In recent months there has been considerable attention given to developments in income inequality in Australia.
The Productivity Commission (PC) in a research paper released in August examined recent evidence and trends around inequality, economic mobility and disadvantage across Australian society.
While much of the focus was on those of working age, some of the analysis relates to those aged 65 and over.
While some level of inequality is unavoidable in any society, excessive inequality and entrenched disadvantage can erode social cohesion and hinder growth. More fundamentally, excessive inequality and poverty are not right in a moral sense. Although economists tend to be a bit wary of getting into that territory.
The news however is not all bad. Twenty seven years of uninterrupted economic growth has delivered improved living standards for the great majority of Australians. This has both direct and indirect implications for the accumulation of retirement savings and standards of living in retirement.
More years in paid employment (through lower unemployment), increases in real wages and healthy profits boosting profits (contributing to returns on equity) have helped those in the accumulation phase. Retirees have been benefitting from, among other things, increases to the Age Pension flowing from both discretionary decisions by governments and indexation in line with average growth in wages in the economy.
However, life is not uniformly good for retirees and for some people things did not get that much better over the last 25 or 30 years, at least in terms of how their lifestyle compared to community norms and standards.
Retirees tend to be asset rich and relatively income poor.
Those aged 25 to 34 are over represented among middle and upper income groups. This reflects higher incomes associated with greater workforce experience and higher rates of partnering.
People aged 35 to 44 are also over represented in middle and upper income groups, but less so than those aged 25 to 34. This reflects parents having children and taking time out of the workforce.
Those aged 45 to 54, and even more so those aged 55 to 64, are over represented among the top income deciles. This reflects parents returning to the workforce, workers moving through their peak earning years and savers benefiting from income associated with capital accumulation.
People aged 65 and older are strongly over represented in lower income deciles. This reflects retirement from the workforce, reliance on the age pension and drawing down savings to support consumption. However, once the benefits flowing from home ownership are factored in, the overall position of those over 65 looks quite a bit better.
During working age years there is also movement up and down the income distribution but much less so in traditional retirement ages. On average, each person spent time in five different income deciles between 2000-01 and 2015-16. Close to 90 per cent had a difference of at least three deciles between the top and bottom income deciles they spent time in. Less than 1 per cent of people remained in the same income decile over the whole period.
As I have previously stated, this income mobility means that projections of tax expenditures on superannuation by income decile of the population are likely to be extremely misleading when calculated over a period of 30 years or more. Projections for the top income percentile are even more misleading. Both the Treasury and the Grattan Institute could do well reading the PC research report.
Retirement income mobility is much less common, at least in terms of upward mobility. Not many people aged over 80 win a lottery or inherit big from their parents.
Rates of measured income poverty are also relatively high. Over 10 per cent of retiree households were estimated to be in poverty in 2015-16 based on their level of private consumption relative to the rest of the community. Retirees experience higher poverty levels than working households, but less than unemployed households, reflecting a combination of superannuation income and the higher rates of the Age Pension compared to the Newstart Allowance.
Having a decent superannuation balance in retirement is an important safeguard against ending up in poverty. Compulsory superannuation is clearly a socially progressive policy.
