Housing Costs and Living Standards among the Elderly

How do the living standards of older Australians compare with those of the overall population? How much variation in living standards is there across the elderly population and how have their living standards changed over time? Home ownership has been identified as an important aspect of the retirement support package in Australia. Do the answers to these questions change when account is taken of the reduced housing costs and the housing consumption services provided by owner-occupied housing? This report examines these questions using data from the Australian Bureau of Statistics (ABS) Household Expenditure Surveys (HES) from 1988-89 to 2003-04 and the ABS Surveys of Income and Housing (SIH) from 2003-04 to 2007-08.A number of different measures of living standards are used:• disposable income (DI)• adjusted disposable income (ADI) - income is adjusted to be not less than the base pension for people over Age Pension age• disposable income after housing (DIaH) - disposable income minus housing costs• total consumption (TC) - disposable income after housing plus an estimate of housing consumption• non-housing expenditure (NHX) and a corresponding measure including housing consumption (NHX HC)• non-durable expenditure (NDX) and a corresponding measure including housing consumption (NDX HC) - these remove durable expenditures other than housing from the above measures.All measures are adjusted using an equivalence scale to take account of the needs of households of different sizes (based on the Age Pension single/couple relativity). Living standards in 2005-06:Measures of wellbeing that do not take account of housing consumption overstate the degree of inequality at the top end of the distribution, but understate it at the bottom end. In general terms, the first result comes from the fact that many middle-income households have substantial housing wealth, and the second result comes from the fact that low-income households have substantial rental expenditures.On all of the measures, average living standards are shown to decline with age after 50 years of age. This decline is less at the bottom of the income distribution where incomes are cushioned by the Age Pension.This drop in consumption with age is smaller (but still present) when housing costs and housing consumption are taken into account - because most of the elderly have paid off their houses and have greater housing wealth.Note, however, that these results refer to one point in time only and do not necessarily follow the situation of individuals as they age. Part of the income decline after age 50 years reflects the fact that the younger cohorts have higher living standards, rather than any actual decline of individual living standards with age.Gender and household composition are two key determinants of living standards after retirement. Women tend to have lower consumption in retirement because of their greater longevity and lower lifetime employment income. This is confirmed by the data in this report. The drop in average consumption for those aged between the early 50s and early 70s is greatest for couples, but single women have the lowest average standard of living at all ages.At the bottom of the distribution, single men also fare poorly at all ages. At the top of the distribution, single women both have a large drop across all age groups and the lowest standard of living in retirement. For older women, the income disparity between being single or partnered is greater the higher their education level.Trends in average incomes from 1988-89 to 2007-08:Across all the different measures of resources, the median living standard for the older population has increased steadily since 1988-89, particularly in the last few years up to 2007-08. However, the growth was small in the first five-year period because income in 1988-89 was unusually high as a result of the high interest rates at the end of the 1980s.The last 15 years have been a period of strong income growth for the whole population, but the relative position of the elderly began to fall after the turn of the century, even though the Age Pension has been indexed in line with wage growth for much of this period, and even though the coverage of superannuation has increased. This stabilised after 2005-06, and the trend might possibly reverse now that we are entering a period of reduced economic growth.Despite the cross-sectional finding that income continues to fall after retirement, for the cohort of people aged 60 to 65 years in 1988-89, median disposable income has been relatively constant subsequently. Nonetheless, for the cohorts starting at earlier ages, a fall in cohort income over the retirement years is still apparent.The two expenditure-based measures show somewhat different patterns from each other. On the one hand, a clear decline in living standards across the retirement transition is seen when using the non-housing expenditure plus housing consumption measure for cohorts - though it is not as large as the fall in disposable income. On the other hand, the non-durable expenditure plus housing consumption stays relatively constant between pre-retirement and post-retirement years. The difference between these two measures is consumer durable expenditure. Even though many durables purchased before retirement are likely to last into the retirement phase, the quality of service obtained from them is likely to deteriorate as they age. Hence it is likely that the average consumption level of cohorts is decreasing across the retirement transition.Trends in market and transfer income, and in inequality:Since 1993-94 (after a fall in interest rates), the share of disposable income received from the market has steadily increased for the top three quintiles of the elderly. This has been associated with a growth of inequality among the aged population since 1993-94. In 1993-94 the 10th percentile had an adjusted disposable income of 83 per cent of the median household. By 2007-08 this had fallen to under 70 per cent. The fall was particularly large between 2005-06 and 2007-08. Similarly, the 75th and 90th percentile households moved away from the median household over this period as their income increased. The picture is somewhat different when consumption of services from housing wealth is taken into account. This had an equalising tendency for some years after 1993-94 (particularly in the bottom half of the income distribution), but inequality has started to increase again after 2005-06.In light of the large changes in income levels and inequality among the elderly associated with the high interest rates at the end of the 1980s, the above changes in inequality among the aged population cannot be assumed to represent a long-term trend.