Modelling the relative needs of single and couple age pensioners

Retirement policies often seek to set pensions at levels that enable single and married pensioners to have the same standard of living. The existing literature on consumer equivalence scales provides little assistance to this policy objective as the estimated scales are not very precise and rely on strong and opaque assumptions. This paper proposes an alternative strategy which involves the use of detailed, but transparent, assumptions about the extent of joint consumption of particular commodities (low, preferred and high joint consumption assumptions are used). These assumptions are embedded in a model of household consumption (related to the Barten equivalence scale model). Using the budget shares of Australian single and couple pensioners respectively, Laspeyres, Paasche (and Fisher) equivalence scales are calculated. In the current Australian Age Pension, the payment rate for home-owning couples is 1.64 times the single rate. The estimates here suggest that couples of Age Pension age who own their own home actually need only between 1.32 and 1.60 as much as a single person household (with a preferred value of 1.46). For those actually receiving the pension, the preferred relativity is similar (1.47). This relativity has steadily fallen over the past 15 years because of shifts in expenditures towards household public goods. Estimates for renting households and for unrelated people living together are also given.