1  Introduction

It is commonly assumed that a family’s current income is a good proxy measure of its living standards. This assumption lies behind the widespread use in many countries of income, in various forms and in comparison with some benchmark standard, as a measure of whether a family unit is in poverty. One problem with using income itself as a component of a living standards measure is that it complicates the analysis of the relative importance of income as against various other factors that might influence living standards. Income can not then be included with other explanatory variables, since it is itself the ‘living standard’ variable whose determinants we seek to understand.

An alternative approach is to use standard of living indicators that do not include income. This approach uses information on the extent to which people exhibit symptoms of low living standards, such as an inability to access basic goods and services or to participate in desired social activities, together with self-assessments, to construct an index measure of living standards. It is then possible to explore empirically the strength and interaction of various factors, including income, on this index. Income can enter an explanatory model because it is not a direct component of the living standards measure one is seeking to explain.

This approach was adopted in a work programme to measure and evaluate the living standards of older New Zealanders, commissioned by the Super 2000 Taskforce and continued and extended in 2001 by the then Ministry of Social Policy. A survey of older people was conducted in 2000, and a new Material Well-being Scale was developed.[1] Regression analysis published at the time indicated that the material living standard that older New Zealanders are able to enjoy in their retirement depends on their current net income, albeit rather weakly, as well as a number of other socio-economic factors, such as accumulated assets and accommodation costs.[2]

In this paper we revisit the estimated relationships between the living standards of older people and their current income and accommodation costs. The objective of this work is to extend the previous analysis to better understand the source(s) of these observed relationships, and the extent to which they reflect direct effects of current income and accommodation costs on well-being as opposed to acting as proxies for other factors that determine living standards in retirement. For this purpose we focus specifically on testing the following two hypotheses implied by the previous analysis: first, that only current income, and not the source of income, is associated with well-being; and second, that only accommodation costs, and not the type of accommodation tenure, is associated with well-being.

It is important to emphasise that it is not the objective of this paper to provide a critique of the general methodology or findings of the original report. Thus, for instance, we remain silent on the broader issues concerning the validity of such methods of modelling living standards, and statistical implications of such issues as the opposite skewness of the well-being index and income distributions.[3] We also accept the linear regression framework for modelling the influences on living standards. Rather, we take on face value the underlying basis for the reported analysis, and use the regression specification(s) adopted as the point of departure for a re-evaluation of these two specific issues.

The first focus of the paper is the relationship between material well-being and current income. The original analysis presented in Fergusson et al (2001b) maintained a simple linear specification between the living standards of older people and the logarithm of their total net income.[4] The implication of this specification, which we focus on and relax in our re-analysis, is that the marginal dollar of income has the same (associative) effect on living standards irrespective of the source of that income. In particular, controlling for total net income, we examine whether the fraction of income derived from alternative sources matters for the estimated relationship.

We find that controlling for the fraction of income from different sources roughly halves the estimated associative effect of income on material well-being. Furthermore, for a given level of income, those with higher fractions of either employment earnings or capital investment income have significantly higher material well-being scores, while those with a higher fraction of income from benefit allowances have lower scores. These results demonstrate that the relationship between material well-being and current income of older people is more complicated than that specified in the original report. We suggest that, rather than reflecting a direct income effect, the estimated relationship may proxy for other factors, such as health and wealth, which are correlated with alternative sources of older people’s income.

The second focus of the paper concerns the estimated relationship between older people’s living standards and their accommodation costs. As with the treatment of income, the original analysis adopted a simple linear specification between living standards and the logarithm of accommodation costs. Also, property rates were excluded from the measure of accommodation costs. Our re-analysis of the accommodation costs relationship, first, considers the effect of including property rates to obtain a more complete measure of accommodation costs and, second, controlling for total accommodation costs, examines whether the type of accommodation tenure (freehold home owner, mortgage holder, renter, or no accommodation costs) matters for the estimated relationship.

We find that including property rates in accommodation costs, without controlling for housing tenure, tends to reduce the estimated effect of accommodation costs by about 20%. Also, when we control for housing tenure, the estimated effect of accommodation costs (including rates) is, at most, half that originally estimated and, for some specifications, much less and insignificantly different from zero. Furthermore, controlling for the level of accommodation costs, mortgage holders and renters have significantly lower material well-being scores than freehold homeowners. These findings again strongly suggest the original report’s specifications are too simple, and draw into question whether there is a direct effect of accommodation costs levels on the material well-being of older people, or whether the estimated correlation between these reflects other factors.

The paper is organised as follows. In section 2, we briefly summarise the methods and main findings of the original report on the living standards of older New Zealanders, and discuss the nature of our concerns and proposed analysis. In Section 3, we present and discuss our empirical analysis. We first replicate the results from the original report, and then investigate the robustness of this specification for understanding the relationship between material living standards and, in turn, current income, and accommodation costs. The paper concludes with a summary discussion in section 4.