20/02/2018 - Households’ economic well-being is usually measured by income. But what if there’s an interruption in the flow of income? Or an unexpected expense? Such events highlight the importance of wealth accumulation to people’s economic well-being. New evidence on the distribution of wealth shows that in the OECD many people, who are not considered income poor, are nevertheless economically vulnerable in the event of a sudden loss of income, e.g. through unemployment, family breakdown, or disability. If income were to suddenly stop, such people would not have enough ready assets to keep living above the poverty line for more than three months.
Since incomes can be saved and assets can generate returns, one might expect households’ incomes and assets to be closely correlated. However, OECD data on wealth distribution shows that this correlation is far from perfect. In particular, the elderly tend to have substantial assets, but lower incomes. Overall, in the OECD area, less than one household in three belongs to the same quintiles for both income and wealth.
Figure 1 shows that, on average in the OECD, 11% of people are both income and asset poor, and another 36% are not income poor but are economically vulnerable because of insufficient ready assets.
The scope of the problem varies widely across countries. In Greece and Latvia, for example, more than half the population lacks enough liquid financial wealth to maintain a poverty level income for three months. By contrast, the share is much lower in Korea and Japan.
Figure 2 shows how different population groups are affected by economic vulnerability. Vulnerability tends to be highest among working age two-parent households and those headed by a person with only a primary or secondary education. Economic vulnerability also diminishes with the age of the head of household, as assets are generally accumulated over one’s life.
The fact that so many individuals who are not income poor are still vulnerable to sudden losses of regular income – whether from losing their jobs, family breakdown, disability or other causes – needs to be factored into policies. One issue that may need addressing is waiting periods. While most OECD countries have social safety nets, access to relief may involve a significant delay to establish or assess eligibility, during which families may incur significant distress.
Definitions of asset-based poverty vary, depending on which assets are considered, what income level is deemed necessary for an adequate standard of living, and how long that income level could be maintained from cashing in available assets. We define relevant assets as excluding housing wealth, since people still need a place to live even when they have no income. An adequate income level is defined as the standard OECD poverty line of 50% of median disposable income; and we assume that assets would need to yield three months of that income. So individuals are “asset poor” if they do not have enough liquid financial wealth to keep them above the standard poverty line if their incomes stopped for three months. Evidence on alternative asset-based poverty measures is available in the OECD Wealth Distribution Database.
In the OECD Wealth Distribution Database, household net wealth means the real and financial assets held by private households resident in the country, net of liabilities. Assets and liabilities are classified based on the nomenclature in the OECD Guidelines for Micro Statistics on Household Wealth, which distinguishes five categories of non-financial assets, eight categories of financial assets, and three categories of financial liabilities. The data in the OECD Wealth Distribution Database are by household, rather than by persons or adults: contrary to the convention when analysing household income, no adjustment is made for differences in household size.