNI Per capita net worth 300,000 40, ,000 30, ,000 20, ,000 10,000 60,000 0 Italy France Germany Japan United Kingdom Canada United States 0

4 The problem (2) Standard approach: poverty = income insufficiency Lack of income/expenditure relative to some minimally acceptable level Many measurement aspects (e.g., absolute vs. relative), but common approach (US, EU, Italy ) Household wealth only enters through cash income flow it generates in current year imputed rent, (realized) capital gains/losses Fail to represent full amount of resources at disposal of consumer unit

5 The problem (3) Two reasons to go beyond purely income-based measure of poverty Well-being: Income-poor have different living standards depending on net assets Assets fundamental to smooth out consumption patterns when income is volatile Lifetime equity: chances in one s life much depend on the set of opportunities open to a person which are, in turn, a function of the person s endowments different if current consumption but not permanent income below poverty line, or both below poverty line (Morduch) when policy objective is to level the playing field more than to ensure a decent standard of living, wealth redistribution may be more effective than income redistribution responsibility-enhancing role of assets (Bowles-Gintis)

6 Monitor standard of living The problem (4) Three approaches 1. Income-net worth 2. Asset poverty 3. Financial vulnerability (not discussed today) Remaining of presentation definitions application of 1 and 2 to LWS data

7 Standard approach (1) Insufficiency of current income CY t Y t r t NW t 1 Y t r t NW t-1 incomes from labour, pensions, transfers property incomes (r t interest rate, NW t-1 net worth) Underestimates resources at individual s disposal: people can spend all NW, or at least the part that can be sold immediately

8 Standard approach (2) Y Z poor if: CY = Y + r NW < Z Y < Z r NW NW

9 Income-net worth (1) Weisbrod and Hansen (1968): replace actual property incomes with n-year annuity value of net worth AY t Y t 1 (1 ) n NW t 1 n length of annuity interest rate of annuity

10 Income-net worth (2) Net worth converted into constant flow of income, discounted at the rate over a period of n years n annuity made of interest, AY=Y+rNW=CY n = 1 AY=Y+NW Weisbrod-Hansen: n = life expectancy hypothesis: no wealth left at death Generalisations (e.g., single vs. couples) Conceptually consistent way of combining current income and net worth independently of feasibility. It does not imply either that people generally do purchase annuities with any or all of their net worth, that they necessarily should do so, or that they can do so.

11 Income-net worth (3) Percentage annuity rate by age and sex 30 Females 30 Males Age Age 2% interest rate 6% interest rate Annuity rate with a 2% rate Annuity rate with a 6% rate elderly look much better, on average

12 Income-net worth (4) Y Z Age poor if: CY = Y + r NW < Z Y < Z r NW NW

13 Income-net worth (5) Theoretically neat solution but several measurement assumptions: length of annuity interest rate wealth aggregate that is annuitized treatment of couples population subgroups whose wealth is annuitized allowance for bequests/precautionary saving poverty threshold

14 Income-net worth (6) Application based on Luxembourg Wealth Study data Comparable database containing wealth variables based on existing datasets to enable cross-country comparisons on household net worth, portfolio composition and wealth distribution Some caution: wealth is difficult to measure Households guard their financial privacy jealously: in fact, it may be more unusual today for people to reveal intimate details of their financial affairs than to reveal details of their intimate affairs. In addition, many households have complicated finances, with multiple accounts at different financial institutions, having different tax status, and including both mutual funds and individual stocks and bonds. Even households that wish to cooperate with researchers may have some difficulty answering detailed questions accurately. John Campbell (2006)

15 LWS COUNTRIES (10) AND DATASETS (13) Austria Canada Cyprus Finland Germany Italy Norway Sweden United Kingdom United States Survey of Household Financial Wealth Survey of Financial Security Survey of Consumer Finances Household Wealth Survey Socio-Economic Panel Study Survey of Household Income and Wealth Income and Wealth Survey Wealth Survey British Household Panel Study Panel Study of Income Dynamics Survey of Consumer Finances Varied group of participants

16 The Luxembourg Wealth Study database Country Type of source Over-sampling of the wealthy Sample size No. of non-missing net worth No. of wealth items Austria Sample survey No 10 Canada Sample survey Yes 15,933 15, Cyprus Sample survey Yes Finland Sample survey No 3,893 3, Germany Italy Sample panel survey Sample survey (panel section) Norway Sample survey + admin. records Sweden Sample survey + admin. records United Kingdom United States Sample panel survey Sample panel survey Yes 12,692 12,129 9 No 8,011 8, No 22,870 22, No 17,954 17, No 4,867 4,185 7 No 7,406 7, Sample survey Yes 4,442 4, Survey differ! Perfect comparability cannot be achieved, but much can be done to improve comparability

17 The cost of cross-national comparability: reconciling LWS and national concepts (averages in thousands of national currencies) Variable Canada Finland Italy Sweden United States LWS net worth pension assets other financial assets business equity (1) other non-fin. assets LWS adjusted net worth (2) National source net worth Source: LWS and country sources. (1) Business assets. (2) Not include other debts.

18 LWS data Country Disposable income Total financial assets Net worth Net worth to disposable income ratio Austria (2004) 61.0 Canada (1999) Finland (1998) Germany (2002) Italy (2002) Norway (2002) Sweden (2002) UK (2000) US-PSID (2001) US-SCF (2001) Source: elaborations on LWS data Net worth: missing in Austria, not comparable in Norway/Sweden Wealth-to-income ratios lower than for aggregate balance sheets Impact of different survey characteristics: compare two US sources Finland vs. Italy vs. US

19 Income-net worth (7) % share of income-poor and income-net worth-poor households All households (head life expectancy, 2% rate, zero bequest) Country National lines US-PSID line Income-net worth poor Income poor Difference Income-net worth poor Income poor Two poverty lines Adjustment only for heads 55+ Replacing actual annual yield of net worth with its annuity value reduces poverty ratios Country ranking unchanged, but higher wealth holdings of Italians produce biggest reduction Smaller effect if we annuitize financial assets rather than net worth Difference Finland (1998) Germany (2002) Italy (2002) US-PSID (2001) US-SCF (2001) Source: elaborations on LWS data

20 Income-net worth (8) % share of income-poor and income-net worth-poor households Households with head 55+ (head life expectancy, 2% rate, zero bequest) Country National lines US-PSID line Income-net worth poor Income poor Difference Income-net worth poor Income poor Difference Finland (1998) Germany (2002) Italy (2002) US-PSID (2001) US-SCF (2001) Source: elaborations on LWS data Income poverty higher for this subgroup than for whole population in Finland and US, lower in Italy and Germany Much larger impact from the adoption of income-net worth indicator Pronounced narrowing of differences between US and Europe

21 Asset-poverty (1) Impose less structure on data supplement incomebased with asset-based poverty measures Exposure to potential risk vulnerability more than poverty World Bank (2001): vulnerability measures the resilience against a shock the likelihood that a shock will result in a decline in well-being. [It] is primarily a function of a household s asset endowment and insurance mechanisms and the characteristics (severity, frequency) of the shock. asset-poor = wealth < fraction of income poverty line Haveman and Wolff (2004) = 1/4 Gornick et al. (2009) = 1/2 net worth : indicator of long-run economic security of families liquid assets : indicator of emergency fund availability

22 Asset-poverty (2) Y Asset poor only Z Asset and income poor ζ Z NW

23 Asset-poverty (3) Country Income poor Net worth poor Income and net worth poor Liquid asset poor Income and liquid asset poor Austria (2004) 13.8 Canada (1999) Finland (1998) Germany (2002) Italy (2002) Norway (2002) Sweden (2002) UK (2000) US-PSID (2001) US-SCF (2001) Source: elaborations on LWS data Net worth poverty 2 to 3 times income poverty in most nations Income and liquid asset poor not terribly different from income poor

24 Conclusions Need to integrate wealth into the analysis of poverty and inequality Empirical problem: income & wealth together, for income-net worth better wealth data need ex ante standardization of methods and definitions Asset-related measures of poverty may have distinctive informative value with respect to income-based statistics Pools of asset-poor and income-poor do not coincide and their incidence need not move synchronously Better understand properties of alternative indicators Be careful with using income-net worth across generations! Assess sensitivity to different assumptions Paying attention to household assets and debts is of increasing importance in the current economic crisis which is seriously affecting housing values, mortgage debt arrears, and financial assets in all rich nations

25 MANY THANKS FOR YOUR ATTENTION