Asset-Based Measurement of Poverty

Andrea Brandolini

Banca d’Italia, Department for Structural Economic Analysis

Silvia Magri

Banca d’Italia, Department for Structural Economic Analysis

Timothy M. Smeeding

Institute for Research on Poverty and University of Wisconsin “European measures of income, poverty, and social exclusion recent developments and lessons for U.S. poverty measurement” APPAM - Special Pre-Conference Workshop 4 November 2009, Washington D.C.

The problem (1)

50,000

Per capita GNI and net worth (US$, PPP, 2005)

Per capita GNI Per capita net worth 300,000 40,000 240,000 30,000 180,000 20,000 10,000 0 Italy France Germany Japan United Kingdom Canada United States 0 120,000 60,000

The problem (1)

50,000

Per capita GNI and net worth (US$, PPP, 2005)

Per capita GNI Per capita net worth 300,000 40,000 240,000 30,000 180,000 20,000 10,000 0 Italy France Germany Japan United Kingdom Canada United States 0 120,000 60,000

The problem (2)

• How to account for wealth in measures of well-being – Here, focus on poverty • Two reasons to go beyond purely income-based measure of poverty –

Well-being

: Income-poor have different living standards depending on net assets –

Lifetime equity

: chances in one’s life much depend on the set of opportunities open to a person which are, in turn, a function of the person’s endowments

Aim & Outline

• Our aim – develop tools to monitor standard of living: how net worth affects households’ current economic well-being – relevant for social policy: assets may condition eligibility to means-tested public benefits • Outline – Conceptual framework  Income-net worth  Asset poverty – Comparative results from the LWS

Conceptual framework (1)

• Insufficiency of current income

CY = Y + r NW Y r NW

incomes from labour, pensions, transfers property incomes (

r

interest rate,

NW

net worth) • Underestimates resources at individual’s disposal: in principle, people can spend all

NW

Total financial resources:

FR = CY + NW = Y +

(1+

r

)

NW

Labour income

Y Z

Conceptual framework (2)

poor if: CY = Y + r NW < Z → Y < Z – r NW

NW

Net worth poor if: FR = Y + (1+r) NW < Z → Y < Z – (1+r) NW

Conceptual framework (3)

• Intermediate solution • Weisbrod and Hansen (1968): income-net worth – Convert net worth into constant flow of income, i.e. replace actual property incomes with

n

-year annuity value of net worth ρ

AY = Y + ————— NW

1 - (1+ ρ) -

n n

length of annuity ρ interest rate n → ∞ n = 1 only interest, all net worth,

AY AY

= =

CY FR

–

n

= life expectancy [hp: no wealth left at death]

Labour income

Y Z

Conceptual framework (4)

n

↓

NW

Net worth

Conceptual framework (5)

• Theoretically neat solution but several measurement assumptions: – length of annuity – interest rate – wealth aggregate that is annuitized – treatment of couples – population subgroups whose wealth is annuitized – allowance for bequests/precautionary saving – poverty threshold

Conceptual framework (6)

30 25 20 15 10 2% rate 2% annuity rate 6% rate 6% annuity rate 5 0 0 10 20 30 40 50 Age 60 70 80 90

Percentage annuity rate by age

elderly look much better, on average

Conceptual framework (7)

• Impose less structure on data  supplement income based with asset-based poverty measures • Exposure to potential risk →

vulnerability

more than

poverty

• asset-poor = wealth < fraction of income poverty line Haveman and Wolff (2004) – Fraction = 1/4 – “net worth”: indicator of “long-run economic security of families” – “liquid assets”: indicator of “emergency fund availability”

Labour income

Y Z

Conceptual framework (8)

Asset poor only Asset and income poor ζ Z

NW

Net worth

Some comparative results (1)

• Application based on a novel database

Luxembourg Wealth Study

– Broadly comparable database containing wealth variables for 10 countries – Based on existing datasets harmonized ex post – Caution: wealth is difficult to measure, definitions vary across countries

Some comparative results (2)

% SHARE OF POOR HOUSEHOLDS (head life expectancy, 2% rate, zero bequest, only heads 55+)

25 20 15 10 8.4

10.7

5 0 Income-net worth poor Income poor 9.2

12.5

12.9

11.3

14.5

17.4

19.5

16.6

Finland 1998 Italy 2002 Germany 2002 USA PSID 2001 USA SCF 2001 • Lower poverty ratios • Country ranking unchanged, but biggest reduction in Italy • Smaller effect if financial assets annuitized • Narrowing of differences between US and Europe for the elderly (not shown)

60 50 40

Some comparative results (3)

% SHARE OF POOR HOUSEHOLDS

57 53 52 49 46 43 36 32 45 30 20 10 10 6 11 8 12 7 13 9 13 10 15 10 17 13 17 15 20 15 0 Sweden 2002 Finland 1998 Income poor Norway 2002 Italy 2002 Germany 2002 UK 2000 Canada 1999 US(PSID) 2001 US(SCF) 2001 Income & financial asset poor Financial asset poor • Income & financial asset poor not terribly different from income poor • Many households have little financial assets

Conclusions

• Need to integrate wealth into the analysis of poverty and inequality • Empirical problem: – income & wealth together – better wealth data – need ex ante standardization of methods and definitions • Asset-related measures of poverty have distinctive informative value with respect to income-based statistics – Pools of asset-poor and income-poor do not coincide – Better understand properties of alternative indicators

MANY THANKS FOR YOUR ATTENTION