Are retirees ‘hit’ by Labor’s policy, and what is a wealthy household? | Greg Jericho

The ALP’s policy to end the cash rebate of dividend imputation has brought out the usual pre-budget argument over who is rich a bit earlier than usual. But the debate has also very nicely brought attention to the importance of wealth holdings. This is vital because as people enter retirement they can be quite income poor (and very much taxable-income poor) but have very large holdings of wealth.

It is no surprise that the issue of franking credits has focused on retirees, because overwhelmingly they are the ones who receive them.

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According to the latest ATO statistics, while 65-74 year olds accounted for just 7% of all individuals with an income, they accounted for 17% of individuals claiming franking credits and for 20% of the total value of those credits.

The disparity for those aged over 75 is even greater. Such people accounted for 3% of all income earning individuals, but 22% of the value of all franking credits.

Share of the dividend franking credits by age (2014-15)

Total of individiuals with an income

Total number of individuals

Created with Raphaël 2.1.2

3.4%

75+

10.0

20.0%

0.9%

Under 18

11.8%

18-24

22.3%

25-34

20.2%

35-44

19.3%

45-54

15.2%

55-64

6.9%

65-74

3.4%

75+

Chart: Greg Jericho Source: ATO Get the data Created with Datawrapper

When we look at those aged over 65 who claim dividend franking credits, overwhelmingly they are claimed by those with taxable incomes under $37,000, but the vast amount of dollar value of the credit goes to those with a taxable income above $180,000.

While just 3% of those aged over 65 had a taxable income above $180,000, they claimed 43% of the value of dividend franking credits. Their average credit was $60,697 compared to the average of $767 claimed by those with a taxable income below the tax free threshold:

Share of the dividend franking credits by those aged 65+ by taxable income

Number of individualsFranking credits (no.)Franking credits ($)Avge franking credits

Created with Raphaël 2.1.2

2.8%

$180,001+

10.0

20.0

30.0%

33.5%

Less than or equal to $18,200

32.3%

$18,201 to $37,000

23.3%

$37,001 to $80,000

8.2%

$80,001 to $180,000

2.8%

$180,001+

Chart: Greg Jericho Source: ATO Tax Stats Table 3 Get the data Created with Datawrapper

But that a plurality of those over 65 who claim franking credits are below the tax free-threshold does pose some problems for the ALP. Clearly they will be among those negatively affected by the policy. But the relatively small average figures involved mean the overall revenue savings from the policy should easily cover any need to compensate pensioners.

And it is always worth remembering that these figures relate to “taxable” income – which can be greatly different from total income.

In 2014-15, for example, 468 individuals with a total income above $180,000 but with a taxable income below the tax-free threshold claimed a total of $9.5m in dividend franking credits.

And thus we always need to be mindful of the difference between taxable income and total income, given the whole point of taxation minimisation such as negative gearing is to get your taxable income down as low as possible in order to claim the credits.

We also need to be aware of just what is a wealthy household.

The latest household income and wealth figures released by the ABS last year showed that the median annual disposable income (ie after tax) in 2015-16 for a single person was $44,356 – or around $52,900 before tax

For a household of two adults and two children under 15, the median was $93,148. That works out using a 70/30 income split of a household with one adult earning around $84,700 before tax while the other earns $29,800:

Equivalised household disposable income by income decile and household type 2015-16

Annual amount

Single

Created with Raphaël 2.1.2

Average

100,000

$200,000

10th

20th

30th

40th

Median

60th

70th

80th

90th

Average

Source: ABS 6523.0, Table 1, derived Get the data Created with Datawrapper

But the debate over dividend imputation has very rightly highlighted that older people generally earn less. Thankfully the ABS also gives us the figures for households by age of the head of the household. While the median equivalised disposable income for a household with the head aged 45-54 is $47,840, for one aged 65-74, it is just $35,672:

Equivalised household disposable income by age (2015-16)

15–24

Created with Raphaël 2.1.2

$73,268

90th

20,000

40,000

60,000

$80,000

$20,592

10th

$25,116

20th

$28,288

30th

$34,372

40th

$41,444

50th

$47,320

60th

$55,276

70th

$61,776

80th

$73,268

90th

Chart: Greg Jericho Source: ABS 6523.0, derived Get the data Created with Datawrapper

To give some context for the talk about which retirees are rich and which are not, the aged pension plus energy supplement is worth $23,254 a year – which would put such a person in the second lowest income decile for people aged 65-74.

Now of course income is not the only factor at play – especially for retirees. A couple with a disposable income of $53,508 might be right on the median income for those aged 65-74, but there is a big different between such a couple who are renting, and a couple with the same income who have paid off their home.

This is where wealth comes into play.

While retiree aged households have lower incomes, they have a great deal more wealth, because you accumulate wealth over your lifetime:

Median household disposable income & wealth 2014-15 by age

Equivalised annual disposable incomeNet worth

Created with Raphaël 2.1.2

$44,356

Total

20,000

$40,000

$41,444

15–24

$46,488

25–34

$45,812

35–44

$47,840

45–54

$52,728

55–64

$35,672

65–74

$28,548

75+

$44,356

Total

Chart: Greg Jericho Source: ABS 6523.0, dervied Get the data Created with Datawrapper

A big reason for that wealth is property and superannuation. The richest 20% of households hold an average of $1.2m in property – 2.5 times the level held by households in the median income quintile.

The richest 20% also hold 2.8 times the level of superannuation that is held by median households:

Value of assets by equivalised household income quintiles

2014-15

Superannuation

Created with Raphaël 2.1.2

$429,900

Highest

200,000

400,000

$600,000

$46,800

Lowest

$107,700

Second

$156,200

Third

$218,900

Fourth

$429,900

Highest

Chart: Greg Jericho Source: ABS 6523.0 Get the data Created with Datawrapper

And while we like to get excited about growing income inequality, over the past decade, wealth inequality has grown by much more:

10 year growth of income and wealth by household percentile

2005-06 to 2015-16

IncomeWealth

Created with Raphaël 2.1.2

19.7%

All households

10.0

20.0

30.0%

23.9%

10th

19.1%

20th

18.7%

30th

16.3%

40th

17.0%

50th

16.9%

60th

19.4%

70th

21.2%

80th

19.9%

90th

19.7%

All households

Source: ABS 6523.0, Table 1 & 3, derived Get the data Created with Datawrapper

It is why housing affordability is such a crucial issue. Not because buying a house might be preferable to renting, but because it generates wealth holdings that become vital in retirement.

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While those who rent do have a lower median income than those who either own their home outright or are still paying off a mortgage, the difference between wealth holdings of renters and home owners is massive:

Income and wealth of households by tenure status

Median annual equivalised disposable incomeMedian net worth

Created with Raphaël 2.1.2

$44,356

All households

20,000

$40,000

$38,428

Owner without a mortgage

$52,572

Owner with a mortgage

$37,648

Total renters

$44,356

All households

Chart: Greg Jericho Source: ABS 6523.0, dervied Get the data Created with Datawrapper

It makes for a complex picture and one that demands we watch out for sloppy reporting and lazy talk by politicians of those being “hit” by Labor’s policy. Those who have a low taxable income might have a disposable income that is actually relatively high, and it can tell us little about their level of wealth holdings let alone whether or not they are actually struggling.