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Estimation of Joint Income-Wealth Poverty: A Sensitivity Analysis

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Abstract

Most poverty studies build on measures that take account of recurring incomes from sources such as labour or social transfers. However, other financial resources such as savings and assets also affect living standards, often in very significant ways. Previous studies that have sought to incorporate assets into poverty measures agree that (1) poverty estimates including wealth are considerably lower than the traditional income-based measures; (2) poverty rates of the elderly are more affected than those of the non-elderly and (3) poverty rates are especially affected by the household’s main residence. This paper assesses the sensitivity of these conclusions to various plausible alternative assumptions, such as the poverty line calculation, the types of assets included in the wealth concept and choices with respect to the equivalence scale. Moreover, we check whether the impact of alternative assumptions is consistent across age and institutional settings. To that effect we compare Belgium and Germany, two countries with similar living standards and income poverty rates, but very different levels and distributions of wealth. Using data from the Eurosystem Household Finance and Consumption Survey we show that accounting for wealth affects the incidence and age structure of poverty in a very substantial way. However, we also illustrate that results strongly depend on all kinds of measurement choices. We show that poverty rates may increase as well as decrease depending on how wealth is accounted for. Cross-country rankings may also change, overall or for specific groups. Second, current measures are not representative for young households such that any conclusion on the age ratio of poverty is highly sensitive to the assumptions made.

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Fig. 1

Source: Brandolini et al. (2010, pp. 270, 272)

Fig. 2

Source: own calculations based on HFCS

Fig. 3

Source: own calculations based on HFCS

Fig. 4

Source: own calculations based on HFCS

Fig. 5

Source: own calculations based on HFCS

Fig. 6

Source: own calculations based on HFCS

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Notes

  1. It should be clear that not all asset types can be easily sold or bought on the market. In the case of non-liquid assets like real estate it is certain that an immediate sale would mean incurring substantial costs.

  2. The specification of n in function of expected lifetimes of both partners is proposed by Rendall and Speare (1993). Although Brandolini et al. (2010) discuss this broader specification, they do not implement it. As most authors they use the longest of the two expected lifetimes. We prefer to use the Rendall and Speare specification because it represents the improved economic situation of the surviving household as the same level of wealth is then available to fulfill the needs of fewer household members. Ideally, one should take into account the wealth loss due to inheritance taxes.

  3. Authors tend to refer to wealth poverty when implementing the unidimensional approach, while the term asset poverty is mostly used for the two-dimensional approach. As both approaches use net worth in their calculations, this reflects only a difference in terminology.

  4. In Belgium this oversampling was based on the NUTS 1 region and the average income by neighbourhood of residence.

  5. Property taxes could not be taken into account because the HFCS does not include cadastral values.

  6. A Eurostat study (2013) proposes another method to jointly assess poverty in disposable income and net wealth. By statistically matching the EU-SILC and HFCS data they largely find the same results.

  7. Also saved income from the ongoing year can be represented in the net worth measure. As we have no information on current incomes we cannot correct for this.

  8. We cannot assign life expectancies if we do not have information on the exact age. As a consequence for both countries about 80 sample households were not included in the analysis.

  9. Elderly is defined as at least one of the adults being 65 years or older, the legal retirement age in Belgium and Germany.

  10. It is also possible to use broader wealth concepts. For example, augmented wealth will add to disposable wealth some valuation of pension rights and human capital or a comparable measure of future earnings possibilities (Wolff 1990). However, since this kind of information is not covered in the HFCS data, we do not implement such a wider wealth concept.

  11. θ equal to 0.5 refers to the square root equivalence scale, which is used in the baseline indicators.

  12. If wealth is annuitized over an infinite period it would be equal to the traditional income poverty indicator.

  13. Weisbrod and Hansen (1968) argue: “the fact that intergenerational transfers are so frequently made via the estate route rather than by transfers before death may be less an indication of people’s desires to pass on their wealth than it is a reflection of their inability to anticipate the time of their death.” Indeed, if people were to know exactly when they would die, they would transfer their wealth before death so as to avoid inheritance taxes.

  14. This is not only true for the joint income-wealth poverty measures; equivalence scales also have the largest impact on the elderly in terms of traditional income poverty (e.g. de Vos and Zaidi 1997).

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Authors and Affiliations

  1. Herman Deleeck Centre for Social Policy, University of Antwerp, Sint-Jacobsstraat 2, 2000, Antwerp, Belgium

    Sarah Kuypers & Ive Marx

  2. IZA, Bonn, Germany

    Ive Marx

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  1. Sarah Kuypers
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  2. Ive Marx
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Correspondence to Sarah Kuypers.

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The authors gratefully acknowledge financial support from the Belgian Science Policy Office (BELSPO) under contract BR/121/A5/CRESUS. We would like to thank Koen Decancq, Gerlinde Verbist and participants of the 2015 Spring Meeting of the ISA RC28, the 2015 LISER/DSEF Joint PhD Workshop, the 2016 Improve Final conference and 34th IARIW General Conference 2016 for their helpful comments and suggestions on earlier versions of this paper.

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Kuypers, S., Marx, I. Estimation of Joint Income-Wealth Poverty: A Sensitivity Analysis. Soc Indic Res 136, 117–137 (2018). https://doi.org/10.1007/s11205-016-1529-5

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