6470.0.55.001 - Information Paper: Introduction of the 17th Series Australian Consumer Price Index, 2017  
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17TH SERIES EXPENDITURE WEIGHTS

4.1 The CPI and SLCI weights reflect the relative expenditures of the CPI population group and SLCI sub–groups. The weights reflect average expenditure of households and not the expenditure of an 'average household'. The household average weekly expenditure (AWE) and corresponding 17th series CPI weights for the CPI groups are shown in Table 4.1.

TABLE 4.1: 17TH SERIES CPI, AVERAGE WEEKLY EXPENDITURE AND WEIGHTS, SEPTEMBER QUARTER 2017, WEIGHTED AVERAGE OF EIGHT CAPITAL CITIES

Average weekly expenditure
(2015-16 quantities,
September quarter 2017 prices) (a)
CPI weight
CPI group
$
%

All groups CPI
1,594.18
100.0
Food and non–alcoholic beverages
256.55
16.09
Alcohol and tobacco
113.02
7.09
Clothing and footwear
56.56
3.55
Housing
361.49
22.68
Furnishings, household equipment and services
149.62
9.39
Health
86.57
5.43
Transport
164.51
10.32
Communication
42.70
2.68
Recreation and culture
202.62
12.71
Education
68.05
4.27
Insurance and financial services
92.50
5.80

(a) Derived from 2015-16 ABS Household Expenditure Survey and other sources.
Note: Any discrepancies between totals and sums of components in this table are due to rounding.


4.2 The 17th series CPI weights and household average weekly expenditure by group, sub–group and expenditure class as at September quarter 2017 are shown in Appendix 1 and in the data cube Consumer Price Index: 17th Series Weighting Pattern (cat. no. 6473.0). For the SLCIs, this information is available from Selected Living Cost Indexes: 17th Series Weighting Pattern (cat. no. 6474.0).

4.3 Total household expenditure in the CPI basket increased by 16.3% from $1,371.30 per week in 2009-10 (at June quarter 2011 prices) to $1,594.18 in 2015-16 (at September quarter 2017 prices). The All groups CPI increased 14.3% over the same period, while wages growth was 19.3% (Wage Price Index, cat. no. 6345.0). Table 4.2 summarises the changes in expenditure by group.

TABLE 4.2: AVERAGE WEEKLY EXPENDITURE BETWEEN THE 16TH AND 17TH SERIES CPI

16th series average weekly expenditure
(2009-10 quantities,
June quarter 2011 prices) (a)
17th series average weekly expenditure
(2015-16 quantities,
September quarter 2017 prices) (b)
Percentage change
CPI group
$
$
%

All groups CPI
1,371.30
1,594.18
16.3
Food and non–alcoholic beverages
230.87
256.55
11.1
Alcohol and tobacco
96.87
113.02
16.7
Clothing and footwear
54.58
56.56
3.6
Housing
305.75
361.49
18.2
Furnishings, household equipment and services
124.79
149.62
19.9
Health
72.56
86.57
19.3
Transport
158.39
164.51
3.9
Communication
41.81
42.70
2.1
Recreation and culture
172.30
202.62
17.6
Education
43.67
68.05
55.8
Insurance and financial services
69.71
92.50
32.7

(a) Derived from 2009-10 ABS Household Expenditure Survey and other sources.
(b) Derived from 2015-16 ABS Household Expenditure Survey and other sources.
Note: Any discrepancies between totals and sums of components in this table are due to rounding.



CHANGES IN WEIGHTING PATTERNS

4.4 A detailed comparison of the 16th and 17th series CPI weights is presented in Appendix 2. Before analysing the changes to the weighting patterns over time, a number of points should be noted.


Quantities underlying the weights are fixed

4.5 Although the weights are expressed in terms of expenditure shares, it is not the expenditure shares (where expenditure is given by the product of quantity and price) that are held constant (or fixed) from period to period. What are held constant are the quantities of products underpinning these expenditures. Weights are presented in expenditure terms because it is not possible to present quantity weights in a comparable way. The relative expenditure shares of items will change over time in response to changes in relative prices. The weights in the 17th series CPI and SLCIs generally relate to expenditures in 2015-16. These have been revalued using price movements to September quarter 2017 (the 'link' quarter) prices, maintaining fixed '2015-16 quantities'. For more information see Chapter 4: Price Index Theory in Consumer Price Index: Concepts, Sources and Methods (cat. no. 6461.0).


Weights are relative

4.6 The weight of an expenditure class depends on how expenditure on that class compares to total expenditure (i.e. expenditure shares). If the increase in expenditure on a particular expenditure class in the reference period is greater than the increase in total expenditure between two series, the weight of that expenditure class will increase. For example, between the 16th and 17th series, the expenditure share on 'Restaurant meals' in the CPI increased from 2.81% to 3.32%, driven by an increase in average weekly expenditure of 37.3%. Conversely, if the increase in expenditure on a particular expenditure class in the reference period is less than the increase in total expenditure between two series, the weight of that expenditure class will decrease. For example, in the 17th series the expenditure on 'Waters, soft drinks and juices' increased by less than the increase in overall expenditures. As a result, the weight fell from 0.87% in the 16th series to 0.75% in the 17th series.


Changes in weights between the 16th and 17th series

4.7 The changes in CPI and SLCI weights between the 16th and 17th series can be broken down into price and volume effects. The volume change captures both quality and quantity changes between the reference years 2009-10 and 2015-16. The volume changes were calculated by removing the price change (corresponding price index measure) between the two periods. The corresponding CPI and SLCI price movements were used as the measures of price change.

4.8 For the CPI population, households continue to spend the most on Housing, followed by Food and non–alcoholic beverages and Recreation and culture. Although Food and non–alcoholic beverages remains one of the most heavily weighted CPI groups, it fell as a proportion of household spending between the 16th and 17th series. Communication and Clothing and footwear represent the smallest portions of household expenditure.

4.9 The changes in CPI weights and average weekly expenditures for a selected number of groups and ECs are discussed in more detail below. All analysis refers to the weighted average of the eight capital cities.


Food and non–alcoholic beverages group

4.10 Despite average weekly expenditure rising by $25.68, the weight of the Food and non–alcoholic beverages group decreased 0.75 percentage points (pp) to 16.09%. This reflects the strong competition that has occurred on food items over recent years, which has kept prices and expenditure growth relatively low. Compared to the 16th series, weights fell across most food products.

4.11 The weight for Fruit fell from 1.60% to 1.07%. Average weekly expenditure decreased 22.1% from $21.97 to $17.11. The 16th series weight for Fruit was impacted by adverse weather conditions, which affected supply and pushed up prices. These conditions have not been as prevalent or as long–lived during the 17th series, resulting in the weight for Fruit returning to more normal levels.

4.12 Partially offsetting the falls was Restaurant meals, which recorded the strongest increase in weight within the group (+0.51pp). Average weekly expenditure increased from $38.55 to $52.94. This is supported by strong price and volume growth, as consumer preferences shift from goods towards experiences.


Housing group

4.13 Average weekly expenditure on Housing increased by 18.2% between the 16th and 17th series, from $305.75 to $361.49. Rents and Electricity were the major contributors to the increase in average weekly expenditure.

4.14 A moderate increase in the weight of Housing was recorded (+0.38pp), with a greater proportion of expenditure on Rents and Utilities partially offset by a fall for New dwelling purchase by owner–occupiers (Graph 4.1).

4.15 The weight of Utilities, comprising Water and sewerage, Electricity, and Gas and other household fuels, increased 0.45pp to 4.06%. Average weekly expenditure rose 30.8%, from $49.45 to $64.66. This increase was predominantly price driven, with prices rising 45.6% between 2009-10 and 2015-16. Higher wholesale and network costs have contributed to the rise.


GRAPH 4.1: HOUSING GROUP - % CONTRIBUTION TO ALL GROUPS CPI
A bar graph that compares the percentage contributions to All groups CPI between the 16th and 17th series for the Housing group and its various subgroups.



Q: Why have the weights of New dwelling purchase by owner-occupiers and Rents moved in opposite directions between the 16th and 17th series?

A: Strong house price growth is indirectly strengthening the weight of Rents, but having the opposite impact on New dwelling purchase by owner-occupiers.

Detailed information:

In the CPI, owner–occupied housing is represented by purchases of new dwellings (net additions to the housing stock) and the increase in the volume of housing due to renovations and extensions. This can be a challenging concept to understand. One way to think about it is the following.

The CPI measures price inflation for the household sector. Therefore it is necessary to consider the purchases of dwellings between the household sector and other sectors of the economy, rather than within the sector. From this perspective, it is only purchases of newly built dwellings and those dwellings that have been acquired by households from outside the sector (e.g. private purchases of houses previously owned by the government) that are relevant. Purchases of established dwellings generally occur between households and are excluded. Additionally, the CPI is interested in measuring the prices of consumption goods and services. Land is considered an investment purchase, as it does not deteriorate over time, and is therefore out of scope. This leaves the CPI to only measure the price of new dwelling structures.

New dwelling purchase by owner–occupiers is the major component of Housing costs and household spending overall for the CPI population. However, its weight fell between the 16th and 17th series, from 8.67% to 7.78%, with average weekly expenditure increasing by only $5.21. Although there has been an overall increase in the rate of additions to the owner–occupier dwelling stock since 2009-10, driven by strong building activity over recent years, there has also been a compositional shift, led by strong price growth in detached houses, towards cheaper apartment living. The proportion of apartment construction approvals has risen from 18.2% to 34.7% of total new dwelling approvals between 2009-10 and 2015-16 (Building Approvals, Australia (cat. no. 8731.0)) .

The increase in apartment construction has delivered dwellings that are less expensive than low density housing, due to increased supply and lower construction costs brought on by cheaper inputs. Coupled with price growth for other residential construction rising at a much slower pace compared to house construction between 2009-10 and 2015-16 (7.4% vs. 17.2%, Producer Price Indexes), this has resulted in a decrease in the weight of New dwelling purchase by owner–occupiers in the CPI.

Conversely, Rents, the second most significant component of the CPI and Housing group increased in weight between the 16th and 17th series, from 6.71% to 7.22%. Average weekly expenditure rose 25.1%, from $92.01 to $115.12. It should be noted that this value represents an average expenditure across the entire CPI population, and not just households that rent.

The increase in the weight for Rents was due to rises in both prices and volumes. Strong growth in house prices over the last 5 years has led to an increase in the proportion of renters in Australia’s capital cities, pushing up expenditure on rents. 2016 Census data shows that 30.2% of occupied private dwellings are rented, up from 28.8% in 2011. The strong demand for rental properties has also impacted prices, with price growth of 20.2% between 2009-10 and 2015-16.

TABLE – WEIGHTS FOR HOUSING GROUP, 16TH AND 17TH SERIES COMPARISON, CPI

Component
17th series weight (a)
%
16th series weight (a)
%
Change in weight from 16th series
pp

Housing group
22.68
22.30
+0.38
New dwelling purchase by owner–occupiers
7.78
8.67
-0.89
Rents
7.22
6.71
+0.51

(a) Expenditure as a proportion of total household spending.



Furnishings, household equipment and services group

4.16 Average weekly expenditure on Furnishings, household equipment and services increased by 19.9% to $149.62. This resulted in the weight of the group increasing from 9.10% to 9.39%.

4.17 Child care was the predominant contributor to the rise, increasing as a proportion of household expenditure from 0.69% to 1.35%. This was partially offset by falls in weights for a number of the goods components, including Furniture (-0.24pp), Household textiles (-0.12pp) and Major household appliances (-0.09pp), driven by subdued price growth as a result of retail competition and imports.



Q: What influences are contributing to an almost doubling of the weight of Child care in the CPI?

A: Increased demand for child care services, changes in industry standards and pricing pressures for centres have led to strong growth in expenditure on child care between the 16th and 17th series.

Detailed information:

Child care in the CPI and SLCIs encompasses services provided at community, private and family–based child care establishments. Both full–time and part–time care are included. Expenditure is measured on an out–of–pocket basis, i.e. gross fees payable, less any subsidies households receive on child care services.

The expenditure share of Child care in the CPI has risen from 0.69% to 1.35% between the 16th and 17th series. Average weekly expenditure increased by 127.1%, from $9.47 to $21.51. While this figure might appear low, it should be noted that it represents the average weekly expenditure (on a net basis) of all households in the CPI population, not just those who use child care services.

This rise in the expenditure and weight of Child care is driven by increased demand, which has also resulted in significant upward pressure on prices. Contributing to increased demand has been rising workforce participation, particularly for women. Over the last 20 years, the participation rate of women in the workforce has increased from 53.8% in January 1997 to 59.1% in January 2017 (Labour Force, Australia, cat. no. 6202.0). Between 2009-10 and 2015-16, the increase has been around 0.8 of a percentage point.

The rise in workforce participation has contributed to a strong increase in the number of children in approved care, as well as increased hours for those in care (Early Childhood and Child Care in Summary, Department of Education and Training). Approved care refers to care provided by Long Day Care, Family Day Care and In-Home Care, Outside School Hours and Occasional Care services. In particular, the number of children in approved care increased 43.5% between September quarter 2009 and June quarter 2016. While pushing up costs for families, this is also resulting in increased costs for child care centres which are being passed on to parents in the form of higher fees.

Also contributing to price growth has been changes in industry standards, including higher qualification requirements for teachers in early childhood care (implemented on 1 January 2014) and increased educator–to–child ratios (implemented on 1 January 2016). Overall, prices for child care have risen 60.0% between 2009-10 and 2015-16, the largest rise of all ECs apart from Tobacco.

The rise in expenditure, driven by higher gross fees and volumes, has more than offset increases in government financial assistance for child care between the 16th and 17th series, resulting in a significant increase in the weight of Child care in the CPI.

In terms of the SLCIs, Employee households are the most likely to use child care services, and therefore were the most heavily impacted by these conditions. The expenditure share of Child care rose 0.90pp for Employee households, to 1.72% of total expenditure.

TABLE – WEIGHT OF CHILD CARE, 16TH AND 17TH SERIES COMPARISON, CPI AND BY HOUSEHOLD TYPE

Household type
17th series weight (a)
%
16th series weight (a)
%
Change in weight from 16th series
pp

CPI
1.35
0.69
+0.66
PBLCI (b)
0.57
0.26
+0.31
Employee households
1.72
0.82
+0.90
Age pensioner households
-
-
-
Other government transfer recipient households
1.05
0.44
+0.61
Self–funded retiree households
-
-
-

(a) Expenditure on child care as a proportion of total expenditure for each household type.
(b) PBLCI is an aggregation of Age Pensioner and Other government transfer recipient households.



Health group

4.18 Although the Health group recorded a moderate increase in weight from the 16th series (5.29% to 5.43%), there has been a slight shift in expenditure share away from Pharmaceutical products, which decreased from 1.17% to 1.03%, predominantly due to subdued price growth.

4.19 In contrast, the weight for Medical and hospital services rose from 3.42% to 3.73%, and is the predominant driver of Health costs increasing as a proportion of overall household spending. Average weekly expenditure increased by 27.0%, from $46.85 to $59.49. The strong rise in private health insurance premiums over this period was the major contributor to the increase. Between 2010 and 2016, premiums increased 5.71% per year on average at the industry weighted level (Department of Health).




Q: With the ageing population in Australia, why has the weight of Pharmaceutical products fallen across the CPI and most household types?

A: Government policies and initiatives have contributed to subdued growth in out-of-pocket expenses for medicines.

Detailed information:

Pharmaceutical products are a fundamental component of the health system and are used by a large number of households to prevent, alleviate and cure illness.

With an ageing population, there is a greater reliance on these medicines. As a result, changes in prices will have a relatively large effect on household out–of–pocket expenses, that is, the final price the household pays after subsidies. Price growth of pharmaceutical products has been fairly subdued compared to other health costs such as Private Health Insurance, which has seen significant price increases since 2009-10.

Weak price growth for pharmaceuticals reflects additional medicines being added on to the Pharmaceutical Benefits Scheme (PBS) schedule, as well as government initiatives such as Simplified Price Disclosure. In 2015-16 alone, there were 370 new and amended PBS listings (Department of Health 2015-16 Annual Report). This included high cost medicines for the treatment of breast cancer, melanoma and hepatitis C. The Simplified Price Disclosure program builds on the changes to price disclosure policy made in 2012 under Expanded and Accelerated Price Disclosure (EAPD), and allows PBS prices to be adjusted to market prices more quickly than the previous approach. This measure came into effect in 2014. A more recent initiative allowing pharmacists to offer a discount of up to $1.00 on scripts where a co–payment is made (from 1 January 2016) has also contributed to the fall in weight between the 16th and 17th series.

Combined with increased retail competition in the industry, these government initiatives are helping to subdue the rate of price growth and reduce households’ out–of–pocket costs. The following table presents the proportion of household expenditure on pharmaceutical products by household type and for the CPI. Age pensioners spend the greatest proportion of their expenditure on pharmaceutical products, more than double the proportion spent by CPI households, but also showed the largest fall in weight between the 16th and 17th series, as they benefit most from these government programs.

TABLE – WEIGHT OF PHARMACEUTICAL PRODUCTS, 16TH AND 17TH SERIES COMPARISON, CPI AND BY HOUSEHOLD TYPE

Household type
17th series weight (a)
%
16th series weight (a)
%
Change in weight from 16th series
pp

CPI
1.03
1.17
-0.14
PBLCI (b)
1.92
2.06
-0.14
Employee households
0.95
1.06
-0.11
Age pensioner households
2.49
3.06
-0.57
Other government transfer recipient households
1.44
1.39
+0.05
Self–funded retiree households
2.00
2.08
-0.08

(a) Expenditure on pharmaceutical products as a proportion of total expenditure for each household type.
(b) PBLCI is an aggregation of Age Pensioner and Other government transfer recipient households.



Transport group

4.20 Transport costs fell as a proportion of total household expenditure, recording the largest fall of all the groups in the CPI (-1.23pp). Average weekly expenditure on Transport rose by only 3.9%, from $158.39 to $164.51.

4.21 The main driver was Automotive fuel, which recorded a fall in weight of 0.77pp to 2.78%. Average weekly expenditure decreased 8.8% from $48.67 to $44.39. This was predominantly a result of falls in the world oil price.

4.22 Motor vehicles also recorded a fall in weight, with average weekly expenditure remaining relatively unchanged between the 16th and 17th series. Vehicles have become cheaper over the period, driven by increased competition between brands for sales, manufacturing changes which have enabled cars to be built more cheaply, and a higher proportion of imported cars being sold.


Education group

4.23 The Education group recorded the largest increase in weight in the 17th series CPI, up 1.09pp to 4.27%, although it still remains a small component of household spending. Secondary education recorded the largest increase, up 0.44pp to 1.70%. This was followed by Preschool and primary education, up 0.40pp to 0.92%, and Tertiary education, up 0.25pp to 1.65%.



Q: What factors are behind the Education group recording the largest increase in weight between the 16th and 17th series CPI?

A: Prices and enrolment numbers have increased across all levels of education between 16th and 17th series.

Detailed information:

The cost of education at any level can be driven by several factors such as; changes in student numbers, government regulatory policies on education or funding, or standards (e.g. increased teacher–to–student ratios, services or syllabus).

For CPI purposes, the Education group comprises all expenditure on primary, secondary and tertiary education, and preschool services. Both private and public institutions are included.

Education is a necessity and compulsory at certain levels, so it is very difficult for households to avoid any price changes. Despite the availability of schools and universities, households may not substitute in response to price changes. This is because parents might have a particular preference in the type or location of their child’s education, or because prices change similarly across the various institutions available to them.

Any growth in student enrolment puts additional pressure on schools, resulting in increased costs which are generally passed on. The number of student enrolments increased between 2009-10 and 2015-16. As of May 2016, nearly 20% of the population were enrolled in some form of study, with the proportion of people studying increasing across most of the demographics in the past 10 years (Education and Work, Australia, cat. no. 6227.0). At the primary and secondary education levels, the number of enrolments increased 9.0% between 2009 and 2016 (Schools, Australia, cat. no. 4221.0).

Additionally, between 2009 and 2016, there has been a slight shift in preference towards non–government schools, which are typically more expensive. The number of students enrolled in non–government schools (catholic and independent) increased 10.4%, compared to an 8.2% rise for government schools. This trend has started to reverse in the last two years.

The increased enrolments have contributed to higher fees for students. Prices rose across all the ECs between 2009-10 and 2015-16: Preschool and primary education (+37.7%), Secondary education (+41.6%) and Tertiary education (+33.9%).

TABLE – WEIGHTS FOR EDUCATION GROUP, 16TH AND 17TH SERIES COMPARISON, CPI

Component
17th series weight (a)
%
16th series weight (a)
%
Change in weight from 16th series
pp

Education group
4.27
3.18
+1.09
Preschool and primary education EC
0.92
0.52
+0.40
Secondary education EC
1.70
1.26
+0.44
Tertiary education EC
1.65
1.40
+0.25

(a) Expenditure as a proportion of total household spending



Expenditure weights for the SLCIs


4.24 The SLCIs are produced as a by-product of the CPI, with the main conceptual difference being that the SLCIs are constructed on an outlays basis, while the CPI is constructed on an acquisitions basis. The SLCIs are designed to measure the change in out–of–pocket living expenses of four Australian household types: Employee, Age pensioner, Other government transfer recipient, and Self–funded retirees. The PBLCI combines the Age pensioner and Other government transfer recipient household types. See paragraphs 3.3 to 3.5 for SLCI concepts and conceptual differences.

4.25 At the 8 caps level, average weekly expenditure grew for all population sub–groups between the 16th and 17th series (Graph 4.2). The increase ranged from $71.42 for PBLCI households, to $204.75 for Employee households.

GRAPH 4.2: ALL GROUPS SLCIS – AWE COMPARISON

A bar graph that compares the All groups average weekly expenditure for all the household types in the selected living cost indexes.



4.26 Housing and Food and non–alcoholic beverages remain the significant components of household expenditure for most population sub–groups. All sub–groups recorded an increase in weight for Housing, driven by Rents and Utilities. Other government transfer recipients recorded the most significant rise, due to having a greater proportion of renters.

4.27 The weight of Health also increased across all population sub–groups, with Self–funded retirees and Age pensioners showing the largest movements, increasing from 8.53% to 10.31% and 8.85% to 10.22% respectively. These rises were driven by Medical and hospital services, following significant increases in private health insurance premiums over the period.

4.28 Conversely, Clothing and footwear has fallen as a proportion of expenditure across all population sub–groups. This is driven predominantly by price falls in garments as a result of increased competition from online and international entrants to the Australian retail market.

4.29 Changes in the weights for Insurance and financial services varied across the sub–groups, driven by the different proportions of owner–occupier and renter households. Employee and Other government transfer recipient households recorded falls in weight driven by lower interest charges, with the cash rate reaching record lows during 2015-16. Exposure to mortgages is lower for the remaining household types, and combined with increases in gross premiums for insurance, resulted in increases in their weights for Insurance and financial services.



Q: Why do price changes in Utilities affect Age pensioner and Other government transfer recipient households relatively more than other households?

A: Because Age pensioner and Other government recipient households spend the greatest proportion of their household budget on utilities.

Detailed information:

When the prices of products change, what’s important to consumers is: by how much did the price change; the proportion of the household budget spent on these products; and whether substitute products are available so consumers can avoid some of these price changes.

Household Utilities are essential features of Australian dwellings. Utilities, for the purposes of the Australian CPI and SLCIs, relate to: Water and sewerage, Electricity, and Gas and other household fuels. Utilities are consumed by households during most home based activities, whether it’s boiling the kettle for a cup of tea, taking a shower or watching TV.

The amount of water, electricity and gas consumed by households and their prices can significantly impact household budgets. In part this is because it’s very difficult for consumers to avoid price changes for utilities. That is, substitutes aren’t readily available.

The proportion of the household budget spent on utilities is also important when prices change. The following table presents the proportion of household expenditure on utilities by household type and for the CPI. Age pensioner and Other government transfer recipient households (and subsequently Pensioner and beneficiary households) spend the greatest proportion of their household budget on utilities; significantly more than the proportion spent by Employee households.

So when the price of utilities change, it is Age pensioner and Other government transfer recipient households that are most affected.

TABLE – WEIGHT OF UTILITIES, 16TH AND 17TH SERIES COMPARISON, CPI AND BY HOUSEHOLD TYPE

Household type
17th series weight (a)
%
16th series weight (a)
%
Change in weight from 16th series
pp

CPI
4.06
3.61
+0.45
PBLCI (b)
6.28
5.48
+0.80
Employee households
3.94
3.28
+0.66
Age pensioner households
6.83
6.09
+0.74
Other government transfer recipient households
5.82
5.06
+0.76
Self–funded retiree households
5.09
4.03
+1.06

(a) Expenditure on utilities as a proportion of total expenditure for each household type
(b) PBLCI is an aggregation of Age Pensioner and Other government transfer recipient households