1287.0 - Standards for Cash Income Statistics, 1997
ARCHIVED ISSUE Released at 11:30 AM (CANBERRA TIME) 19/12/1997
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UNDERLYING CONCEPTS
17. To enhance the utility of cash income data collected in the context of a household survey program as an indicator of household economic wellbeing, the ABS implements certain variations to the principles embodied in the nominal definition. Regularity 18. The regular and recurring criterion adopted in the definition serves as a practical rule of thumb rather than a strict distinguishing criterion. For example, irregular earnings from short episodes of casual employment are intended to be included as income, as are the lump sum advances of certain government cash benefits when paid partly as a lump sum and partly as reduced regular instalments. 19. On a practical level, current transfer income is distinguished from capital transfers by the criterion that they are regular and recurring receipts rather than one off, lump sum receipts. Another rule of thumb used to distinguish current transfer income from capital transfers is that it comprises relatively small rather than large sums. 20. An exception is made to these practical rules in the case of pre-payments of Government pensions and allowances. Under current arrangements, some beneficiaries may be entitled to take up to half of the total benefit payable over a period of three to six months as an advance and the rest as fortnightly instalments. The intention of both regular payments and advances is to provide for the current needs of the recipients rather than the accumulation of capital. Because such lump sum advances represent a variation in the timing of payments, rather than in their nature, they are collected as cash income, where methodology allows. 21. Excluding these pre-payment sums would result in underestimation of the amount of income support received from government pensions and allowances. The collection instruments used in the Household Income and Expenditure Survey (HIES) provide for the collection and pro-rating of lump sum pre-payments. But this is not considered feasible for the shorter standard question modules used in other ABS surveys due to the extra questions involved. Running down assets in superannuation and other retirement funds 22. The ABS takes a practical view of pension payments from superannuation and other retirement funds (as does the 1993 System of National Accounts (SNA) (Inter-Secretariat Working Group on National Accounts 1993, p. 188)), recognising that households do not regard these pensions as a drawing on assets but as income. In addition, for many households they are the only regular cash receipts and their exclusion would severely affect analysis of the distribution of economic wellbeing, particularly with relation to retirees. These payments are therefore collected and classified as cash income. 23. Although conceptually a form of Employee cash income, employer contributions to superannuation schemes are not collected as cash income for two reasons. First, it is not possible to collect complete or accurate data on this form of income in household surveys, and second, this income is not available to the employee for current use. Furthermore, because payments from superannuation funds and annuities are treated as income, the same amounts might then be counted twice - once when received from the employer and invested in the fund and again when withdrawn in retirement. Deduction of costs 24. Conceptually, income is net of costs incurred in deriving it. However, for practical reasons, the deduction of these expenses is limited to situations where the expenses are assumed to form a considerable part of the regular receipts. On these grounds, deductions are limited to operating expenses and depreciation of capital equipment in relation to income from unincorporated enterprises and rental properties owned by household members. Other expenses, incurred by employees, such as transport, dry cleaning etc., are ignored. SCOPE OF THE VARIABLES 25. While the scope of the concept of income extends to all persons, income units, families and households, in practice it is generally collected in ABS household surveys from persons aged 15 years and over who are usual residents of private dwellings. The exclusion of people living in institutions and other non private dwellings from these surveys affects comparability with national accounting estimates of household income and estimates from other sources of the numbers and value of payments received by various categories of pensioners/beneficiaries. Counting units 26. In household surveys, income may be collected and output using all four principal counting units for household based data, i.e. persons, income units, families and households. Income of persons 27. Income of persons is not usually a good proxy measure of economic wellbeing. This is because there is usually some sharing of income within income units, families and households and the income of each member will affect the standard of living of the whole group to some extent. However, because the exact extent of income sharing is unknown and may vary considerably between units, income of persons is still used by analysts, in conjunction with larger unit income (income unit, family or household) to provide an indication of economic dependence/independence and contribution to total income of different members. 28. It should be noted that in collections which do not collect cash income data from all household members over 15 years of age in scope, the individual income of the person(s) selected will not necessarily provide a reliable indication of the economic wellbeing of the larger unit to which they belong and should not be used for this purpose. DISCUSSION OF CONCEPTUAL ISSUES 29. This section articulates the conceptual background to the use of cash income statistics as a proxy measure for economic wellbeing. 30. An important area of economic and social concern, both in Australia and internationally, is that relating to household income and expenditure. This area of concern, which can broadly be described as 'economic wellbeing', is closely related to other areas of social concern such as health, education and working life. The economic resources available to income units, families and households are important determinants of their overall economic and social wellbeing. 31. The purpose of this section is to draw together, and discuss in greater depth, some of the more important conceptual issues which have been addressed in the development of the standards for cash income. Although much of the discussion pertains in particular to the variable 'Total cash income', it provides background to an understanding of the other two Cash income variables. 32. Cash income statistics alone are not and cannot be a measure of economic wellbeing. Income units, families and households vary considerably in their size and composition; illness and disability impose costs on some units that others do not have to meet; costs of living vary geographically; costs associated with receiving income (e.g. childcare, transport) vary; non-cash receipts may have an impact; savings and access to credit may permit some units to enjoy a higher standard of living than their income alone would suggest. Nevertheless, for most income units, families and households in Australia, the primary source of economic resources available on an ongoing basis is the current regular and recurring cash received from one source or another. It is primarily for this reason that the ABS collects cash income statistics as an indicator of economic wellbeing. In some collections, such as household income and expenditure surveys, because of the detail in which cash income is collected and the extensive data on expenditure, it may be possible to develop a more refined measure of economic wellbeing. 33. Questions of sufficient levels of income and equity of distribution of income and expenditure have been the subject of a number of ABS statistical collections. 34. The main vehicles for collection of household income and expenditure statistics within the ABS program have been the periodic surveys of household income and expenditure, the Survey of Income and Housing Costs (SIHC) and the HES. Other ABS surveys, including the General Social Survey (GSS) and those focusing on families, health and housing, have also collected data on income, although in considerably less detail. The five-yearly Census of Population and Housing also includes a question on income. 35. The ABS recognises that the picture of economic wellbeing drawn from these collections is incomplete, describing flows of cash income into households (and, in the HES, expenditure on consumption of goods and services). Additional analyses carried out by the ABS (e.g. Fiscal Incidence Studies) have expanded the measure of income to include the imputed effects of selected government benefits and taxes on household income. 36. Other flows of resources that may have a significant effect on the economic wellbeing of the population have mostly not been measured in ABS collections. These relate to income in-kind from employers, indirect government benefits, capital transfers from private enterprises, gifts and services provided by friends and relatives, and 'services' provided to the household by home ownership, ownership of other consumer durables and by unpaid household work as offset by corresponding opportunity costs. 37. The value of the stock of household assets and liabilities is also of great importance in considering the household's economic wellbeing. The 2003-04 Household Income and Expenditure Survey (HIES) is the first ABS household survey to collect a comprehensive range of asset and liability information. The ABS has developed a model which uses national accounts data and unit record indicators to model household wealth distribution. Reference period - Annual income vs. current income 38. Annual income has the advantage that it smooths out short term income fluctuations and 'lumpy' receipts and may therefore be a better proxy of economic wellbeing than a current measure. Also, financial year income provides a useful practical reference period given that persons with unincorporated businesses are required to assess their financial year income for taxation purposes. 39. There are, however, some major disadvantages in using annual income:
40. Mismatching between last financial year income and current economic wellbeing can occur for a number of reasons. For example, in the formation or dissolution of family groups between the two periods, such as where a person changes his or her financial situation from financial dependency to financial independence (school leavers and dependent spouses who have separated to become one parent income units). Other mismatches relate to those between labour force status and cash income, e.g. in the case of retirees who are not in the labour force at the time of interview but report high annual earnings for the reference period. The income of newly arrived immigrants is similarly affected. Such mismatches of income and characteristics will result in an incorrect estimation of persons, income units, families and households and their resources during the financial year. 41. Results from the 1990 Income Distribution Survey (IDS) show that there were almost 600,000 persons (over 5% of persons aged 15 years and over) who were not in a position to earn income for the full financial year, and for whom last financial year income was considered to be a poor measure of their income during that year (e.g. immigrants arriving during the year, persons overseas for part of the year, or who left school during the year, etc.). In addition there were many others for whom current income and annual (last financial year) income were very different (the retired, those losing or gaining jobs etc.). 42. Current income has the advantage that it is more timely than annual income, and it generally relates directly to the demographic and social characteristics of the household at the time of interview. 43. Another disadvantage of a current income measure is that for some sources, such as unincorporated business income and rent and other investment income, it may not be possible for respondents to report accurately on a current basis. Income from these sources may be received as infrequently as once a year (in the case of farmers for example) and is net of operating expenses which vary considerably and may not be known until the end of the financial year, when taxation records are prepared. 44. For most purposes, however, current income is preferred to annual income as it relates most closely to the characteristics of persons and households at the time of the survey. Usual income vs. Actual income 45. In some cases, the actual amount received in any given payment, e.g. the most recent payment, may not be a true reflection of the financial resources usually available to the person from that source. For example, last week's pay could include an unusually high or low amount of overtime, holiday pay in advance or deductions for unpaid leave. 46. The widespread use of 'Total cash income' as a proxy measure of economic wellbeing requires a measure which is relatively stable and unaffected by short-term fluctuations. For this reason the standards adopt a current usual weekly equivalent income measure. 47. Depending on the question module used, respondents may be asked to respond directly in terms of current usual income from all sources or this measure may be derived from a series of questions relating to actual payments and reference periods for specific sources of cash income. 48. As stated above, for some forms of income such as that from unincorporated business, rent and investments, respondents cannot provide accurate information on their income on a current basis. For this reason, the practical solution (in surveys other than those using the Short and single question modules) has been to use the reported business income for the previous financial year as a proxy for the current year, which is then expressed as a current usual (weekly equivalent) income. 49. Income from other sources, which are collected for a shorter reference period, differ in the degree of variability over time. The general approach for these is to use the most recent payment received, expressed as a weekly equivalent. If the last payment is unusually high or low then the respondent is asked to report the amount usually received. Shift workers with different 'usual' pays for different shifts may find it difficult to give a usual pay and therefore income for the last three pays may be averaged. 50. Traditionally, the levels of income from government pensions and benefits were considered to be fairly stable and subject to little variation from week to week. It was therefore acceptable to collect the value of the last actual payment. However, current arrangements allow partial pre-payment of some benefits for a three to six month period. These changes have made the assumption of stability in government cash payments less tenable. 51. This variability reflects administrative arrangements rather than the financial resources available to the recipient. Some beneficiaries take half of their pension or allowance as a pre-payment and the other half as a fortnightly receipt. Other beneficiaries receive the full amount on a fortnightly basis. While each receives the same amount of income support over the longer term, their 'usual' payments will be very different. Gross (before tax) income vs. after tax income (disposable income) 52. Many clients require a measure of gross income. These data are used, for example, in eligibility testing for income support policies. Many also want a measure of disposable income after tax. However, while respondents may be quite able to report net income after tax from last week's wages, they are not expected to be able to estimate tax payable on income from all sources prorated to a weekly amount at time of interview. Because it is not reasonable to expect respondents to report net total income reliably, the ABS maintains an up-to-date model for imputing tax payable on cash income reported in the SIHC and HES. 53. Reliable imputation of taxes paid or payable requires that a cash income value be collected for each relevant source of income. This is necessary because some forms of income are taxable while some other forms are not. Where estimates of the amount of income that is taxable are not available from the survey, then the imputation of tax is less reliable. Negative income (loss) 54. Household surveys collect business income from own unincorporated enterprise and rental income as a 'profit or loss'. It is possible for income from unincorporated businesses and from rent to be negative or zero when the deductible expenses incurred in gaining this income are greater than or equal to the receipts. Individual 'Sources of cash income' vs. 'Total cash income' from all sources 55. Ideally, income would be collected as a separate value for each different source of cash income rather than a single value for total income. This is the collection method employed in the SIHC and HES and is preferred for the following reasons:
56. However, it is recognised that it is not always feasible to collect income data at this level of detail and the standard incorporates a range of collection modules which produce measures of 'Total cash income' which vary greatly in the level of detail, precision and analytical power. Dollar values vs. ranges 57. Income should be collected in dollar amounts and not as ranges (unless the data collection methodology prevents this). 58. There are many reasons for collecting income in dollar values rather than ranges. Basically, collection in dollar values allows for a greater range of analytical options, flexibility, and better comparability than can be achieved from range data. Collection in dollar values is preferable for a number of reasons:
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