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Why high income households get benefits

Published 23 Nov 2016

Treasury Staff Insights: Rangitaki article by Brett Stawinski

Introduction – Here’s some data

Today’s Staff Insights article presents selected demographic statistics for New Zealand by income quintile for the 2014/15 tax year. The article discusses the data, how to interpret it and some common misconceptions or questions we come across. 

These statistics are presented in the ‘Characteristics of New Zealand by Household Disposable Income Quintiles’ table below.  This table has a lot of information in it, but we will step you through it.  The data is generated from Treasury’s tax and welfare model, Taxwell.  This is a micro-simulation model which uses a modified version of Statistics New Zealand’s Household Economic Survey (HES) for its data source.  A micro-simulation model is a computer model of a system at an individual unit level, and in this case the units are people. 

Quintiles – What does that even mean?

Imagine the whole population lined up in order of their incomes, lowest to highest. If we then split everyone into five groups by taking the first fifth with the lowest incomes, then the next fifth, and so on, we would have five groups which we call quintiles. We can order the population up by anything – in this case we use equivalised disposable incomes (explained below). On a related note deciles are the 10% fractions of the population.

The first quintile represents the bottom 20% of the population (less than $23,160 for a single adult) and the top quintile represents the top 20% (greater than $64,995 for a single adult).   The quintiles have an equal number of people (as opposed to households) in each.  This is standard practise and accounts for the fact that households vary in size across the income distribution.

There are a few things to note about equivalised household disposable income:

  • Disposable income = private gross income + transfers - personal income tax
    • Private income is mostly from wages and salary but also includes sources such as self-employed income, investment income, income from hobbies, etc
    • Income is summed up across all members of the household
    • Transfers include things such as tax credits, benefits, New Zealand Super, and accommodation supplement.
  • Households consist of everyone living at an address. Therefore there can be multiple families in a household, whether that be a flat of singles, or a 25 year-old living with their parents and grandparents (3 families in the model).
  • Equivalisation is a process to make incomes comparable across different sized households.  So for instance a $40,000 household with one adult is not considered the same as a $40,000 household with two adults and two children.  This is because the household with the children has to share their income across more family members, so the single adult would usually be assumed to be better-off – in material terms – than the family with children (ignoring wealth).  The ‘equivalised income’ takes account of this difference. In this case we use square root equivalisation which is the method used by the OECD, though it should be noted there are different ways you can equivalise incomes. We use these equivalised incomes to order households and create the quintiles. 

How to interpret the data

As you can see in the table shown at the bottom of the page there are three sections of the table: the first contains general stats about the quintiles, the second contains stats that sum across the row, and the last contains stats that sum down the column. The following examples demonstrate the difference between these sections.

Example 1

Data that sums across the row refers to the breakdown of a single group across quintiles.  For example, 45% of all the working age people undertaking little to no work are in quintile one.

Income Quintiles 1 2 3 4 5

Work status ages 25-64 (sum to 100% across row)

 
    Worked full-time (annual average of 30+ hours a week) 4% 13% 22% 28% 33%
    Worked part time (annual average of 5 to less than 30 hours a week) 16% 23% 21% 19% 20%
    Little to no work (annual average of less than 5 hours a week) 45% 23% 15% 10% 8%

Data that sums down a column refers to the proportion of people in a specific group within a quintile. For example, 66% of working age people in quintile one have little to no work.

Income Quintiles 1 2 3 4 5

Work status ages 25-64 (sum to 100% down column)

 
    Worked full-time (annual average of 30+ hours a week) 14% 44% 64% 74% 78%
    Worked part time (annual average of 5 to less than 30 hours a week) 20% 26% 20% 16% 15%
    Little to no work (annual average of less than 5 hours a week) 66% 30% 16% 10% 8%

Example 2

In this example, from the across the rows table below you can see that the majority of people on the In Work Tax Credit (IWTC) are in quintile two (55%).

Income Quintiles 1 2 3 4 5
People receiving IWTC  (sum to 100% across row) 16% 55% 21% 5% 3%

The complimentary table below tells you that 21% of adults in quintile two receive IWTC.

Income Quintiles 1 2 3 4 5
People receiving IWTC  (% adults within quintile) 6% 21% 7% 2% 1%

These examples show how across the row tables serve a different purpose than down the column tables.

Some interesting trends and “facts”

Here a few things to notice from the data. There are many more trends and “facts” you could take away from this sheet; these are just a few examples.

  • Households in higher income groups have more earners (on average).   
Income Quintiles 1 2 3 4 5
Average number of salary, wage, or self-employed earners per household 0.40 1.20 1.60 1.90 2.00
  • The raw average household income of a quintile is always higher than the maximum equivalised income of that quintile.  Equivalisation factors have a minimum of one (generally for a household of one adult) and are greater for households with more people in them, which means equivalised incomes are equal to or less than the unequivalised income.
Incomes Quintiles 1 2 3 4 5
Household disposable income per person equivalised[3] quintile upper boundary  $  23,160  $  33,764  $  45,977  $  64,994 NA
Average household disposable income  $  24,580  $  46,840  $  64,521  $  89,066  $  168,831
  • For 18-64 years of age, the proportion of older people increases by income quintiles. This generally matches the accepted notion of wages increasing with age.
Income Quintiles 1 2 3 4 5

Age of People (sum to 100% down column)

 
    0-17 years 31% 33% 25% 20% 14%
    18-24 years 7% 9% 10% 12% 11%
    25-34 years 10% 12% 12% 15% 14%
    35-64 years 29% 32% 40% 42% 51%
    65 years and over 22% 14% 12% 11% 11%
  • The proportion of higher educated people increases in higher income quintiles, again generally matching the notion of increasing income with education.
Income Quintiles 1 2 3 4 5

Education level, 25 years and over (sum to 100% down column)

         
    No Education 35% 20% 16% 13% 6%
    NCEA level 1-3[4] 32% 32% 29% 27% 23%
    Diploma/NCEA level 4-6[5] 23% 32% 30% 32% 31%
    Bachelor's degree or higher 10% 16% 24% 28% 39%

Why higher income households get benefits

Looking at either section of the data you may have noticed some surprising things in the top quintile, such as people receiving benefits and accommodation supplement (AS).  Since quintile five contains the top 20% of households by income, how can people be receiving benefits or AS? There are a few reasons for this which we will discuss below.

Income Quintiles 1 2 3 4 5
Beneficiaries (% adults within quintile)[6] 40% 17% 9% 5% 3%
People receiving Accommodation Supplement  (% adults within quintile) 34% 30% 16% 13% 6%

Why some high earning households receive benefits and AS:

  • Most importantly, as mentioned earlier, households can have multiple people in them and even multiple family units.  For instance, you could be a high earning working professional living with your friend who recently lost their job, and they might be on Job Seeker Support (JSS) and qualify for AS to cover their portion of the rent.
  • Another consideration is that personal situations can change during the tax year. For instance, if you started the year unemployed on Sole Parent Support (SPS), and then started working full time in a well-paying job you could have been on benefit for a portion of the year but employed for the rest of the year and earnt enough to be in the highest quintile.
  • The Taxwell model creates estimates of the New Zealand population.  These Taxwell estimates are based on survey responses of thousands of individuals, and includes some form of survey error and bias. People may not accurately report their time spent on a benefit, and it is common for respondents to round up or down their income. 

Conclusion

Hopefully you’ve learned a bit more about looking at income distributions and data, and hopefully you find the information in this quintiles table useful for informing your thinking in the future.

Selected Characteristics of New Zealand by Household Disposable[1] Income Quintiles[2] 2015
  Lowest fifth Second fifth Middle fifth Fourth fifth Highest fifth
Household disposable income per person equivalised[3] quintile upper boundary  $23,160  $33,764  $45,977  $64,994  NA
Average household disposable income  $24,580  $46,840  $64,521  $89,066  $168,831
Average number of salary, wage, or self-employed earners per household 0.40 1.20 1.60 1.90 2.00
Average number of dependents in households with dependents 2.1 2.0 1.8 1.8 1.5

Statistics of New Zealand by Household Disposable[1] Income Quintiles[2] (Statistics sum across the row)

Households with no salary or wages (sum to 100% across row) 62% 22% 7% 5% 4%

Family Type (sum to 100% across row)

         
    Couples with dependents 12% 26% 24% 21% 17%
    Single-parent families 50% 24% 15% 8% 4%
    Couples without dependents 13% 12% 19% 24% 32%
    Singles without dependents 26% 17% 18% 20% 19%

Age of People (sum to 100% across rows)

    0-17 years 25% 27% 21% 17% 11%
    18-24 years 15% 19% 21% 24% 21%
    25-34 years 16% 19% 19% 24% 22%
    35-64 years 15% 16% 21% 22% 26%
    65 years and over 32% 20% 17% 15% 16%

Work status ages 25-64 (sum to 100% across row)

    Worked full-time (annual average of 30+ hours a week) 4% 13% 22% 28% 33%
    Worked part time (annual average of 5 to less than 30 hours a week) 16% 23% 21% 19% 20%
    Little to no work (annual average of less than 5 hours a week) 45% 23% 15% 10% 8%

Education level, 25 years and over (sum to 100% across row)

    No Education 38% 20% 18% 15% 8%
    NCEA level 1-3[4] 21% 20% 20% 20% 19%
    Diploma/NCEA level 4-6[5] 15% 19% 20% 22% 24%
    Bachelor's degree or higher 8% 12% 19% 24% 37%
Beneficiaries (sum to 100% across row)[6] 53% 21% 13% 8% 4%
People receiving New Zealand Superannuation  (sum to 100% across row) 32% 20% 17% 15% 16%
People receiving IWTC  (sum to 100% across row) 16% 55% 21% 5% 3%
People receiving Family Tax Credit  (sum to 100% across row) 42% 42% 10% 4% 2%
People receiving Accommodation Supplement  (sum to 100% across row) 33% 28% 17% 14% 7%

Statistics of New Zealand by Household Disposable[1] Income Quintiles[2] (Statistics sum down the column)

Households with no salary or wages (% within quintile) 67% 23% 10% 6% 5%

Family Type (sum to 100% down column)

         
    Couples with dependents 11% 28% 24% 20% 15%
    Single-parent families 15% 9% 5% 3% 1%
    Couples without dependents 18% 20% 28% 34% 43%
    Singles without dependents 56% 43% 43% 44% 40%

Age of People (sum to 100% down column)

    0-17 years 31% 33% 25% 20% 14%
    18-24 years 7% 9% 10% 12% 11%
    25-34 years 10% 12% 12% 15% 14%
    35-64 years 29% 32% 40% 42% 51%
    65 years and over 22% 14% 12% 11% 11%

Work status ages 25-64 (sum to 100% down column)

         
    Worked full-time (annual average of 30+ hours a week) 14% 44% 64% 74% 78%
    Worked part time (annual average of 5 to less than 30 hours a week) 20% 26% 20% 16% 15%
    Little to no work (annual average of less than 5 hours a week) 66% 30% 16% 10% 8%

Education level, 25 years and over (sum to 100% down column)

         
    No Education 35% 20% 16% 13% 6%
    NCEA level 1-3[4] 32% 32% 29% 27% 23%
    Diploma/NCEA level 4-6[5] 23% 32% 30% 32% 31%
    Bachelor's degree or higher 10% 16% 24% 28% 39%
Beneficiaries (% adults within quintile)[6] 40% 17% 9% 5% 3%
People receiving New Zealand Superannuation (% adults within quintile) 32% 21% 16% 13% 13%
People receiving IWTC  (% adults within quintile) 6% 21% 7% 2% 1%
People receiving Family Tax Credit (% adults within quintile) 20% 21% 4% 2% 1%
People receiving Accommodation Supplement  (% adults within quintile) 34% 30% 16% 13% 6%

Source: Treasury Taxwell modelling using HES 2014/15

Access to the Household Economic Survey data was provided by Statistics New Zealand under conditions designed to give effect to the security and confidentiality provisions of the Statistics Act 1975. The results presented here are the work of Treasury, not Statistics New Zealand.

* Combined for confidentiality

** Suppressed for confidentiality

Notes

  • [1] Household disposable income consists of the sum of a household's personal income minus taxes plus transfers (benefits, accommodation supplement, tax credits, NZ Super, etc).
  • [2] Quintiles created using household (everyone within an address) disposable income square root equivalised, even number of people per quintile.
  • [3] Incomes equivalised using square root equivalisation.
  • [4] Other NZ secondary school qualifications & overseas secondary school qualifications included.
  • [5] Other post school qualification included.
  • [6] Beneficiaries include recipients of JSS, SLP, SPS, YPP, YP, Special Benefits, Disability, War Disability, Surviving Spouse, Orphans Benefit, & other misc benefits.
    Created: July 2016

 

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