Pensions for Singles and Couples

Retirement policies often seek to set minimum 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 in reaching this policy objective, as the estimated scales are both imprecise and reliant upon strong and opaque assumptions. This paper proposes an alternative modelling strategy which has low data requirements and involves the use of detailed, but transparent, assumptions about the extent of joint consumption of particular commodities. These assumptions are embedded in an economic model of household consumption and combined with household expenditure data to calculate consumer equivalence scales. It is estimated that Australian couples of Age Pension age who own their own home need expenditures between 1.32 and 1.60 times that of single person households in order to have the same effective consumption level. These scales are lower than those used in the pension system at the time the research was undertaken.