1504.0 - Methodological News, Dec 2007  
ARCHIVED ISSUE Released at 11:30 AM (CANBERRA TIME) 18/12/2007   
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Low Consumption Possibilities (LCP) Project

The Analytical Services Branch (ASB) is undertaking a project aimed at developing a framework for identifying Australian households experiencing economic hardship. 'Consumption possibility' refers to the potential consumption that a household could enjoy, based on all of its economic resources, including income and wealth. The purpose of the analytical component of the LCP project is to determine the feasibility of combining income and wealth into a single distribution for purposes of identifying households experiencing economic hardship.

The method being used involves converting the amount of net worth owned by a household or individual into an annuity that pays a constant amount over the remaining lifetime of the annuitants. This annuity is then added to disposable or final income to yield estimates of wealth-adjusted income (WAI). The estimated distribution of WAI can be modelled using a variety of statistical methods.

Annuitisation of net worth involves a number of assumptions, considerations and data adjustments, including the types of assets to be annuitised, inter-generational wealth transfer, rates of return on assets and liabilities, the period of annuitisation, equivalisation of income and of wealth, avoiding double counting of investment income, and the inclusion or exclusion of superannuation in the value of assets to be annuitised. Several sets of estimates of WAI were produced based on these assumptions and considerations.

Examination of the estimated WAIs has shown that the method is reliable, and is robust and insensitive to minor variations in the assumptions underlying the method. When tested for their reliability and validity as indicators of economic hardship, the estimates of WAI were found to be consistent with both subjective and objective measures of economic hardship, such as financial stress and households reporting low economic resources. Analysis of the results also shows that if identification of households experiencing economic hardship or low consumption possibility were based only on income, then households identified as experiencing economic hardship would be different from those identified if identification was based on the estimated WAIs. The analysis may provide answers to questions relating to the discrepancy between income and expenditure, such as why some households in the lowest income deciles appear to have expenditure levels far in excess of their income and also have higher expenditure levels than some households in higher income deciles.

For more information on this project, contact Tetteh Dugbaza on (02) 6252 7221.