4.1  Income inequality

Consider the effects of ‘pure' population ageing and labour force participation changes on an aggregate measure of inequality, the Gini measure. First, Figure 8 shows variations in the Gini coefficient for a range of household income concepts. In each case the household is the unit of analysis and no adult equivalent scales or sharing rules have been applied. The graph shows a slight increase in the Gini measure of household market income from 0.504 in 2010 to 0.533 in 2060; an increase of approximately 6%.[16] The Gini measures of disposable and final incomes are relatively stable across time: the rises very slightly from 0.345 to 0.349, while the latter falls slightly from 0.313 to 0.307.

Figure 8 - Gini Coefficients by Income Type

As the core working-age population decreases and the population ages and more people become eligible for pension payments, NZS is expected to represent a higher proportion of total transfer payments. Figure 7 suggests that a significant proportion of the age 65+ population is expected to remain in lower income deciles. Therefore if current indexing arrangements prevail over the next 50 years, NZS will become a more prominent redistributive instrument over time.[17] That is, in the absence of changes to tax and transfer policy settings, any increase in market income inequality may be offset by more generous transfer payments in the form of NZS to a larger group of people at the lower end of the income distribution. The percentage reduction in the Gini measure between market and disposable household incomes increases from 31% in 2010 to 35% in 2060 as a higher proportion of transfers in the form of NZS are directed towards the elderly in lower income deciles. This percentage reduction changes by only 1 percentage point per decade up to 2040, and remains constant at 34% by 2050. Similarly, a higher proportion of health expenditure directed to lower income households leads to an increase in the percentage reduction in the Gini from disposable to final income of 9% in 2010, rising to 11% in 2030 and 2040, then to 12% in 2050 and 2060.

If the unit of analysis is the individual, the general picture remains similar to that in Figure 8 but the absolute values are somewhat different. For example, the Gini value of individual market income increases from 0.674 to 0.699; these are larger than above because of the large number of zero individual market incomes. The inequality of household disposable income per adult equivalent person, using the individual as the unit of analysis, actually falls from 0.296 to 0.281 from 2010 to 2060. The use of income per adult equivalent person implies a type of equal sharing, whereas the use of an explicit sharing rule, as discussed above, leads to more inequality. Thus the Gini measure of disposable income per person, after explicit sharing and using the individual as the unit of analysis, falls slightly from 0.427 to 0.411 over the period. The inequality of individual final income, after sharing, falls from 0.329 to 0.320.

A sharing rule that involves smaller differences in the weight attached to each type of person is obviously expected to produce less inequality within each family. However, it is not clear how overall inequality may change. Suppose the weight attached to subsequent adults, after the first adult, is 0.8 and the weight attached to children is 0.5. The Gini measure of final income, after sharing and with the individual as unit, varies from 0.302 in 2010 to 0.291 in 2060. The corresponding measure of disposable income falls from 0.389 to 0.371 over the period. These are somewhat lower than in the previous paragraph but show similar variations over time.

The important result remains that whichever income measure or unit is used, population ageing and assumptions about future rates of labour force participation are not, in isolation, expected to affect income inequality, as measured by the Gini coefficient, significantly.[18]