By Greg Jericho Wednesday 6 August 2014
Photo: Those on welfare payments spend more of their money keeping the lights and gas going. (AAP)
The cost of living might be rising for all of us, but employees are currently faring much better than people on welfare payments, who will face an even tougher time under the budget, writes Greg Jericho.
The most recent inflation figures showed the consumer price index had grown by a relatively high 3 per cent in the past year. But last week's release of the latest cost of living indexes reveals that the pace of inflation is quite varied across households.
Given the Government's changes to the indexation of benefits in the May Budget, this will mean significant changes to how much pensioners and others will receive in the future.
Cost of living always rises because unless we're in a deep recession, prices on average go up. So the intelligent question is not about whether or not the cost of living is rising, but by how much is it rising, and also by how much is it rising for different households.
The ABS splits its cost of living indexes into 4 household groups: employees (which accounts for around 72 per cent of all households), aged pensioners (11 per cent), other government transfer recipient households (i.e. those on welfare, but not age pensioners - 12 per cent), and self-funded retirees (5 per cent). And in 2007, the "pensioner and beneficiary" category was introduced, which in essence combines the "age pension" and "other government transfer recipient" categories.
As general rule, rises in cost of living pretty closely match the rises in inflation (measured by the consumer price index), but they can sometimes vary significantly. At the moment, the cost of living for aged pension and beneficiary households is rising much in line with the CPI, but the cost of living for employee households is rising much slower:
Embed: Cost of living annual growth
The reason is the weighting given for each measure. The CPI tries to get a balance of all households, and so assumes, for example, that households on average spend 0.69 per cent of their weekly earning on child-care. But child-care is not a concern for most aged pensioners or self-funded retiree households for obvious reasons.
Similarly, the CPI estimates 16.84 per cent of weekly expenditure is spent on food and non-alcoholic beverages. But given such things are necessities, it's not surprising that households with lower incomes will spend a greater proportion of their income on food.
Embed: Weightings of household expenditures for cost of living and consumer price indecies
The impact of the weightings on a household's cost of living becomes apparent when you look at the items that have increased the most over the past decade and the past year:
Embed: Price rises of CPI sub-groups over past decade
Tobacco prices, for example, rose by the most in the past 12 months, but the ABS estimates that employee households on average spend only 2.25 per cent of their weekly earnings getting a nicotine fix, compared to 5.83 per cent for pensioner and other beneficiary households.
That's a big difference, and not buying items like tobacco and alcohol can thus make a big difference to your cost of living. For example, inflation rose 3 per cent in the past year, but if you exclude alcohol and tobacco it only rose 2.8 per cent.
What these different weightings show is that certain government policies can hit certain households more than others. It's why the introduction of the carbon price hurt pensioner and government beneficiary households more than employee ones.
The carbon price most affected the price of utilities - electricity and gas. But whereas employee households only spend on average 3.28 per cent of their earnings on utilities, those on pensions and government benefits spend 6.09 per cent and 5.06 per cent respectively keeping the lights and gas going.
It was also why the Gillard government's compensation for the carbon price was heavily weighted in favour of lower income earners.
The cost of living is also different from the CPI in the treatment of housing prices and mortgages. The CPI does not include mortgage payments in its bundle of goods, but it does include the price of new dwellings bought by owner occupiers. The cost of living measures are the opposite - they don't include housing prices but they do include mortgage payments.
And as we can see over the past 10 years, the growth of mortgage payments has fluctuated wildly (as interest rates rise and fall), whereas housing prices and rents have been rather more steady:
Embed: Price rises of mortgages, rent and new dwellings
It's one of the main reasons why the rises in cost of living for employee households in the past 12-28 months have been so much lower than for other households:
Embed: Price rises of mortgages, rent and new dwellings
Employee households not surprisingly spend a lot more of their income on mortgage payments (11.68 per cent of weekly expenses) than do those on government benefits (3.26 per cent). So the cuts to interest rates have on average helped employee households much more than others.
But where the difference in the indexes really hits the road is in the changes announced in the budget on the indexing of government benefits.
Currently the Age Pension; Disability Support Pension; Carer Payment and Veterans' Affairs pensions are increased every 6 months based on whichever rate is highest out of the CPI, Male Total Average Weekly Earnings or the Pensioner and Beneficiary Living Cost Index.
The budget proposed from June 2017 changing the indexing of these benefits to be purely in line with the CPI (which is what happens currently with Newstart).
In the past year this would have seen such payments rise by an annual 3 per cent which is the CPI, instead of the 3.1 per cent which was the rise in the pension and beneficiaries cost of living index (the next average weekly earnings is out in two weeks, which will give a better comparison, as the 12 months to November 2013 saw abnormally low wage rises of just 2 per cent).
Embed: Annual rise in inflation, cost of living, and wages
Now 0.1 per cent does not sound like a lot, but it adds up.
As we can see over the past 6 years, there have been only 7 quarters where the CPI was rising faster than the cost of living for pension and beneficiary households:
Embed: Annual cost of living growth compared to inflation
All up, since the pension and beneficiaries index was introduced in June 2007, the cost of living for such households has increased by 23.9 per cent compared to inflation rising by 20.8 per cent and average male weekly earnings by 30.5 per cent.
Starting with the current fortnightly aged pension of $766, that would see over the same time period the payment in 2021 rise to $925 using the CPI index, $949 using the cost of living index, or $999 using the male weekly earnings increases.
That's a fair difference - about $1,924 annually - and it's clear why these measures were budgeted to be saving the government $393m in 2017-18.
Thus the cost of living numbers are not merely interesting, they are useful for seeing how increases in government welfare keeps up with actual living expenses.
But it's always worth noting just why the cost of living of certain households has increased, and whether we should be too concerned. The costs of living for self-funded retirees for example in the past year increased by much more than for other households.
The reason is that in the past year holiday travel and accommodation rose by 6.8 per cent - second only to tobacco price increases. The ABS estimates that self-funded retiree households spend 11.3 per cent of their income on domestic and international travel compared with around 4.7 per cent for everyone else. Which just goes to show that as good as they are, cost of living indexes can sometimes really be measuring cost of lifestyle.
Greg Jericho writes weekly for The Drum. His blog can be found here. View his full profile here.
Rising living costs are hitting some of us harder - The Drum (Australian Broadcasting Corporation)
